Ukraine Bonds Gain as U.S. Sanctions Risk Pressures Yanukovych

Ukraine’s bonds rose for a second day as a threat of U.S. sanctions piled pressure on President Viktor Yanukovych to obtain financing from abroad to shore up the nation’s currency as foreign reserves dwindle.

The yield on the nation’s dollar bonds due in June 2014 fell 133 basis points, or 1.33 percentage point, to 18.57 percent at 5:40 p.m. in Kiev, following a 1 percentage-point decline yesterday from a record. Non-resident holdings of sovereign domestic bonds jumped to 9.37 billion hryvnia ($1.1 billion) as of Dec. 12 from 3.68 billion hryvnia a month earlier, according to data on the central bank’s website.

The U.S. is considering imposing sanctions against Ukraine after riot police attempted to clear thousands of anti-government activists off the streets of Kiev, State Department spokeswoman Jen Psaki said yesterday. Yanukovych said this week he will restart bailout talks with the International Monetary Fund and is still interested in signing a trade pact with the European Union after his decision last month to choose closer Russian ties over the EU pact triggered street protests.

The threat of sanctions “certainly further increases the pressure on the government to give in,” Thu Lan Nguyen, a Frankfurt-based strategist at Commerzbank AG, said by e-mail today. “It is mainly the financial markets that the government is or should be worried about.”

Five-year credit-default swaps, contracts insuring the nation’s debt against non-payment, rose 15 basis points to 1,098, after dropping 57 basis points in the previous two days, according to CMA data.

Weaker Currency

The nation’s foreign reserves dropped 9 percent last month to $18.8 billion and are down 51 percent since mid-2011, central bank data published on Dec. 6 show.

The hryvnia weakened for a third day, dropping 0.2 percent to a 13-month low of 8.2875 against the dollar. The yield on Ukraine’s dollar bonds due April 2023 dropped 19 basis points to 10.22 percent, after touching a record 10.8 percent on a closing basis Dec. 9, according to data compiled by Bloomberg.

The slide in the currency “means that the central bank is still forced to deplete reserves,” Nguyen said. “They cannot do this much longer, and therefore we are seeing a first peace offer by the government as it is now open for negotiations with the opposition.”

The KievPrime rate at which Ukrainian banks lend overnight to each other fell 3.4 percentage points to 8.13 percent, the lowest in a week and compared with a 2013-high of 20 percent on Dec. 9, according to National Foreign Exchange Association data compiled by Bloomberg.

Liquidity among Ukrainian lenders tightened this month as central bank interventions to prop up the hryvnia during the street protests drained the currency from the financial system.

Credibility Issue

An index of Ukrainian stocks listed in Warsaw declined 2.1 percent today, lowest close since it started in January 2011. The gauge has lost 25 percent this year, compared with a 9.5 percent advance in Warsaw’s WIG Index. (WIG) The UX stock index in Kiev added 0.2 percent today, paring its 2013 loss to 6.4 percent, according to data compiled by Bloomberg.

The government’s bid to push activists out of the center of the Ukrainian capital re-energized a protest movement that’s almost in its fourth week. Yanukovych urged a national dialog that includes clergy and civil society activists, according to an e-mailed address yesterday.

“There is now an issue of credibility at the heart of all the problems, and no one really seems to be sure about the administration’s intent,” Tim Ash, chief emerging-markets economist at Standard Bank Group Ltd. in London, said by e-mail today. “These comments from Yanukovych are unlikely to sway demonstrators” protesting in Kiev, at this stage, he said.

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net

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