How Investors Are Dealing With Threat of Russian Debt Sanctions

(Bloomberg) -- Just when Russian debt was starting to look like a safe bet, investors were hit this week with a reminder that the biggest risk of all is still lurking just around the corner.

Lawmakers in the U.S. renewed discussion about the nuclear option of punishing the Kremlin for alleged election meddling by sanctioning Russian sovereign-bond markets. While the bill being introduced by two leading senators is a long way from becoming a law, its proposal was enough to send yields to the highest level in a month.

The majority of investors polled by Bloomberg said they are concerned about the threat of sanctions, but the latest development isn’t enough to make them consider selling. Allianz Global Investors is counting on the fact that the U.S. Treasury has already warned against such sanctions, while GAM UK Ltd., one of the biggest holders of Russian 10-year bonds, said they are “a lot less keen” following the proposal.

Here’s a summary of what some of the biggest emerging-market and local money managers are thinking:

Allianz

• "The U.S. Treasury has warned against sanctions on Russian sovereign debt,” said Shahzad Hasan, an emerging-market debt investor with a market-weight position on Russian sovereign bonds. “I think that’s why the sanctions will most likely not target sovereign debt.”
• “They could potentially target corporate entities or individuals. Depending on the actual sanctions, the market will react accordingly. As we head into the U.S. mid-term elections in November, the noise will increase, creating pressure on Russian assets.”

GAM

• "This creates a material downside risk and makes us a lot less keen on Russian ruble government debt,” said London-based fund manager Paul McNamara, who is overweight ruble government bonds. “We are monitoring the situation closely."

Aberdeen Standard Investment

• "From what we’ve seen of the draft of the legislation there is no retroactivity. It only applies to new issues,” said Edwin Gutierrez, head of emerging-market sovereign debt. “Real rates are attractive.”

Union Investment Privatfonds

• “The potential for tougher sanctions is there,” said Sergey Dergachev, senior portfolio manager in Frankfurt. “Will we see sanctions on Russian sovereign debt, or Gazprom? In my base-case scenario very unlikely, but it cannot be ruled out."
• "The key risk for Russian assets is not that sanctions might be announced. It is the risk of unexpected sanctions."

Capitulum Asset Management

• "Sanctions have been with us for many years now and unfortunately will stay with us for more years, so markets get used to it," said Lutz Roehmeyer, chief investment officer.
• "As Europeans we are a little more relaxed on investing in Russia."

Aricapital Asset Management

• “Any impact will be contained to a temporary correction,” said Moscow-based money manager Alexey Tretyakov, a money manager in Moscow. “If yields rise, the Ministry of Finance is likely to cut the borrowings to allow the domestic market absorb sales by the foreigners.”

Kapital Asset Management

• "Investors show demand at the current levels after the sanctions rhetoric, and this clearly shows that the talk is unsubstantiated,” said Renat Malin, a Moscow-based money manager. “There will be elections in the U.S. in November, and they can say whatever they want before that, they will have little time to do anything.”

--With assistance from Ksenia Galouchko.

To contact the reporters on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net;Olga Voitova in Moscow at ovoitova@bloomberg.net

To contact the editors responsible for this story: Mark Sweetman at msweetman@bloomberg.net, Natasha Doff, Alex Nicholson

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