Investors position for potential easing of Russian sanctions

While the trading interest is considerable, substantial risk still exists.

Investors are betting on possible profits in Russian assets as there is speculation that US President Donald Trump's attempts to broker a ceasefire with Russia might result in the easing of sanctions, according to the Financial Times.

Hedge funds and brokers are seeking to make money from Russian bonds and the rouble, which have been shunned since the Ukraine crisis broke out in 2022, Financial Times reports. Investors expect any effort by Trump to ease sanctions as part of a larger peace agreement to spur a sharp rally in Russia's markets.

Market optimism builds ahead of Trump-Putin talks

Trump and Russian leader Vladimir Putin are due to talk on Tuesday about the conflict. Ukraine has promised a 30-day ceasefire but Moscow has so far been coy about signing up. However, diplomatic hopes have already lifted the rouble by nearly a third against the dollar so far this year.

"Some of [Trump's] statements regarding Russia are erratic, and you have to adjust for that, but this is all about the sanctions being lifted," said Paul McNamara, an investment director at GAM.

Sanctions make direct investments difficult

In spite of increased optimism, Western funds find it hard to directly invest in Russian assets because of current sanctions and domestic regulations. Investors are eyeing Russian corporate bonds, previously considered worthless but now valued within.

Yet, selling the rouble directly is being held back by sanctions on Russian banks and controls on capital. Foreign trading has fallen to just about $50 million a week, down starkly from levels before the war. Traders are using some of Kazakhstan's tenge instead as a stand-in for the rouble because of close economic relations between Kazakhstan and Russia.

Another widely used method is non-deliverable forwards (NDFs), which enable investors to wager on rouble movements without actually owning the currency or Russian assets. "Western banks are clearly subject to sanctions. The non-deliverable forward is a tool where you don't have to own the currency or any Russian assets," said Luis Costa, global head of emerging markets strategy at Citi.

High stakes amid political uncertainty

While the trading interest is considerable, substantial risk still exists. A failure of ceasefire talks or a US shift to imposing further sanctions could undermine any recent gains in the markets. Moreover, even if the sanctions are eased, certain investors will likely utilize the move to exit the Russian market.

"If you're a Russian who has fled a system that has become more and more repressive. are you going to return to your town to endure the exclusion of society?" asked Roger Mark, a fixed-income analyst at Ninety One.

Sanctions and Moscow's limits on payments to "unfriendly" nations still restrict foreign access to Russian government bonds. Domestic banks have been the main buyers of Moscow's recent debt offerings.

"Direct access to the Russian market will be restricted for now for western investors because of the limitations of the Central Bank of Russia," added one fund manager. "These investors ought to have to look for a reliable partner from a neutral jurisdiction in order to obtain their ticket into the Russian market."

As risks are still high, the potential for a thaw in US-Russia relations has encouraged renewed investor interest, highlighting the multifaceted dynamics underpinning Russia's economic prospects.