Ruble Falls to Record as Micex Drops on Ukraine Incursion

Photographer: Kirill Kudryavtsev/AFP PHOTO

Belarus' President Alexander Lukashenko, center, with Russia's President Vladimir Putin, left, and Ukraine's President Petro Poroshenko in Minsk on August 26. Putin met his Ukrainian counterpart and hailed the talks as a step toward a political resolution. Close

Belarus' President Alexander Lukashenko, center, with Russia's President Vladimir... Read More

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Photographer: Kirill Kudryavtsev/AFP PHOTO

Belarus' President Alexander Lukashenko, center, with Russia's President Vladimir Putin, left, and Ukraine's President Petro Poroshenko in Minsk on August 26. Putin met his Ukrainian counterpart and hailed the talks as a step toward a political resolution.

The ruble tumbled to a record low and stocks fell amid a growing threat of tougher sanctions on Russia as Ukraine said intensified separatist fighting was a “de facto” incursion.

The currency sank 1.5 percent to 36.7247 per dollar at the close of trading, the lowest level in data going back to July 1993. The Micex Index (INDEXCF) lost 1.7 percent to 1,423.78. Yields on Russia’s benchmark bonds climbed the most since March, while equities and currencies across eastern Europe fell.

The Micex erased its weekly gain after Ukrainian President Petro Poroshenko called an emergency security meeting as rebels widened their offensive. The U.S. said Russia may be directing attacks by separatists, souring investor sentiment that improved in recent weeks on optimism that Putin would take steps to ease the conflict that’s claimed more than 2,000 lives.

“In the last couple of days things have taken a turn for the worse on the ground and the markets are reacting to that,” Lars Christensen, the chief emerging-market analyst at Danske Bank A/S in Copenhagen, said by phone. “We are likely moving to another round of sanctions.”

France and Germany threatened Putin’s government with further penalties after pro-Russian insurgents took several towns outside their strongholds of Donetsk and Luhansk, including near the Sea of Azov. That opened a new front and a seaborne supply channel for the rebels, said Anton Herashchenko, an adviser to Ukrainian Interior Minister Arsen Avakov.

Regional Fallout

The Ukrainian Equities Index (UX) tumbled 6.2 percent, the most since March 3, and the government’s bonds maturing in July 2017 dropped for a seventh day, sending the yield up 128 basis points to a three-month high of 12.2 percent. The zloty retreated 0.6 percent against the euro and forint lost 0.8 percent, while stock indexes in the Czech Republic, Hungary and Poland declined more than 2 percent.

Gas prices in the U.K., Europe’s biggest market, rose the most since July 25 on ICE Futures Europe in London. The next-month contract jumped as much as 6.6 percent to its highest level since May and traded at 45.04 pence a therm.

Russia, which meets about 30 percent of Europe’s gas needs through pipeline exports, is shipping half of that volume via Ukraine. The violence expanded a day after Putin met Poroshenko and hailed the talks as a step toward a political resolution. Russia denies involvement in the conflict.

Credit Risk

Credit default swaps, contracts insuring Russian debt against non-payment for five years, climbed 24 basis points to 250, the biggest increase since July 17. The yield on ruble-denominated bonds due February 2027 rose 39 basis points to 9.72 percent, the most since March 12.

“Investors’ mood has changed for the worse,” Vladimir Bragin, the head of research at Alfa Capital in Moscow, said by phone. “Ukraine’s statements that Russia has sent troops to Ukraine have caused a selloff.”

The U.S. and European Union imposed harsher sanctions on Russian companies in July, prompting Putin to retaliate with a food-import ban this month. The penalties, which limit the largest state-owned lenders accessing dollar and euro financing, curbed appetite for Russian assets. Putin’s Aug. 14 vow to “do all we can” to end the bloodshed in Ukraine helped steer the longest rally in the Micex since 2005.

“The market has risen quite a bit recently and investors used the increase in Ukraine tensions as an excuse to take profits,” Yuri Selyandin, a money manager who helps oversee about $2 billion at GHP Group in Moscow, said by phone. “Despite the meeting in Kiev, military activities haven’t slowed down and that’s disappointing for the market.”

Russian Hackers

Russian hackers attacked JPMorgan Chase & Co. and at least four other banks this month in a coordinated assault that resulted in the loss of customer data, according to two people familiar with the investigation. At least one of the banks has linked the breach to Russian state-sponsored hackers, said one of the people.

The FBI is investigating whether the attack could have been in retaliation for sanctions, said the second person, who also asked not to be identified, citing the continuing investigation.

OAO Aeroflot retreated 3.5 percent after posting a first-half loss versus a profit a year earlier. A drop in earnings at consumer-oriented companies from Aeroflot to OAO M.Video have soured investor appetite as sanctions threaten to push the economy into a recession.

Consumer Spending

“Aeroflot is very sensitive to the economic slowdown because of it affects consumer spending,” Ksenia Arutyunova, an analyst at Rye, Man & Gor, said by phone from Moscow. “Travel is the first thing people cut back on when their incomes decline.”

OAO Sberbank, Russia’s biggest lender, lost 4.3 percent, the most since July 21, even as second-quarter profit advanced to 97.5 billion rubles, beating estimates. Sberbank has the third-biggest weighting in the Micex at 11.4 percent.

“The Russian market is ignoring strong results from Sberbank, and selling off across the board due to continued accusations of Russian interference in Ukraine,” John Heisel, the Moscow-based vice president of sales and trading at Renaissance Capital Holdings Ltd., said by e-mail.

To contact the reporters on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net; Natasha Doff in London at ndoff@bloomberg.net

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

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