Assessing the potential opportunities and challenges
The Trump administration has initiated talks with Russia on a broad range of security issues, including a potential ceasefire agreement. These developments could have significant geopolitical and economic implications. It is important to emphasise that the process remains fluid – at times an agreement may seem imminent, while at others, negotiations appear to stall.
We believe there are two main scenarios to consider regarding the investment implications of a potential ceasefire. Our base case is for a limited ceasefire, while the more bullish case is for a sustainable peace deal between Russia and Ukraine. We explore both scenarios below, focusing on the investment considerations, particularly as it relates to Russian sovereign and corporate debt, emerging market debt, and the energy sector.
Base case: A limited ceasefire
Our cautiously optimistic base case is for a limited ceasefire in Ukraine, which would involve a small peacekeeping force but no security guarantees from NATO or the US, and conditions requiring Ukraine to hold elections before Russia agrees to talks for a more lasting peace deal. In this case, as the possibility of a ceasefire gains traction, the US and Europe may lift financial sanctions imposed on Russia when it invaded in 2022. It is important to note that sanctions will likely only be lifted if there is a ceasefire, although comments from the US suggest this sequencing is up for debate.
If US sanctions are lifted, and investment in Russia securities permitted, we believe the most immediate market impact would be on Russian sovereign debt, with current prices offering significant discounts to emerging market peers. Russian corporate credit could also present attractive investment opportunities. However, it is important to note that credit ratings across the Russian market are unlikely to return to investment grade due to qualitative factors. Furthermore, investors and ratings agencies will have to determine how to treat the cash paid into domestic Russian bank accounts that has been servicing these bonds since sanctions were enacted.
There might also be opportunities in Ukraine’s hard currency debt, although this depends on the nature and conditions of the ceasefire. Other emerging market beneficiaries could include the hard and local currency bonds of both Turkey and Egypt. Turkey could benefit from stronger European economic growth and lower gas prices, while Egypt could benefit from lower wheat prices.
Bullish case: A sustainable peace deal
In the more bullish but less likely scenario of a sustainable peace agreement with meaningful Russian concessions, Europe could also lift energy sanctions that would allow for a partial resumption of gas flow through the Ukraine pipeline to Europe. This development could help lower energy prices in Europe. In the base case scenario, we think it is unlikely for European energy sanctions on Russia to be lifted quickly.
In terms of Russian oil exports, the impact of a ceasefire is expected to be minimal in either of the scenarios, as production will likely be determined more by OPEC+ quotas than by sanctions.
The Venezuela precedent
The removal of sanctions on Venezuela in 2023 serves as a helpful example to understand the potential timeline and impact of sanctions removal on asset prices. In Venezuela, sovereign bond prices doubled from $10 to $20 the day after sanctions were removed in October 2023, and then peaked a couple of months later in January 2024 at $23. Subsequently, J.P.Morgan announced index reinclusion in February 2024, which was phased in over three months from April to June 2024. During this period, prices ranged between $18 and $22 before domestic politics took over as the driver of price action. It is important to note that Russian bonds are currently not trading at comparably distressed prices given their stronger underlying credit fundamentals.
Source: Bloomberg, as of 28 February 2025. An investment cannot be made in an index.
The bottom line
While the path is uncertain, a potential ceasefire could bring some respite to the region and could also have significant geopolitical and economic implications. The market is likely to price in developments quickly, even if it takes several months to ultimately lift sanctions and resume Russian pipeline gas flows to Europe. We continue to closely monitor events as they unfold.
