Global investment banks have sustained heavy losses on their emerging market fixed-income trading desks following Russia’s invasion of Ukraine, with executives bracing for further damage in the coming weeks.
Citigroup has taken the worst hit, of about US$100m, related to Russian exposure in emerging market fixed-income and currencies trading, according to sources familiar with the matter, while Goldman Sachs and Societe Generale have lost about US$50m apiece and JP Morgan is down about US$30m. Spokespeople for all four banks declined to comment.
Executives note that asset prices are extremely volatile at present and that mark-to-market positions are changing on a daily basis on these desks, which trade a range of products linked to local market interest rates, credit and currencies. But many expect Russia-related trading writedowns to grow significantly over the coming weeks and months given the considerable uncertainty over the geopolitical outlook and the difficulty banks will face in disentangling themselves from Russian exposure following sweeping sanctions imposed on many local firms.
One executive said international banks’ problems in unwinding derivatives trades with Russian banks subject to Western sanctions were causing large losses on emerging market interest-rate trading desks in particular, while there is also a great deal of uncertainty over the fate of currency exposure such as non-deliverable forwards and FX options.
Elsewhere, many banks have incurred smaller losses of up to about US$10m in delta-one equities trading following a halt in local currency Russian stock market transactions, sources said.
The swings in Russian markets have been dramatic since Moscow mounted its invasion of Ukraine in late February. The rouble was trading at 110 to the US dollar on Friday, according to Refinitiv data, from about 75 in mid-February. That slump came despite the Central Bank of Russia raising its key interest rate from 9.5% to 20% in one go on Monday. Russian hard-currency bonds have plunged in price to around 30% of face value and local-currency bonds are no longer tradable.
Even so, global banks' trading losses linked to Russia are far from overwhelming right now, especially in the context of their wider global markets divisions, which generate billions of US dollars in quarterly revenue and can typically weather volatility of this magnitude. Other parts of banks' global markets units, such as the huge desks trading products linked to developed market interest rates, can sometimes bring in extra income during these turbulent periods, counterbalancing large moves in riskier markets.
Senior bank executives had indicated prior to the Ukraine crisis that global markets businesses were headed for a decent quarter, with trading in currencies and interest-rate products picking up at the start of the year. Investors reshuffling positions in anticipation of the US Federal Reserve raising interest rates in March had triggered bumper volumes in these markets.