Ukraine Bonds Drop as Tension in East Stokes Separatist Concern

Ukraine’s benchmark bonds fell, pushing yields to a three-week high, as intensifying clashes in the country’s east stoked concern Russia may seek to seize more territory after annexing Crimea last month.

The yield the dollar-denominated debt due April 2023 rose 38 basis points to 9.89 percent, the highest since March 24, at 4:01 p.m. in Kiev. The hryvnia slid for an eighth day, losing 3.5 percent to 13.15 per dollar. The currency, the world’s worst performer this year after a 37 percent drop, weakened to a record 13.6075 on April 11, data compiled by Bloomberg show.

In the Ukrainian town of Slovyansk, about 240 kilometers (150 miles) from the Russian frontier, camouflaged gunmen fired on government troops over the weekend in an anti-terror operation, killing one serviceman, the government in Kiev said. The nation’s bonds ended a three-week rally last week as armed separatists occupied official buildings. They ignored a deadline to vacate earlier today.

“Market reaction is not surprising given the latest violence,” Ivan Tchakarov, the Moscow-based chief economist for Russia at Citigroup Inc., said in e-mailed comments today. “Economics is now in the back seat to geopolitics.”

Tension has been building in Ukraine’s east since residents of the Crimea peninsula voted to join Russia following the toppling of former Ukrainian President Viktor Yanukovych. The confrontation near Slovyansk followed the takeover of a regional police station in Donetsk by pro-Russian gunmen and battles in which police used force to stop separatists from seizing buildings in other towns.

IMF Aid

The country’s $1 billion of notes maturing on June 4 fell 1 cent on the dollar to 96.43, the biggest drop in a week. The price has recovered since falling as low as 90.999 cents on the dollar on March 12, supported in part by the International Monetary Fund agreeing to a deal last month that will unlock $27 billion of aid to the country to help it avoid defaulting.

Officials from NATO, the European Union and the U.S. urged Russia to “de-escalate” the crisis and pull back troops, while Russian Foreign Minister Sergei Lavrov denied his nation is involved. European officials weighed expanding sanctions against Russia, saying it’s stoking deadly separatist unrest with the same methods it used to destabilize Crimea. The U.S. also imposed sanctions on some Russian officials last month.

Ukraine’s longer-dated debt has more to lose if violence escalates before elections scheduled for May, with yields “easily” climbing to levels seen before the IMF agreement on March 27, Tchakarov said. The 2023 yield had risen to a month-high of 10.91 percent 10 days earlier.

“Although we do not believe that a military action will take place in Ukraine, at least at this stage, negative headlines may adversely impact Ukrainian and Russian bonds,” Regis Chatellier, London-based director of emerging-market strategy at Societe Generale SA, said in an e-mailed note today. Societe Generale reduced Ukrainian sovereign debt to neutral from overweight.

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

To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net Daliah Merzaban, Justin Carrigan

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