Analysis-Rush to Russian assets belies 'permafrost' some investors fear

By Libby George, Karin Strohecker and Alexander Marrow

LONDON (Reuters) - Large fund managers expect the bulk of Russia's assets to remain closed to Western investors, despite a flurry of "exotic" trades betting on a rapprochement between Moscow and Washington.

The diplomatic thaw, ushered in by U.S. President Donald Trump's perceived openness to Russia's Vladimir Putin, has prompted bets on Russian-linked financial assets, including the rouble, Kazakhstan's tenge currency - a rouble proxy - and the bonds of Russian energy companies Gazprom and Lukoil.

But rather than a gold rush back into Russia, which has been isolated from the global financial system since it invaded Ukraine in 2022, veteran players say they expect a longer-term hiving off of key parts of Russia's economy from foreign investors.

"We see maybe some asset swaps," said Gunter Deuber, head of research for Austria's Raiffeisen Bank International - one of the few Western banks still operating in Russia.

"There are still a lot of assets of Russia that are in the West and of the West that are in Russia. And I think having asset swaps is now a rather nice way to de-risk on both sides."

Last week, Putin issued a decree allowing U.S. hedge fund 683 Capital Partners to buy securities in Russian companies from certain foreign stakeholders. But the order also authorised their future sale to two Russian funds, quashing hopes this indicated an impending reopening.

RUSH TO POSITION

Still, investors said there are increasing queries from brokers dealing in Russia-related assets.

One of the favourites is roubles via non-deliverable forwards (NDFs) - derivatives traded and settled in dollars that shield investors from sanctions complications, although much like the rouble, their value is linked to Russia's economy.

The rouble is the top performer among emerging currencies this year, having strengthened some 30% against the dollar.

Data from UBS showed hedge funds betting on directional trends held $8.7 billion worth of rouble NDFs in early March, the second-largest long position across major currencies - indicating funds expect the currency to strengthen.

These bets allow traders to cash in if Russia's markets surge amid a Trump/Putin rapprochement.

"Investors can definitely try to get exposure to some end of sanctions without having some direct Ukrainian or Russian exposure," said Anton Hauser, senior fund manager with Erste Asset Management, calling the NDF trade "very niche".

But for now - and for years to come, Hauser expects - Erste is unlikely to get involved, despite holding some sanctions-frozen local Russian currency bonds.

"It's extremely exotic at the moment," he said.

Analysts estimate the average daily volume in rouble NDF trade at $25 million to $40 million - a fraction of the $2-2.5 billion in daily pre-war rouble trading.

POOR LIQUIDITY

Investors said interest had also spiked for still-tradeable corporate hard-currency bonds issued by Russian firms - such as Gazprom, Lukoil and fertiliser company Phosagro. But poor liquidity means buyers demand a discount.

"They still pay you coupons, but tradability is very, very poor," said Sergey Dergachev, portfolio manager at Union Investment Privatfonds.

Hard-currency debt issued by Russian corporates was once an emerging market mainstay; the nearly $100 billion outstanding accounted for 4% of indexes in 2022, and international investors held roughly a fifth of that, according to JPMorgan calculations at the time.

Proxy trades have also strengthened since Trump's return, including the sovereign bonds and currencies of Uzbekistan and Kazakhstan - Russian neighbours with closely linked economies.

Investors say brokers in Central Asian, Middle Eastern and Latin American nations with access to Russia's domestic markets - and deemed "friendly" by the Kremlin - have increased offers of Russian-related trades.

Brokers say investors, including U.S. and European distressed asset managers, are more interested in exposure to Russia's still-sanctioned rouble-denominated OFZ bonds, even though sanctions on Russia's National Settlement Depository and Moscow Stock Exchange MOEX mean direct ownership is impossible.

Ararat Mkrtchian, CEO of Armenian broker Sirius Capital, said yields of around 15% are enough to spark interest in domestic government bonds despite the hefty losses many foreign investors suffered when sanctions took effect.

"In general, there is a desire from foreign capital to return because this is a highly depreciated but high-quality financial asset - if you forget about politics," said Mkrtchian.

EUROPE VS UNITED STATES

A growing gap between Europe's approach to Russia and that of the United States under Trump could complicate hopes to trade sanctioned assets, such as Russian government bonds, more actively.

"The friendliness that we see on the highest levels between Washington and Moscow doesn't exist between most European leaders and the Kremlin," said Petar Atanasov, Gramercy Funds Management's co-head of sovereign research.

While Trump has held direct talks with Putin, Europe is now making its largest defence spending push since World War II and has doubled down on sanctions.

And one of the biggest obstacles is Russian law: Amid the sanctions onslaught, Moscow passed laws restricting asset ownership and trading by parties in "unfriendly" countries.

This combination has transformed Russia's economy, with a much larger state role, said ProMeritum Investment Management's Pavel Mamai, and there are no clear signs yet Moscow is willing to open up again.

"I don't believe that the Russian market and the international market will be merged again in short future."

(Reporting by Libby George, Karin Strohecker, Alexander Marrow and Nell Mackenzie; Additional reporting by Carolina Mandl and Darya Korsunskaya; Editing by Hugh Lawson and Michael Perry)