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Ukrainian Bonds Gain Most Since Russia Bailout as Azarov Resigns

Ukrainian government bonds gained the most in more than a month as Prime Minister Mykola Azarov resigned today to help end more than two months of street protests that turned deadly last week.

Yields on the dollar-denominated notes maturing in June fell 2.27 percentage points to 10.45 percent at 7:29 p.m. in Kiev, while the rate on the sovereign’s 2023 debt slid 61 basis points to 9.03 percent, data compiled by Bloomberg shows. Both yields are down the most on a closing basis since Dec. 17, the day Ukraine won a $15 billion bailout pledge from Russia that helped ease concern the eastern European nation will default.

Azarov quit to allow for a “peaceful resolution of the conflict,” according to a statement on the cabinet’s website. Lawmakers revoked a two-week-old anti-protest bill today as President Viktor Yanukovych struggles to quell unrest that’s spread from Kiev to other cities.

“The news that Azarov has resigned is rather market positive, at least in the short term,” Regis Chatellier, a London-based director of emerging-market credit strategy at Societe Generale SA, said in e-mailed comments today. “Yanukovych looks increasingly isolated and it may be very difficult for him to retain full power.”

The cost of insuring Ukrainian bonds against non-payment with credit-default swaps fell 75 basis points to 854, according to data provider CMA. The contracts, which fall when investor perceptions of creditworthiness improve, remain the highest in Europe as the country grapples with a record current-account deficit and its third recession since 2008.

Rating Cut

Standard & Poor’s lowered Ukraine’s foreign-currency rating by one level to CCC+, seven steps below investment grade, today due to the “significant” escalation in political turmoil.

Yields on the government’s 2023 debt climbed 124 basis points last week, the most on record for the period, as the protests claimed their first lives and the European Union warned the conflict could escalate into a civil war. The opposition says six people have died and thousands have been injured in the first deadly protests in the country’s 22 years of independence.

Opposition leader Arseniy Yatsenyuk has rejected twice in the last four days an offer from Yanukovych to take the premier’s post.

Russian Aid

While the nation’s stock index added 0.9 percent today, the hryvnia was little changed at 8.4850 per dollar, after touching its weakest intraday level since September 2009 yesterday at 8.6500.

Russia, which bought $3 billion in two-year Ukrainian debt on Dec. 20, may reconsider further disbursements of the $15 billion program if the government was dissolved, the Wall Street Journal reported today, citing an unnamed senior official.

Azarov’s resignation includes that of the entire cabinet, the president’s office said today in a statement on its website. The current members will stay until a new government is named, according to the statement.

JPMorgan Chase & Co. today raised Ukrainian bonds to a “tactical” overweight from marketweight on optimism Azarov’s departure will lead to a peaceful resolution of the conflict, the bank’s London-based analysts Nicolaie Alexandru-Chidesciuc and Jonny Goulden wrote in a report. The situation remains “volatile” and the Ukrainian economy is a concern, they said.

“Recent events suggest that negotiations instead of bloodshed will bring an end to protests and we think that extreme scenarios such as civil war have a low likelihood,” the analysts said. “Russia might not have to buy bonds worth $15 billion, as market financing would become more available.”

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