U.S. assertions that President Vladimir Putin’s troops have crossed into Ukraine are rekindling the threat of sanctions and fanning a selloff in Russian assets.
Benchmark government ruble bonds due in February 2027 tumbled the most since March yesterday, wiping out this month’s gains, while the Russian currency slumped to an 11-year low versus the dollar. The cost of insuring the sovereign’s dollar bonds against non-payment with credit-default swaps soared to a five-year high relative to the world’s largest emerging markets.
Sentiment turned after Ukraine President Petro Poroshenko said Russian troops have “de facto” entered his country, two days after he met Putin for talks. Russia is showing a “pattern of escalating aggression,” according to U.S. State Department spokeswoman Jan Psaki. The moves boost the case for sanctions, said Edwin Gutierrez of Aberdeen Asset Management Plc.
“Investors are panicking,” Konstantin Nemnov, head of fixed income at TKB BNP Paribas Investment Partners in St. Petersburg, said by phone yesterday. “At the moment it’s impossible to say how this situation will develop as investors are pricing in the risks of new sanctions and are selling.”
The yield on the 2027 OFZ notes increased 39 basis points to 9.72 percent yesterday, compared with 9.42 at the end of last month, according to data compiled by Bloomberg. Russian assets climbed earlier in August after Putin pledged to do all he can to bring peace to Ukraine’s battle-torn east, reducing speculation that sanctions would be ratcheted up further.
The détente-mood crumbled as NATO Brigadier General Nico Tak said yesterday that Russia had masterminded a counteroffensive by Ukrainian rebels, with well over 1,000 of its troops operating inside Ukraine. They are helping insurgents open a second front in the south of the country, he said.
“Our base case is another round of sanctions, especially with this incursion,” Gutierrez, who helps manage $13.5 billion in emerging-market debt at Aberdeen, said by phone yesterday. “I just don’t see how the U.S. will not impose sanctions.”
EU leaders will discuss tougher penalties for Russia at an Aug. 30 summit, German Chancellor Angela Merkel said yesterday. The U.S. has a “range of options” to help Ukraine, with existing sanctions having an increasing impact on the Russian economy, Psaki said at a briefing yesterday.
The cost of Russian credit-default swaps jumped 28 basis points to 254 basis points yesterday, the most since Aug. 8, CMA data compiled by Bloomberg show. The premium to an average from the three other leading emerging markets -- China, India and Brazil -- rose to 124 basis points, the most since 2009.
The yield on Russia’s March 2030 dollar bond was heading for an 11 basis point drop this month before it surged 27 basis points yesterday to 4.83 percent. The ruble sank 1.6 percent to 36.7500 per dollar, its weakest close since at least May 2003. The currency slipped 0.6 percent to 36.9585 as of 10:39 a.m. in Moscow today.
“Current eurobond prices are attractive and this could be used as an entry point,” Fedor Bizikov, a money manager at GHP Group in Moscow, said by phone. “These levels look interesting if we don’t see any further escalation.” Bizikov said he didn’t buy or sell Russian Eurobonds yesterday.
Putin had hailed his talks with Poroshenko on Aug. 26 as “positive,” while continuing to deny any Russian involvement in a conflict that’s already claimed more than 2,000 lives.
After expectations the leaders would agree on a plan to de-escalate the conflict, “any optimism is difficult,” Aaron Grehan, a London-based fund manager who helps oversee $4.5 billion in emerging-market debt at Aviva Plc, said by e-mail yesterday. “We continue to assess developments very closely and assess whether the situation requires a reaction.”