Wall Street Is Pouncing on Russia’s Cheap Debt

As the U.S. and allies tighten sanctions on Russia and choke off investor demand for its assets, parts of Wall Street are jumping on the buying opportunity that it’s creating.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. have been purchasing beaten-down company bonds tied to Russia in recent days, as hedge funds that specialize in buying cheap credit look to load up on the assets, according to people with knowledge of the private transactions.

Banks routinely scoop up debt because clients asked them to, or because they expect to find ready buyers. Finding ways to wager on distressed securities is standard fare on Wall Street.

But doing so in the wake of Russia’s widely condemned invasion of Ukraine brings unique risks. World leaders are seeking to punish some Russian companies and cut the country off from the global financial system. Any firm perceived as working against those interests faces potential reputational damage, market watchers say.

“The whole point of the sanctions is to make them and their instruments untouchable,” said Athanassios Diplas, a veteran derivatives trader who was at Goldman Sachs during the 1998 Russian financial crisis. “I have no issues looking at arbitrage opportunities in distressed situations, like back in 1998. But this is different.”

To be sure, the sanctions on Russia haven’t outright banned trading in the assets.

Goldman Sachs is primarily asking for corporate debt from the likes of Evraz Plc, Gazprom PJSC, and Russian Railways that matures within the next two years, and has made bids for Russian sovereign notes, the people said.

The purchases by banks underscore a facet of Wall Street’s longstanding culture: Trading desks are geared toward finding undervalued or mispriced assets, and their activities don’t necessarily reflect the broader view of their firm toward an asset class or nation. Representatives for Goldman Sachs and JPMorgan declined to comment.

Russian corporate bonds denominated in foreign currencies have plunged to deeply distressed levels in recent days. The debt may soon be removed from major benchmarks, and concern is mounting that companies could miss principal payments. JPMorgan was telling clients that it traded about US$200 million of Russian and Ukrainian corporate debt Thursday, including from clients seeking to exit positions.

Still, some banks and fund managers are erring toward caution, either reining in or abstaining from such transactions amid the rapidly evolving situation, people familiar with the matter said.

At one major U.S. hedge fund, a decision was made to avoid Russian bonds entirely for now. The specter of holding debt that could become untradeable in another round of sanctions is too risky, and the war is just a week in. At another, the decision was made to look only at corporate bonds that aren’t majority-owned by the Russian government.

“What we’re seeing is a bit of revulsion—more and more institutions are steering clear of Russia due to reputational risks and pure difficulties in clearing and executing trades,” said Sally Greig, a money manager at Baillie Gifford in Edinburgh. “You have to tear up the distressed playbook. This is not the usual distressed situation. This is a very difficult time.”

Goldman Sachs is also trading credit-default swaps (CDS) on names including Evraz and Gazprom, according to the people with knowledge of the situation.

The market for Russian default protection has faced growing scrutiny this week as traders try to understand whether the contracts insuring $41 billion of sovereign debt could be rendered worthless by sanctions, or could be triggered in the event of a technical default.

In some cases, investors have been pitched so-called basis trades, where Russian corporate bonds would be bought simultaneously with CDS that insure against a default, some of the people said.

CDS tied to Russian government debt this week signaled a 65 percent chance of default within five years and 40 percent within one year, according to ICE Data Services.

Late Thursday, Russia was downgraded to CCC- by S&P Global Ratings, three levels above default, citing sanctions that have dramatically reduced available foreign-exchange reserves and are likely to restricted the ability of bondholders to receive interest and principal payments.

—With assistance from Katherine Doherty, Claire Boston, Eliza Ronalds-Hannon, Rachel Butt & Erin Hudson.

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