What to Expect From Ukraine Vote: The Bull and Bear Cases

As Petro Poroshenko faces off against former Prime Minister Yulia Tymoshenko in today’s Ukrainian elections, investors are preparing for several possible outcomes.

Ukraine’s dollar bonds advanced for nine straight days ahead of the ballot on speculation that an elected leader would be recognized by Russia and start negotiations to ease a three-month standoff triggered by President Vladimir Putin’s annexation of the Crimean peninsula. Russian debt and Moscow’s Micex stock index also rallied as the threat of further sanctions from the U.S. and the European Union subsided.

* Bullish: Poroshenko wins outright; violence eases.

A “reasonably orderly” vote may trigger a rally in Russian bonds as political uncertainty diminishes, Paul McNamara, investment director at GAM U.K. Ltd., which manages $129 billion in assets, said by e-mail from London.

Outright victory for Poroshenko would be welcomed by investors because he has shown a more conciliatory tone toward Russia than Tymoshenko, said Ivan Tchakarov, an economist at Citigroup Inc. in Moscow.

Poroshenko may “possibly” clinch the vote in the first round, with Russia “appearing to accept” the result, Simon Quijano-Evans and Tatha Ghose, analysts at Commerzbank AG in London, said in a May 23 note. They recommended a marketweight position in Ukrainian bonds before the election and forecast “some stabilization or recovery” in the hryvnia currency.

Tatiana Orlova, a senior economist at Royal Bank of Scotland Group Plc in London, said Poroshenko “may even win” in the first round, according to a May 23 research note.

* Neutral to Negative: Poroshenko fails to gain majority.

The most likely scenario is for Poroshenko to face a runoff and win it, said Vyacheslav Smolyaninov, a strategist at UralSib Capital in Moscow. This result wouldn’t lead to “significant repositioning,” he said in an e-mail May 23.

A further round of voting would trigger at least three more weeks of uncertainty and be “negative” for markets, Vadim Khramov, a London-based economist at Bank of America Corp., said in a May 23 note.

* Bearish: Violence escalates and Putin rejects result.

“The biggest risk is that the election is accompanied by a fresh escalation of unrest across the country, which would of course mean more downside for Ukraine’s financial markets,” Liza Ermolenko, a London-based emerging-market economist at Capital Economics Ltd., said in e-mailed comments on May 23. “If Russia does not recognize the result and decides to take some action in response, Moscow stocks and the ruble will come under renewed pressure.”

The Kremlin will probably only “tacitly” recognize the result of the ballot, without any legal commitment, Deutsche Bank AG analysts including Drausio Giacomelli and Hongtao Jiang wrote in a report on May 23.

Lack of official recognition may later allow Russia to send forces into Ukraine, as the country’s legislature cleared Putin to do to protect the interests of Russian speakers. That may probably trigger new sanctions on Russia. OAO Gazprom, OAO Sberbank and VTB Group are among the stocks most sensitive to potential further levies, UralSib said.

Aberdeen Asset Management, which oversees more than $12 billion of emerging-market debt, is steering clear of Ukrainian bonds because the presidential vote is unlikely to ease pro-Russia separatism in the country’s east, Viktor Szabo, a London-based money manager, said by e-mail on May 19.

“I doubt the elections will change much, as Russia will continue to pressure Ukraine,” Szabo said.

To contact the reporters on this story: Andras Gergely in Budapest at agergely@bloomberg.net; Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net

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

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