Bargain hunting for bonds in Russia and Ukraine

This is an audio transcript of the FT News Briefing podcast episode: Bargain hunting for bonds in Russia and Ukraine

Joanna S Kao
Good morning from the Financial Times. Today is Friday, March 25th, and this is your FT News Briefing.

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We’ll start the show in Brussels, where world leaders have gathered for a whirlwind diplomatic effort focused on Ukraine. And we’ll talk with Katie Martin about Russia’s financial markets, which reopened this week.

Katie Martin
I guess this is a bit of a move on the Russian side to give the impression that, you know, we’re back in business.

Joanna S Kao
Plus, we’ll have the latest development in the ongoing corporate saga that is Toshiba. I’m Joanna Kao, in for Marc Filippino, and here’s the news you need to start your day.

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Leaders at the G7, Nato and EU gathered in Brussels to try and come up with ways to help Ukraine. They’re also trying to address the economic fallout from Russia’s invasion of Ukraine. Here’s the FT’s Andy Bounds with some of the key agreements.

Andy Bounds
The main one from the G7 meeting was sanctions on gold. So Russia is trying to avoid, it’s obviously being cut off from a lot of Swift transactions, lot of dollar transactions. So apparently it’s been trying to sell its foreign reserves of gold in order to, you know, generate currency. And therefore they’ve taken action to try and stop that. And then secondly, a big issue for the EU is its very reliance on Russian gas, and obviously that sends lots of money to Russia, which they can use to fulfil their war aims. So the US is going to step up and announce that it’s going to provide or try to provide some more liquefied natural gas to the EU in order to mean they don’t have to buy as much from Russia. It’s a small dent, really, and they are looking into other countries as well to do more. But I think it was important for the US to show that it’s trying to help the EU to wean itself off Russian gas.

Joanna S Kao
Andy, how significant do you think these meetings are? How often have all three major groups come together?

Andy Bounds
I think it’s very, very rare. I haven’t seen this happen before. What we’ve seen is a lot of western unity, and of course, we have to include Japan as well when it comes to the G7. And I think President Biden and the EU and Japan and Canada, they’re all very keen to be seen as united and taking similar sanctions at similar times to deal with the Russian aggression. I think they think that’s very important that Vladimir Putin realises he can’t pick off one country against another and try and exploit differences. I mean, the one consistent guest actually in all three meetings has been, apart from President Biden, has been Volodymyr Zelensky, the Ukrainian president, who has spoken to each one via video link from Kyiv.

Joanna S Kao
Andy Bounds is the FT’s EU correspondent.

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Yesterday, Russia’s stock exchange partially reopened after trading was suspended for three weeks. The White House called the move a charade and a Potemkin market reopening. I’m joined by our markets editor Katie Martin to find out more. Hi, Katie.

Katie Martin
Hey, how are you doing?

Joanna S Kao
So, Katie, what did the White House mean by calling it a Potemkin market reopening?

Katie Martin
Yeah, it’s quite a cute label that they put on it there. So basically, the timing is probably not coincidental. So the day of the market reopening was the same day that Nato officials were meeting with EU officials and with President Biden and all who were all kind of getting together to talk about the situation in Russia and Ukraine. And so I guess this is a bit of a move on the Russian side to give the impression that, you know, we’re back in business. But it wasn’t really a normal market session, put it that way.

Joanna S Kao
And what made it so abnormal?

Katie Martin
So it was just open for a few hours is one thing, and it’s only 33 of the 50 stocks that were in the index that were tradable. That includes some really big names like Gazprom, Sberbank, Rosneft, VTB Bank and all the rest of them. But it was pretty volatile and not particularly normal sessions. And stocks jumped 12 per cent when they first opened, but they ended up in the day just about 4 per cent higher. And it’s worth bearing in mind that they’re still down by a fifth since the invasion started. And there’s still loads of restrictions, right? So there’s no short selling and also foreign investors can’t get out yet, and when they can — in April is the plan — then the money still has to stay in Russia if they get out of Russian stocks.

Joanna S Kao
Katie, what kind of western investors are we talking about here?

Katie Martin
So all the kind of global investors, sort of pension fund managers and, you know, all the usual suspects, there’s been a huge rethink around Russia. And there is a debate, you know, is the best thing to do to sell shares and effectively free them up for Russian oligarchs to buy cheaply and hold for the long term? You know, there are some real ethical dilemmas around what to do with existing Russian holdings, but it’s very clear that certainly no investors that I speak to are going to be looking to rebuild a position in Russian markets, in Russian stocks, anytime soon.

Joanna S Kao
At the same time, we’re also seeing hedge funds bargain hunting for corporate bonds in Russia and also Ukraine. Can you tell us more about what’s going on with that?

