The idea is what is known as a negative base trade or purchase of cheap Russian government or corporate bonds along with credit default swaps that act as collateral for a borrower’s potential default. Data from the MarketAxess website show that Russia’s sovereign debt traded at $ 7 billion between February 24 and April 7, up from $ 5 billion in the same period in 2021 – a 35% increase. Russian bonds are being traded furiously, said Philip M. Nichols, a Russia expert and corporate social responsibility professor at the University of Pennsylvania Wharton School. “There are a lot of speculators who are buying these bonds that have been severely degraded and are on the verge of becoming rubbish,” he said. Nichols says he receives constant calls from analysts interested in whether the potential trade makes sense. “The difference in Russian public debt is astonishing at the moment,” he said. “They make an unusual amount of money in relation to volume.” The cost of securing Russian debt rose to 4,300 basis points on April 5, from 2,800 the previous day. At the same time, bond rates fell sharply – with bonds maturing in 2028 trading at just $ 0.34 a dollar. That means it could cost just over $ 4 million to insure $ 10 million in Russian securities, the Economist said. Hedge funds such as Aurelius Capital Management, GoldenTree Asset Management and Silver Point Capital have increased their exposure to Russian markets, mainly through the purchase of corporate bonds, the Financial Times reported in late March. US financial institutions such as JPMorgan Chase and Goldman Sachs facilitate these transactions by connecting clients who want to get out of their positions with hedge funds that have a higher risk tolerance and less ethical dilemma regarding the Russian debt market. “This is Wall Street,” said Kathy Jones, head of fixed income strategy at the Schwab Center for Financial Research. “It does not surprise me that they saw some kind of window that they could use to make money.” JPMorgan representatives say they act as intermediaries, simply trying to help customers. “As a trader, we help clients reduce their risks and manage their exposure to Russia in secondary markets. None of the transactions violates sanctions or benefits Russia,” a spokesman said. If customers wanted to get rid of their exposure to Russia quickly, they could turn to Russian oligarchs who would happily buy government bonds, said Robert Tipp, chief investment strategist and head of Global Bonds at PGIM Fixed Income. The sale of Russian debt to US hedge funds keeps accrued interest away from Russian hands. The transactions are legal and lucrative, Nichols said, but highly speculative and subject to large fluctuations based on news of Russia’s invasion of Ukraine and further sanctions. There is also a worrying disconnect between Wall Street and the real state of the world economy: Usually, investors base their assessment of Russian debt on whether or not it will be repaid, and the likelihood of repayment will depend on the strength and resilience of the Russian economy. , but this is not the case. New US Treasury sanctions on Tuesday, which barred Russia from accessing any US dollars in US banks, have significantly increased Russia’s chances of defaulting on its debt and that its gross domestic product is the main measure. of a country’s economic power will collapse. The US Congress voted this week to abolish the trade regime of Russia’s most favored country, a significant economic downturn that would pave the way for deeper sanctions and controls on imports of products necessary for Russia, such as chemicals and steel. The removal of this regime, Nichols said, would halt Russia’s integration into the world economy. If Wall Street was connected to the real world, he added, it would not want to be anywhere near Russian debt. “Russia’s debt is the province of high-risk individuals,” Nichols said, “and the institutions should probably stay away.”
