Investment bank traders are renowned more for their pragmatic opportunism than their moral compass. So it is a measure of President Vladimir Putin’s pariah status that none of the big Wall Street names appears to be risking their reputation buying up out-of-fashion Russian assets as they are dumped by mainstream investors.
Unless you think that all Russian companies and the Russian state will cease to exist in the coming months, the price of many shares and bonds, trading at 10, 20 or 30 per cent of their prewar levels or face value, screams “bargain”. And yet, Wall Street’s distressed-asset desks have been shunning them.
Just as western businesses have rushed to leave Russia, so many investors in Russian companies have been desperate to ditch their exposures. Trading volumes in the country’s corporate bonds have nearly tripled over the past month, as mainstream investors rush for the exit.
Under instruction from the Norwegian government, Norway’s sovereign wealth fund has frozen all new investment in Russia, and will begin to divest its $3bn of investments in the country. Abrdn, the UK asset manager with an emerging markets specialism, has begun selling its Russian assets too, according to insiders. This week, JPMorgan Chase will remove Russian bonds from its emerging markets indices.
The sales so far are just a trickle in relative terms, though. One top Wall Street executive said only 3 or 4 per cent of the $50bn of assets that could be sold had so far traded, despite the bulk having been written down to zero on investors’ books.
If some of the usual-suspect distressed buyers are staying away, realpolitik is playing at least as big a role as ethics: shareholder pressure and financial pragmatism have supplemented murderous geopolitics to make a powerful cocktail of deterrence.
“A lot of investors are self-sanctioning,” said Professor Florin Vasvari at London Business School. “Settlement [of bond sales or coupon payments] is very difficult.” But there is also widespread concern among asset managers that they could anger their own investors by continuing to invest in the country, he said.
That is not just true of big long-only asset managers, or indeed the closely scrutinised behemoths of Wall Street. Many large private equity groups and hedge funds are precluded from investing in the country due to the strict attitudes of their backers. “Some endowment funds and Canadian pension funds have had an absolute ban on Russian exposure since 2014 when Putin invaded Crimea,” Vasvari said.
Nevertheless, as the Financial Times reported last week, a posse of small specialist distressed-asset funds has been buying. Apparently unrestricted by the kinds of bars imposed by endowments on bigger funds, the likes of Aurelius, GoldenTree and Silver Point have been snapping up Russian corporate debt at valuations of a few cents on the dollar. Bankers said another crop of distressed investors active in Russian asset purchases was based in the Cayman Islands, where scrutiny is lower.
Distressed funds specialise in high-risk situations like these. The blanket nature of sanctions — and public opprobrium — might make the situation less straightforward to manage than standard corporate restructurings. But with less competition for assets, the spoils could be bigger if events go their way.
There is a parallel here with environmental, social and governance investing. Examples have mounted over the past year or two of publicly owned assets in contentious areas, such as oil and gas, being snapped up by private capital buyers. Last year I wrote about this as an example of “Newton’s law of corporate ownership”: as listed companies have come under increasing investor pressure over everything from executive pay to carbon emissions, one reaction has been a spate of sales to out-of-the-limelight private buyers.
Pure-blooded capitalist theory would suggest that even the most unpopular assets have their value and distressed funds play an important role in the functioning of the ecosystem. Some will argue, too, that just as Russian citizens should not be generically ostracised as Putin supporters, it is unfair to tar all Russian companies with the same brush.
But there can be no compromise in using economic measures to counter Moscow’s tanks and missiles. If the west’s sanctions on Russia are to work to maximum effect, and bring as early an end as possible to Putin’s bloody invasion of Ukraine, then hard-nosed investor profiteering needs to give way to a more moral capitalism.