Some Russian Bond Trading Defrosts as Investors Hunt for Deals

For now, trading is primarily between international banks and investors in dollar-denominated government and corporate debt, fund managers said. The market is still in limbo for Russian treasury bonds, a component of a widely followed index maintained by

JPMorgan Chase & Co.

“The dollar stuff is trading but at very distressed levels. Its sellers are wanting to get rid of it at any price, and there are some buyers willing to pick it up at these levels,” said Viktor Szabo, an emerging-market fund manager at Abrdn.   

A Russian government dollar bond due in 2026 was quoted around 20 cents on the dollar on Wednesday, down from about 100 last week, according to Advantage Data Inc. 

Wall Street banks have resumed trading of some Russian corporate bonds but are demanding trades settle a day faster than usual, said Phil Torres, an emerging-markets portfolio manager at Aegon Asset Management. “The dealers are trying to protect themselves in case there’s another event they’re not anticipating.”

Russian corporate bond prices have plummeted as much as 70% since the country invaded Ukraine, triggering U.S. and European sanctions that cut the country off from much of the international financial system. Unlike most countries with debt at distressed prices, Russia enjoys current-account surpluses and its largest companies are cash-rich. 

While Russian borrowers have the means to pay, it is unclear whether they will. The Bank of Russia blocked interest payments to foreign bondholders this week by instructing depositories and registrars, key parts of financial infrastructure, not to transfer payments to foreign clients. 

The move left the Russian state on Thursday set to miss a coupon for the first time since its 1998 debt crisis.

Records showed that the country’s finance ministry sent the interest payment for a local-currency bond maturing in 2024 on Wednesday, but the next step in the system that should then transfer it to foreign bondholders the following day is blocked by the central bank.

The central bank also barred local brokers from handling sales of securities from foreign investors on Feb. 28. Clearinghouses in Europe have also stopped processing trades on ruble-denominated bonds.

“At the moment, there’s nothing we can do,” said Daniel Wood, a portfolio manager at William Blair Investment Management. Mr. Wood has Russian dollar bonds in his portfolio and expects it won’t be able to receive payment on those coupons when they come due. 

A crucial question for investors is what will happen with indexes that are commonly used as benchmarks for their portfolios and which are often used as a blueprint for which bonds to hold.  Before the invasion, Russian sovereign debt made up around 6% of a popular JPMorgan local-currency emerging-market bond index and 2.7% of one for dollar bonds. 

“I think JPMorgan will be coming under very strong pressure from the U.S. government,” said Tim Ash, a strategist at BlueBay Asset Management who has pushed the bank to remove Russia from all its bond indexes. “At the end of the day I think it’s about reputational damage for JPMorgan.” JPMorgan declined to comment. 

The drop in Russian sovereign bond prices and the fall of the ruble have brought these weightings down to 1.8% and 0.7%, respectively. 

JPMorgan is set to remove Russian bonds from its ESG indexes, which are meant to focus on assets that are environmentally or socially responsible. The bank hasn’t said whether it could make further changes. 

Mr. Wood said he is holding on to his Russian holdings for the moment. “It depends on what JPMorgan does with those bonds. If they take the bonds out completely, we’ll have to decide,” he said.  

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com