Here are the Russian assets depressed by the Ukrainian crisis

19 February 20222 years ago babelfish

Tensions in Ukraine: the implications for markets and for Russia. The analysis by Marco Piersimoni and Flora Dishnica, Pictet Asset Management

The tensions between Russia and Ukraine are certainly nothing new. At the center of the dispute are relations between the country of the former Soviet bloc and NATO: Ukraine's approach to NATO is in fact not welcome by Russia, which has long been trying to change the balance of power of global diplomacy. It is a long-standing story, whose origins date back to the independence of Ukraine in 1991 (the year of the fall of the USSR) and which had its previous climax in 2014, with the annexation of Crimea by Russia. .

Since then, Russia has been subjected to a series of sanctions and restrictions which have now become part of the "normal" functioning of the markets. In November last year, we witnessed a flare-up of Russian-American tensions on the issue of Ukraine (the United States is among the most open supporters of Ukraine's pro-European and pro-NATO policy). The spark came from some satellite images that showed a large mass of Russian troops on the borders of Ukraine.

From that moment, a series of diplomatic exchanges between the US and Russia began. The Biden administration threatened to impose severe sanctions if there was an attack on Ukraine, while Putin sent quite strong demands, including confirmations and assurances that NATO would not pursue Ukraine's entry into the Atlantic alliance. . Although it appeared that diplomatic negotiations were close to having a decisive outcome, the picture worsened drastically last Friday, when news spread from the United States about the possibility of an imminent Russian attack.

After the escalation of tensions over the weekend, conflicting news continues to emerge, making any definitive reading of the prospects for this conflict difficult and unpredictable.

Prior to Friday, this affair had not significantly impacted the performance of equity markets, neither for the developed world nor for the emerging world, except of course for Russian assets. However, the warning that came from the US last Friday led to a radical change of scenario, fueling the general risk-off among the main risk asset classes.

The prospect of sanctions against Russia, an exporter of primary raw materials (both in the energy sector and in precious metals), is in fact grafted onto a rather fragile global scenario, characterized by longer-lasting inflationary pressures than expected. The central banks of the developed world have recently reported a strong discomfort over the persistence of such inflationary pressures, largely due to the energy component, especially in Europe, the region most directly affected by Russian behavior. The risk of instability in Ukraine also plays an important role in the context of exports of raw materials, in this case more related to agriculture. The geopolitical tensions along the axis between Russia, Ukraine and the US therefore risk aggravating fears about the inflationary spiral which in recent months has led to a restrictive turn in central bank policy, in turn due to erratic market trends since the beginning. year.

We do not believe that this situation is capable of substantially changing the global economic outlook, but it remains a disturbing element in a somewhat uncertain scenario in the short term for the above issues.

As for Russian assets, comparing with the 2014 crisis, despite the unexpected annexation of Crimea, the current effect on Russian assets is similar or even stronger:

The ruble, the first relief valve, recorded a -30% between November and the peak of stress at the end of January (in February-March 2014 the depreciation was about -12%);
the CDS (Credit Default Swap) of Russia behaves in a similar way, with approximately + 160bps of enlargement between November and the peak of January, compared to approximately + 100bps in 2014;
equities recorded the strongest effect, with a 30% decline from November to the stress peak at the end of January, compared to around -19% in 2014

This re-pricing makes the valuations of Russian securities very attractive and suggests that the negative effect is mostly already in the prices, especially if one takes into account the country's economic fundamentals. In analyzing the possible future implications, in fact, it is necessary to take into account the virtuous path undertaken by Russia following the 2014 sanctions. a mix of economic maneuvers centered on fiscal rigor (cutting public spending) and on the management of inflationary pressures through an extremely orthodox monetary policy.

The new course has led Russia to register a net surplus in the external position, largely due to the reserves of the central bank and to those that the sovereign fund accumulates whenever the price of oil is above $ 40 a barrel.

These combined are estimated to be worth around $ 600 billion (40% of GDP), a very high level considering that reserves in Europe amount to around 9% of GDP. Furthermore, the very conservative management of the public budget makes it possible to achieve budget parity with oil prices at $ 44, according to international estimates. Finally, another very solid element among the fundamentals of the Russian economy is the very limited amount of debt: the external debt is equal to about 32% of GDP, while the total public debt is just over 17% of GDP (data from IMF, in October 2021).

Nonetheless, with virtually no visibility on future scenarios, Russian assets could remain depressed for a long time to come, barring unexpected resolutions. Within our multi-asset portfolios, exposure to Russian financial assets was extremely limited already at the outbreak of the new crisis, but we reduced it further as part of our risk management process.

As a precaution, we reduced direct exposure in Pictet-MAGO (Multi Asset Global Opportunities) as early as January. A choice linked to the management philosophy of the sector, focused on risk control, and therefore aimed at avoiding risks deriving from any financial sanctions that could make Russian assets illiquid; ultimately, a choice dictated by operational considerations rather than a market view. On the rest of the portfolio, we believe there may be buying opportunities in Europe as the negative effects of the escalation are sufficiently priced.

Regarding Pictet-EMMA (Emerging Markets Multi Asset), given its specialization in investing in emerging markets, we have exposure to Russian equities, while we have reduced direct exposure to fixed income and recently took profit on the ruble position . The re-pricing of Russian assets is certainly attractive in terms of valuations but in the short term it remains a very difficult trade to practice without a clear direction of the ongoing conflict.

In any case, the conditions exist for tactical operations whenever the reaction of the markets exceeds the flow of news, in one direction or another. In addition, some geographically (such as the Polish currency) or financially (energy stocks) neighboring businesses lend themselves to investments according to the same paradigm, but with lower operational risk. On the other hand, the balancing of investment opportunities with risks, be they operational or market, is precisely what distinguishes the multi-asset approach.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/ecco-gli-asset-russi-depressi-per-la-crisi-ucraina/ on Sat, 19 Feb 2022 06:18:14 +0000.