US Ukraine-related sanctions threaten to bring the secondary market for Russian bonds to a standstill, the head of emerging market debt at BlackRock, the world’s biggest asset manager, has told beyondbrics.
Sergio Trigo Paz said BlackRock had sold all its holdings of Russian bonds, worth “hundreds of millions of dollars”, and that the market for Russian debt was “freezing up”.
“The glue of sanctions is starting to dry,” he said. “People thought sanctions were about visas for oligarchs wanting to visit Disneyland. But they are much more important and any US asset manager [owning Russian bonds] will have their legal people looking very closely at the impact of [Russian individuals and companies] being on the sanctions list.”
Trigo Paz said BlackRock had sold all its Russian local currency and foreign currency sovereign bonds and corporate bonds in a preventive move in mid-April. Russia has one of the largest weightings in widely-benchmarked emerging market bond indices, with 10 per cent of JP Morgan’s GBI-EM index of local government bonds and about 5 per cent of similar hard currency sovereign and corporate bond indices.
“People used to ask how much Greece you had in your funds,” Trigo Paz said. “Now they are going to ask how much Russia you have.”
As is standard for US sanctions, regulations published on May 8 by the US Treasury Department’s Office of Foreign Assets Control (OFAC), state that the assets of any entity in which a named individual owns directly or indirectly a 50 per cent or greater interest, are blocked, “regardless of whether the name of the entity is incorporated into OFAC’s Specially Designated Nationals and Blocked Persons List.”
The worry for investors is that the bonds of a Russian company could be blocked even if that company is not identified on OFAC’s list and that bondholders could be prevented from receiving interest payments.
“All transactions could start to freeze,” said Trigo Paz. “Even companies where individuals on the list own less than 50 per cent are being looked at by compliance officers as a potential risk.”
He said he had heard of one other large asset manager that had sold its holdings of Russian bonds but that, in general, fund managers were underweight Russia without having taken such drastic action.
“We hear that many US banks are trying to keep inventories very light while non-US banks that are long Russian bonds are getting more and more uncomfortable,” he said, noting that the buyers of last resort of Russian bonds would be Russian state-controlled banks, which would also be the bond custodians.
“If sanctions escalate, we don’t know what Russia’s answer would be,” he said. “We hear that Russian banks are repatriating dollar deposits to Russia, which is one reason why the rouble is not selling off as much as expected.”