Ukrainian Eurobonds are set for the best monthly rally in four years on investor speculation that Petro Poroshenko’s victory in the presidential election will help ease tension with Russia.
The notes have returned 7.9 percent in May, the most among 56 nations in Bloomberg’s Dollar Emerging Market Sovereign Bond Index, and are headed for the biggest gain since March 2010. The yield on debt due April 2023 fell 23 basis points today by 1:22 p.m. in Kiev to 8.79 percent even as government troops stepped up an offensive against pro-Russian rebels in Donetsk.
The billionaire received 54.5 percent of the May 25 vote to avoid a runoff, the Election Commission said after counting 95 percent of ballots. He pledged to visit eastern regions to end fighting with separatists that hampered voting. Russian President Vladimir Putin, who doesn’t recognize the government in Kiev, has promised to work with the winner.
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“Ukrainian bonds have been rallying on falling risk of a military conflict with Russia, and the presidential election was just an additional step forward to stabilizing the situation,” Vadim Khramov, chief economist for Ukraine at Bank of America Corp., said by phone from London. “The most recent violence in Donetsk shows that internal conflict will remain a risk, but we believe Russia is very unlikely to get directly involved.”
The Ukrainian Equities Index (UX) jumped 4.6 percent yesterday, the most in almost two months, to a two-year high. The gauge slid 1.9 percent today, trimming its rally this year to 33 percent. The hryvnia gained 0.1 percent to 11.90 per dollar, paring its 2014 loss to 30 percent, the worst performance among all currencies tracked by Bloomberg.
“Ukraine’s stocks, bonds and currency may rebound for two to three days following the win,” Aki Yeh, a fund manager for ING Securities Investment Co.’s Greater Russia Fund, said by phone from Taipei yesterday. “One must note this celebratory surge is short-term because fundamentally nothing has changed.”
Ukrainian troops deployed paratroopers, helicopters and warplanes after pro-Russia gunmen tried to seize Donetsk airport yesterday, with fighting spreading into the city.
“There will be a sharp increase in the efficiency of anti-terrorist operations,” Poroshenko said. “They won’t last two or three months; they’ll last a few hours.”
The new leader will inherit a shrinking economy dependent on bailout loans from the International Monetary Fund and large swathes of the Donetsk and Luhansk regions controlled by rebels. He said he’d call early general elections in 2014 as the nation seeks to put the rule of President Viktor Yanukovych, a Putin ally ousted in February, behind it.
“Russia’s playing much longer game than just getting to where we are now” to ensure Ukraine “doesn’t turn into a NATO country or European Union member,” Jan Dehn, the London-based head of research at Ashmore Group Plc, said today by phone. “In order to get leverage on the political situation in Ukraine, it makes sense for Russia to keep a bit of instability going.”
Poroshenko, who has a fortune of $1 billion according to the Bloomberg Billionaires Index, has promised to nurture employment and gear the economy toward Europe. The owner of assets including the Roshen chocolate company speaks Ukrainian and Russian fluently and has been a cabinet minister under both Yanukovych and his predecessor and rival Viktor Yushchenko.
Ukrainian bonds have been recovering from declines earlier this year that were fueled by default speculation and concern that Russia will grab more of the country’s territory after annexing the Crimea region in March. The government in Kiev has since won a $17 billion IMF bailout and signed the first part of a pact with the EU to boost trade and political ties.
The nation has $20.9 billion of debt payments coming due this year and next, including $1 billion of notes maturing on June 4, according to data compiled by Bloomberg.
Russia canceled natural-gas discounts it had offered to Ukraine, almost doubling the price in April to $485 per 1,000 cubic meters. Ukraine has said it will pay its debt to Russia’s OAO Gazprom through March and make further payments if Russia returns to the $268.50 price it had in the first quarter.
“There is additional room for further compression in the bond yields in the short term, if an agreement is reached on the gas price with Russia and if the Eurobond is paid on June 4,” Bank of America’s Khramov said.
To contact the reporters on this story: Krystof Chamonikolas in Prague at firstname.lastname@example.org; Natasha Doff in London at email@example.com; Andras Gergely in Budapest at firstname.lastname@example.org