29.06.2022
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What to do with the currency and where to invest in the face of sanctions against Russia? 06/14/2022

After the adoption of sanctions against the Russian banking system at the end of February, as well as EU measures against NSD (sixth package of sanctions), a number of banks introduced a commission (0.2-1%) of the total balance per month for keeping foreign currency on deposits. This was done contrary to the instructions of the Central Bank, which stated that banks should not change the terms of customer service under existing agreements and introduce negative rates on foreign currency deposits. In addition, there was a risk of “blocking” the currency on brokerage accounts.

The reason for introducing a commission on foreign exchange liabilities is the reduction in cost and the risk of loss of foreign exchange assets by local financial institutions. Such assets include securities (50%), correspondent accounts (20%), foreign currency loans to non-residents (16%) and cash (14%).

We believe that this is not a reason to sell the entire currency at an extremely unfavorable rate. Among the most relevant ideas for investing in currencies with the lowest risk, we would like to highlight the purchase of Eurobonds of the Russian Ministry of Finance and corporate debt through NSD (average annual yield to maturity is 5-8% in currency) and “friendly” jurisdictions such as Guernsey (average annual yield -20% in foreign currency).

Investideas

1. Clients of banks that have avoided sanctions – transfer the currency for storage to relatives abroad, if any, or open a foreign currency account in a “friendly” country, for example, in Saudi Arabia (low risk). You can also first transfer rubles abroad, and then convert them into a currency – as a rule, with such a conversion, the buyer of the currency has to overpay due to the increased commission. Individuals have the right to transfer within a calendar month from their account in a Russian bank to an account abroad (their own or another person) no more than $150,000, or the equivalent of this amount in another foreign currency. It should also take into account the tax aspects and credit risks of different countries. https://gogov.ru/articles/friendly-countries

2. Buy and store cash (low risk) in banking the cell, but holding cash in the face of record real negative rates around the world against the backdrop of record inflation is unprofitable.

3. Leave funds on a foreign currency account (low risk) in a bank with the optimal commission or distribute funds among several banks to minimize the commission (depending on the specific situation). According to the recommendations of the Central Bank, banks should not worsen the terms of existing contracts.

4. Buy physical gold or other precious metals (low risk) in currency. Gold is a reliable and highly sought-after asset, but in the current cycle of active growth in foreign exchange rates, the potential for the metal to rise in price is limited. When buying gold bars and other precious metals, you will not have to pay 20% VAT. Precious metals can act as a long-term currency hedge, as well as a means of portfolio diversification in the event of further sanctions restrictions related to the currency. Of the minuses is storage, and with large spreads between the purchase and sale prices, losses are possible. In addition, this market is characterized by limited liquidity.

https://quote.rbc.ru/news/training/5ec710269a7947fb7ee418f6

5. Buy debt obligations of the Ministry of Finance, banks and companies in rubles (low risk). The revaluation of OFZs and bonds of the first echelon of companies with state participation is almost completed, and investors are putting new forecasts of the key rate into current prices, which the Central Bank will reduce more slowly. The current annualized real return on these instruments is negative due to inflation, which, according to the forecasts of the Central Bank for this year, will be 14%-17% compared to the previous forecast of 18-23%. Our forecast for the key rate at the end of the year is 8-8.5%. According to the Central Bank estimates, the average rate for the year will be 10.8-11.4%. The revaluation of bonds of many reliable issuers of the second tier has not yet been completed, so they are an attractive object for investment. Among those we like based on the balance of credit risk and good returns are ChTPZ, PIK, TMK, Detsky Mir and X5 Retail Group.

6. Buy Eurobonds of the Ministry of Finance in foreign currency (low risk/medium risk) through NSD and “friendly” jurisdictions. For the time being, it remains possible to purchase Russian external bonds through “friendly” jurisdictions like Guernsey, where they are serviced by Euroclear and traded at a huge discount to comparable bonds at NSD. The foreign currency yield on the Treasury’s external bonds serviced by Euroclear is double-digit, but the ministry has not made payments on the obligations since late April due to sanctions. The yield on external debt serviced by the NSD may reach negative values ​​due to high demand and regular payments in rubles. The purchase of external debt of the Ministry of Finance through NSD is a risk-free type of investment in which the purchase is made for rubles, payments are made in rubles at the current rate, but with the possibility of converting into US dollars. The possibility of such investments is provided by the new scheme of payments on bonds, which the Ministry of Finance plans to approve. Funds received as part of coupon and principal payments can be converted into foreign currency.

