To diversify your currency portfolio during sanctions, assemble it from these assets: substitute bonds, yuan bonds, yuan, yuan futures, exporter stocks.
As a result of the US sanctions imposed on the Moscow Exchange, trading in the dollar and euro was completely suspended. This deprived investors of the opportunity to use these currencies to diversify their investment portfolios. Nevertheless, there are alternative instruments that can help protect capital from the risks associated with the ruble devaluation.
US sanctions and their implications for investors
The US announced sanctions against the Moscow Exchange on 12 May 2024. The restrictions also affected the National Clearing Centre. As a result, trading in euros as well as US and Hong Kong dollars was halted on the Moscow Exchange. However, investors still have access to currencies from China and several other countries that have not imposed sanctions against Russia.
The closure of trading using dollar and euro currencies has had little impact on the ability of Russian investors to diversify their foreign currency assets. Previously, there were already certain restrictions in place. Brokers repeatedly warned their clients about possible risks. Some of them took commissions for holding currencies of American and European countries. As a result, many investors even before the sanctions were introduced decided to abandon these financial instruments.
Serious restrictions on currency portfolio diversification appeared two years ago. In this regard, many investors have been using alternative, but also effective instruments instead of euros and dollars for a long time.
Substitute bonds
Substitute bonds are financial instruments that were introduced in the Russian market as an alternative to domestic Eurobonds. Although they depend on the exchange rate of foreign currencies, their payments are made in roubles.
It is important to note that substitute bonds linked to the dollar, euro, pound sterling and Swiss franc are currently available on the Russian market.
Debt securities of this type are characterised by high liquidity. Since payments on substitute bonds are made in roubles, they are not exposed to risks associated with US sanctions. For example, Gazprom’s dollar bonds scheduled for maturity in 2037, if purchased now, can yield 7.5 per cent per annum.
Substitute bonds, like other financial instruments, have risks associated with changes in euro and dollar exchange rates. At the moment, in the current market environment, pricing is less transparent than it used to be. Exchange rates can also fluctuate due to the emotions of investors seeking to lock in profits.
Substitute bonds can yield on average 7-11% per annum.
Yuan bonds
Yuan bonds have lower yields than replacement bonds, but have good growth prospects due to the increasing interest in the Chinese currency. They are similar to substitute bonds in that payments can be made in RMB or RUR at the investor’s choice.
A year ago, RMB bonds did not attract much interest in the market due to high competition and low yields. However, over the last year their yields have increased by 2.5-3 per cent. Now this instrument is attracting attention.
Note: About 70% of the renminbi bond market is in the hands of three companies: RUSAL, Rosneft and Nornickel. The number of issuers is expected to increase and the potential yield is expected to be 7-10%.
Yuan
The integral formation of the yuan price demonstrates high transparency. Unlike the ruble, this currency is not subject to market fluctuations. The RMB exchange rate is set and regulated by the People’s Bank of China, which ensures its stability against the US dollar. This allows the regulator to maintain export competitiveness in the international arena and promote the introduction of the national currency as a reserve and trading currency.
It is important to note that the People’s Bank of China fixes the exchange rate between 7.2 and 7.3 yuan to 1 dollar. This is why the yuan is the strongest currency among countries friendly to Russia.
In terms of liquidity, the Chinese currency is easy to buy and sell on the exchange. It is recommended to use the yuan for savings, as it can be a worthy alternative to the euro and the dollar. It is possible to buy RMB not only on the stock exchange, but also in large Russian banks such as Sberbank, VTB and Sovcombank, which offer RMB deposits.
Futures
To better diversify your currency portfolio, it is worth considering not only simple assets, but also instruments such as currency futures and options. The Moscow Exchange offers settlement contracts settled in roubles, which protects against potential sanctions. Futures and options are a reliable tool to protect against ruble devaluation.
You can also use ruble derivatives on foreign indices, such as S&P 500 and Nasdaq, with full synchronisation of dynamics for diversification. Settlements are made in roubles, reducing infrastructure risks to zero.
Investing in exporters’ shares
In order to diversify your investment portfolio and profit from the fluctuations of the ruble against foreign currencies, you should consider not only direct, but also indirect methods. One of such options is investing in shares of exporting companies. Investments in oil companies are considered particularly attractive due to the high cost of natural resources and the low ruble exchange rate. Ideal are investments in shares of firms that demonstrate potential for growth and regularly pay dividends. Such issuers include LUKOIL, Tatneft, Rosneft, Surgutneftegaz and others.
Financial Risks
Financial experts advise investors in the current environment to keep cool and not to rush. It is better to wait a little and watch how the new over-the-counter model for determining the dollar rate and trading in this currency will function. For some time, it is advisable to analyse changes in the official exchange rates provided by the Central Bank, as well as RMB exchange rates on the stock exchange and exchangers. Over time, the market situation is likely to stabilise.
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