Katie Martin
So Russian debt really got taken to the woodshed when the invasion started, and so there are some hedge funds out there, classic hedge fund names like Silver Point, GoldenTree, there’s a clutch of them that are saying, if I can buy Russian corporate or government debt incredibly cheaply, maybe they buy it at 10 cents on the dollar or, you know, 10 capex on the rouble. At some point in the future, I will still be made whole. And if you’re prepared to play the really long game and hold this stuff to maturity, then it’s possible that you might not get 100 cents on the dollar when the principal is returned to you, but you might at least be able to get something more than you paid for. But you have to be prepared to sit on this paper right through to maturity and potentially to get lawyers involved to actually extract the money when it’s all done and dusted.

Joanna S Kao
And is this the same thinking for people investing in Ukrainian bonds?

Katie Martin
Yeah, there’s a little of that, too. Now for Ukraine, a lot of it comes down to, you know, really bluntly, what will Ukraine be after this? Will it still have the same territory that it started out with when the conflict began? And that’s a really tricky one. You know, if Russia succeeds in keeping its hands on parts of the country, then it might be a little bit more difficult for Ukraine to pay back its government debt. But it’s going to have difficulty enough with that anyway. And there is a reasonable school of thought that whatever happens to Ukraine after this conflict, it’s going to be a country that’s heavily supported by the IMF and by the international community. So again, if you’re prepared to play the really long game and run the risk of just getting completely wiped out on your investment, but you can kind of hope for a big upswing if it all works out, then for some hedge funds that’s an attractive possibility. But again, you have to be the sort of investor that’s prepared to stick it out, prepared to take a big risk and be prepared, if necessary, to get the lawyers in to get your money out at the end.

Joanna S Kao
Before I let you go, Katie, I want to ask you about what’s going on in the US Treasury market. It’s been the worst month for Treasury since 2016. So what’s happening?

Katie Martin
Everybody hates US treasuries at the moment. This pendulum has swung a few times this year, but certainly the groundswell of opinion now is OK, we have to face up to the fact that the US Federal Reserve is going to be raising rates. It is not gonna stop. And that has to be bad news for US government bond prices, it has to push yields higher. And in addition, there is this problem with inflation that’s just not going away and that eats away at the regular returns that their products offer. So what we’re starting to see now is even some of the commentators on the bond market and some of the investors in the bond market who stick with treasuries no matter what, even they are saying, OK, fair enough. We’re going to have to accept that the year is going to end up much weaker than it started. So as you say, it’s been a pretty nasty start to the year. And that looks really set to continue.

Joanna S Kao
Katie Martin is the FT’s markets editor. Thanks, Katie.

Katie Martin
Pleasure.

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Joanna S Kao
One of Japan’s most famous corporations, Toshiba, has been in turmoil for years. The most recent attempt to fix it was a management proposal to split the conglomerate in two. Yesterday, shareholders voted on that plan and they nixed it. Here’s our Asia business editor Leo Lewis.

Leo Lewis
It was a surprise certainly to some of the activist funds that we spoke to the night before because they really did think that the shareholder proposal would pass, even if the management’s proposal wasn’t voted down.

Joanna S Kao
Investors not only voted down management’s plan, they also rejected a proposal by a top shareholder, a Singapore fund that could have led to the company going private. Leo says there are two ways to look at the two failed proposals.

Leo Lewis
You can be very pessimistic, and I think that the lead-up to this demonstrates very clearly that there are quite significant divisions within Toshiba’s management. We know that there are significant divisions on the board, and so, you know, when you see a company with three distinct lines of division, you think, well, gosh, you know, is anything going to unlock this? This could be going on for years — that the manager will propose something that the shareholders don’t like, they’ll vote it down, we’ll go on to the next thing and it won’t happen until you know everyone’s happy. And that may be never. I think there is also an optimistic reading that this actually hands a kind of unspoken mandate to the new CEO to sort this out. And we can live in hope that actually this new CEO who is very well regarded does come up with something that unlocks this kind of logjam that we’re in.

Joanna S Kao
That’s the FT’s Asia business editor Leo Lewis.

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And I’m Joanna Kao. I’ve been filling in for Marc Filippino this week. Marc will be back on Monday. But if you can’t wait to hear his voice, he’ll be on Twitter Spaces today hosting a discussion on Putin’s inner circles. And we’ve got a pretty amazing line-up of people, including Professor Anatol Lieven. He wrote the story about the people closest to the Russian president that many of you have been reading and talking about. Also, you’ll hear from the FT’s Polina Ivanova and Henry Foy, Gillian Tett and Courtney Weaver. That’s on Twitter Spaces today at noon eastern time and 4pm GMT. We put the link on our show notes. The FT News Briefing is produced by Fiona Symon and Marc Filippino. Our editor is Jess Smith. We had help this week from George Drake Jr., David da Silva, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the global head of audio, and our theme song is by Metaphor Music.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.