7. Buy Eurobonds of Russian exporters and individual companies (medium risk) through “friendly” jurisdictions and NSD. Foreign currency debt of Russian issuers, which is serviced by Euroclear, is also trading at a huge (double-triple) discount to NSD peers due to sanctions. At the moment, it remains possible to purchase bonds through “friendly” jurisdictions, such as Guernsey. The minimum purchase amount is $100,000. When buying, rubles are transferred to a Western counterparty bank, which converts them into foreign currency at the current rate. Some issuers, in particular MTS, Veon, Lukoil (who escaped sanctions and have a license), retain the ability to service their debts to external holders, their papers are distinguished by double-digit annual yields in foreign currency. We look forward to the launch of a single channel for ruble settlements through NSD for all corporate borrowers, which will lead to a decrease in the discount of bonds on external markets, as a result of which their prices will rise to prices at NSD, where bonds are already trading above par. Transactions at NSD are conducted in rubles at the exchange rate on the date of their conclusion in order to eliminate the risk of blocking when settling with Western counterparties, but the final yield from the revaluation and coupon is calculated in foreign currency. The minimum purchase volume of bonds at NSD, where there are very few securities left, is $200,000, since these securities are traded at par. Based on the ratio of credit risk and good returns we like Gazprom, Norilsk Nickel, MTS, Lukoil, Alrosa, Metalloinvest, Eurochem and SUEK. https://iticapital.ru/analytics/bonds/bonds-ideas/12814/

8. Buy other currencies (eg RMB, Hong Kong dollar) (medium risk). Currency diversification and withdrawal from the dollar and the euro. The yuan is the least volatile of world currencies, but traditionally weakens against the dollar due to the important role that the dollar plays in the operations of Chinese exporters in trade with the United States. The liquidity of yuan/ruble trading on the Moscow Exchange has increased significantly, to 30 billion rubles. in a day. When buying RMB, there are also risks related to the final exchange rate.

9. Buy shares of exporters (medium risk). The current annualized dividend yield of securities of individual exporters and many other companies (Gazprom, Surgutneftegaz, Gazprom Neft, Norilsk Nickel, MTS, Rosseti, etc.) (>15%) is twice the yield of OFZ and other state-owned companies. The potential for revaluation of securities of many exporters is very high, analysts say. Also, the prices of such shares as a whole will reflect the change in the exchange rate against the ruble. The strengthening of the ruble will lead to cheaper shares of exporters and vice versa. https://iticapital.ru/analytics/stocks/stocks-ideas/12809/

10. Trade through a local broker that has a sub-broker with access to foreign sites (medium risk). It is important that trading is carried out through a segregated account, and the client remains a nominal holder of securities. It is also possible to open an account directly through a broker in Hong Kong.

11. Transfer currency or rubles (with subsequent conversion) to a foreign broker (high/medium risk). The most popular option now is InteractiveBrokers (IB), but there is a risk of blocking payments and “freezing” assets due to sanctions, first of all, it threatens those who are already under sanctions, as well as citizens of the DNR/LNR. On June 13, IB banned citizens of Russia and Belarus from trading in EU shares and transferring funds for such operations, but accounts continue to be opened and so far the restrictions have not affected trading in other instruments. The ban follows EU sanctions against NSD, so in the event of US sanctions against NSD, IB could ban Russians and Belarusians from trading US shares on the platform. According to the clarification of the Central Bank, in order to sell shares through foreign brokers, a Russian resident needs to obtain permission from the commission of the Ministry of Finance, which is not observed in practice. The list of required documents for applying for such a permit is given in the instruction of the Ministry No. 295 dated 06.03.22. https://quote.ru/news/article/62a382129a79471d7d65cb37

Also, clients should be aware of the possibility of technical blocking of the international Internet infrastructure that provides access to the IBKR account.

12. Buy shares of foreign companies on the St. Petersburg Exchange (high risk). The shares of Chinese companies look attractive, in particular Alibaba, NIO, Vipshop, Tencent and companies of certain sectors of the US market, primarily transport (Boeing, United Airlines Holdings), entertainment sector (Walt Disney), cruise operators (Carnival), media companies ( Netflix, Facebook), consumer sector (Walmart, Farfetch), electronic payment operators (PayPal) and financial sector (Citigroup). However, the purchase of such shares through the SPB is a high risk of blocking assets, which has so far affected 14% of the total volume of securities in monetary terms, but at the same time affected the majority of traded shares, which may mean the introduction of a limit on the volume of purchases of securities due to the risk of their blocking by foreign depositories .

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Helped investors place more than 500 million rubles. and over $200,000 in stock market instruments. Developed over 60 investment strategies. Experience in Forex - Basic and Series 1.0. Broker-dealer activity. The purpose of creating the fx-guidance website is to share with you My knowledge, experience and transfer my best practices on the topic of INVESTING IN THE STOCK MARKET, so I want to start with a FREE technical analysis course, thanks to which you will receive:✅Basic technical analysis system used by prof. investors ✅Learn to find the perfect entry and exit points ✅Begin to see long-term trends on the chart and understand the likelihood of further price movement

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