On February 24, Russian President Vladimir Putin ordered troops to advance into Ukraine, signaling a major escalation in the Russian-Ukrainian war that had been brewing since 2014. In the ensuing international response, Russia has increasingly more cut off from the outside world through boycotts and financial sanctions. And during this time, a fire sale of Russian investment assets took place.
For a few large fund companies – including Abrdn, Liontrust, Jupiter and Invesco – this required closing specific vehicles. Many of them have consequently been liquidated, but Liontrust’s Russian fund remains closed and under “continuing review” according to the asset manager’s website.
Six months into the crisis and sentiment towards the region remains the same across the industry.
Russia stays out in the cold
For companies that have liquidated investments or implemented boycotts against Russian assets, there has been no change in this outlook.
Although Liontrust did not liquidate its Russian fund, a company spokesperson explained that the market simply does not fit into its multi-asset team when it comes to finding investment opportunities. because of their focus on risk and return objectives.
“Their investment style is all about strategic asset allocation, tactical asset allocation, and then from there, fund selection, portfolio construction, and then ongoing risk management of the funds they hold. “, explained the spokesperson. “Given they are so focused on risk targeting, that is just not an area they are focused on.”
Another company unchanged in its outlook is Fidelity, which issued a statement earlier in the year that according to company spokespersons still applies: “Fidelity has decided that it will not invest in Russia and in Belarus for the foreseeable future. As such, we have implemented a company-wide ban on any new or additional purchases of Russian and Belarusian securities.
The lack of change in the boycott reflects the fact that the conflict shows no signs of de-escalation. This means that economic sanctions are still firmly in place. Even if international investors wanted to redeploy capital to Russia, they are physically unable to do so.
“In practice, it is literally impossible to invest in the region unless there is regime change in the country,” says David Henry, chief investment officer at Quilter Cheviot. “If the market were to open again in the short term, it is therefore very likely that there would be a sell-off of positions by Western investors. Don’t expect to see institutional managers taking positions in Russian stocks again for very long, if ever.
A secondary fire sell that Henry alludes to here is the fact that some investors have clung to their Russian assets. The February and March sell-offs depreciated some stocks sharply, forcing some to hold until they could sell without suffering a loss.
This was the case for the 20 billion dollars of Russian sovereign bonds whose value has effectively collapsed. Abrn fund manager Cecely Hugh says Western banks have pulled out of trading in these securities, but new guidance from the US Treasury has meant that US holders of these bonds can return to the market in a bid to reduce their positions in what is effectively an amnesty. of Russian trade.
“As a result of this, there were reports of some US banks cautiously returning to the Russian bond market purely for divestment purposes,” says Hugh. “While little light has been shed on the potentially thorny question of the general type of buyer in these sell-off transactions, we have seen some recovery in Russian bond values since late July.”
The Feasibility of a Sustained Boycott
Russia may be so large that it shares land borders with Norway and North Korea, but its economy is only the 11th largest in the world.e largest according to world Bank. Although the conflict caused a spike in inflation around the world, driving some major markets to the brink of recession, on a strictly portfolio-specific basis, the boycott had a limited effect.
“Before the invasion of Ukraine, Russia represented just under 4% of the general MSCI Emerging Markets index,” explains Henry de Quilter Cheviot. “Its weight had declined due to poor performance since 2008, when it was around 10%. The region has now been removed from the benchmark.
“In emerging markets more broadly, we continue to believe that there are enough attractively valued companies in other regions to be confident in the asset class’s long-term growth prospects.”
However, the situation may be more complex when it comes to Russian debt. This is due to the unprecedented nature of Russian defaults.
Typically, when a country or company defaults on its payment obligations, it is because of an inability to pay. Conversely, Russia has the ability to pay and the country continues to earn money from oil and gas exports to China and India. Despite this, the penalties mean that bondholders cannot be paid.
Arguably, the most important forward-looking investment lesson from the Russia sanctions episode may be the need for investors to incorporate a new default category of ‘global systemic exclusion’ into their risk framework. says Hugh d’Abrn. “An important consideration here is the extent to which Russia’s recent default could be considered a one-time anomaly.
“In our view, however, the undeniable reality emerging in recent years of a more protectionist and generally less cooperative global system suggests otherwise.”