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LONDON - When Saudi journalist Jamal Khashoggi was killed in 2018, London-based hedge fund manager Dominic Armstrong bet investors would be turned off and the kingdom's debt would take a beating.
His fund Horatius Capital made a bet worth millions of dollars through credit default swaps - or insurance against sovereign default - that Saudi bonds would be hit.
But investors largely stuck with Saudi debt.
When the United States declassified an intelligence report last month that said de-facto Saudi leader Crown Prince Mohammed bin Salman approved the operation to capture or kill Khashoggi, Armstrong again thought investors would act.
"I was expecting to see investors very quietly vote with their feet," Armstrong told Reuters. "People merely holding their nose was not enough. But I think the mood has changed. What will now follow is the actions to back that up."
He's still waiting, though.
In fact, demand for Saudi euro-denominated bonds was so strong last month that investors paid to lend the kingdom money.
Riyadh rejected the U.S. report as false, while the crown prince has denied involvement in Khashoggi's killing. Saudi Arabia is nonetheless the focus of criticism from campaign groups and some Western politicians over its record on human rights and civil liberties.
Yet the world's largest oil exporter, which has issued about $80 billion in international bonds since 2016, has an A-minus credit rating and pays higher yields than similarly rated peers, making it hard for investors to stay away.
For all the hype and billions of dollars globally pouring into investing based on environmental, social and governance (ESG) factors, it is a niche play in the sovereign bond market.
Some investors say that taking a principled stand on sovereign debt, and financially penalising countries for their record on issues such as human rights could prove counter-productive by constraining modernisation.
"Emerging market debt is full of trade-offs, and taking a Western lens on that sometimes is relatively difficult as they are on a different scale of the development," said Marcin Adamczyk, head of emerging market debt at NN Investment Partners, which manages 300 billion euros ($358 billion).
Adamczyk did not change his holdings of Saudi debt in the immediate aftermath of the U.S. report's publication.
Some of the biggest names in ESG investing, including BlackRock Inc, PIMCO and Ashmore, held a total of nearly $1 billion of Saudi debt, based on the latest data for 2020. They declined to comment when contacted by Reuters about the impact of the Khashoggi report.
A Saudi finance ministry spokesman told Reuters that the kingdom was "going through significant transformation which provides multiple opportunities for investors around the world".