Ruble Weakens on Ukraine Separatists as Putin Starts Army Drills

The ruble fell after separatists in Ukraine’s Donetsk region said they’ll proceed with a referendum and Russian President Vladimir Putin announced a full test of the nation’s military. Stocks rose.

Russia’s currency weakened for the first time in four days, dropping 0.1 percent to 41.1376 against the central bank’s target basket of dollars and euros at 6 p.m. in Moscow, when the central bank stops its open market operations. The Micex Index added 0.6 percent, extending this week’s gain to 5.1 percent. Tomorrow is a public holiday in Russia.

The ruble erased gains after the so-called Donetsk People’s Republic said a May 11 referendum on whether to leave Ukraine will go ahead, ingnoring Putin’s plea for delay. While stocks and bonds rallied the most in seven weeks yesterday after the President pledged to pull troops back from the country’s border, NATO said today there was no sign of a withdrawal.

“Investors wanted to believe that Putin was sincere that Russia would do nothing to further escalate the conflict and would take steps to de-escalate,” Vyacheslav Smolyaninov, an equity strategist at ZAO UralSib Capital in Moscow, said by phone. “People realized after the Donetsk news that something else is going on behind the scenes.”

The ruble depreciated 0.3 percent against the dollar and was little changed versus the euro. The currency is the second-worst performer among 24 emerging-market peers this year against the greenback with a 6.2 percent loss.

Rally ‘Excuse’

Russia is testing its entire military’s combat readiness, Putin said today. The exercises have been planned since November, he said at the Defense Ministry in Moscow, where he watched the drills by video link.

Putin said yesterday violence in Ukraine must stop for any dialogue to begin and he backed the presidential election scheduled for May 25. That marked a change from what Russian Foreign Minister Sergei Lavrov said on May 6, when he called for a delay to the vote because of the Ukrainian unrest.

“Putin’s views on Ukraine have certainly not changed,” Viktor Szabo, who helps manage more than $12 billion at Aberdeen Asset Management Ltd., said in e-mailed comments. “I don’t see a substantial shift, but the market was looking for an excuse for a rally.”

Stocks are down 8.8 percent this year, compared with a 0.7 percent increase for the MSCI Emerging Markets Index. Shares on Russia’s benchmark gauge are valued at 0.67 times net assets, or book value, compared with 1.48 times for the MSCI emerging-markets gauge, data compiled by Bloomberg show.

Hot Money

Three-month implied volatility for the ruble rose for the first time in almost two weeks, climbing 1 percent from an 11-week low to 10.5 percent, according to data compiled by Bloomberg.

“There were promising signs yesterday that the de-escalation has started and it will be on a firmer footing going forward,” Odeniyaz Dzhaparov, who manages $140 million in Russian investments at DWS Investment GmbH, said by phone. “It is clear that the volatility will remain for some time, which is not welcome. Investors need to be cautious.”

Bonds maturing February 2027 rose for a fourth day, sending the yield four basis points lower to 9.10 percent. The rate has fallen 57 basis points this week.

“This is very hot money with a very short-term horizon,” UralSib’s Smolyaninov said. “Any news can produce a bounce in Russia at the moment.”

To contact the reporters on this story: Vladimir Kuznetsov in Moscow at vkuznetsov2@bloomberg.net; Natasha Doff in London at ndoff@bloomberg.net

To contact the editors responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net; Wojciech Moskwa at wmoskwa@bloomberg.net Wojciech Moskwa

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