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By Bloomberg

A year after President Vladimir Putin’s incursion into Crimea put Russia on the path to capital-markets isolation, companies and investors are learning to live with the risks.

Trading in exchange-rate derivatives, which can be used to protect against ruble price swings, surged more than five-fold in the fourth quarter from a year earlier, according to Moscow Exchange data. Three-month volatility for the ruble, the world’s highest after Ukraine’s hryvnia, jumped about seven times in the past 12 months as policy makers abandoned a trading band, allowing it to weaken amid U.S. and European Union sanctions and plunging oil prices.

The changes are starting to pay off after the ruble weakened 43 percent in the four months through January. The currency had its best month on record in February, with bonds also jumping, and ING Groep NV said Russian assets are a bargain even after Standard & Poor’s and Moody’s Investors Service cut the nation to below investment grade.

“The ruble devaluation forced banks and corporates to hedge their exchange-rate risks,” Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said in e-mailed comments on Feb. 27. “Companies are learning how to operate in good times and bad.”

Hedging Needs

The Bank of Russia abandoned its managed-float exchange- rate regime in November and let the ruble trade without restrictions, allowing it to avoid depleting more of the country’s currency reserves while also fueling unprecedented volatility.

The volume of trading in derivative instruments, such as options and futures contracts, on the Moscow Exchange more than doubled in the fourth quarter to 22.5 trillion rubles ($364 billion), while the number of newly opened currency option- contracts soared 38 times to 38.3 million.

“Higher volatility brings to the market companies that wish to hedge their currency risk,” Yulia Safarbakova, a senior fixed-income analyst at BCS Financial Group in Moscow, said by phone Feb. 27. “Then come the speculators, lured by liquidity.”

The ruble, which lost 0.7 percent to 61.60 on Feb. 27, surged 12 percent last month. While the currency is 42 percent weaker than it was on the eve of the Crimea incursion a year ago, oil’s biggest monthly gain in six years is helping assets recover in the world’s largest energy exporter.

Best Bonds

An index of Russia’s local-currency government bonds advanced 3.5 percent in ruble terms and 18 percent in dollars last month, the biggest increase in the Bloomberg Emerging Market Local Sovereign Index.

“Over the past weeks Russia has been recovering some of the lost ground,” Maarten-Jan Bakkum, a developing-country strategist at ING in The Hague, said by e-mail Feb. 27. “It has been the combination of rising oil prices and some optimism about the cease-fire that explains this, but uncertainty remains high.”

While the murder of Russian opposition leader Boris Nemtsov sparked international outrage, it’s unlikely to trigger a selloff in the country’s assets, according to Prosperity Capital Management Ltd. and Landesbank Berlin Investment GmbH.

Demand for derivatives soared across all groups of clients, peaking at the end of last year, Kirill Pestov, a managing director for derivatives market of Moscow Exchange, said in an e-mailed reply to questions from Bloomberg News.

Before Crimea

“We can absolutely exclude the return of volatility” to levels seen before Crimea, as geopolitical tension remains high over developments in Ukraine and the oil price has dropped 46 percent from last year’s high, Andrey Nikitin, foreign currency options trader at Olma Investment Company, said by phone on Feb. 26.

The volume of derivatives trading was almost three times higher than that of stocks and bonds combined, compared with 70 percent of the securities markets in 2009, exchange data show.

The Russian market is becoming more developed, and its participants are starting to look at more sophisticated financial tools, according to Steven Weller, head of currency trading at Sberbank CIB in Moscow, the investment arm of Russia’s largest lender.

“The derivatives market continues to have momentum today,” Weller said in an interview on Feb. 27.