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Ukraine Election Brings Market Triumph for Bonds: Russia Credit

May 26 (Bloomberg) -- Russia’s bonds are extending the best rally in at least four years as Petro Poroshenko won Ukraine’s presidential ballot with a mandate to resolve the crisis that’s roiled the nation since November.

The billionaire got 54 percent of yesterday’s vote with 72.3 percent of ballots counted, the Election Commission in Kiev said, dodging a run-off that Bank of America Corp. said would have triggered more market volatility. Russian and Ukrainian assets rallied this month on speculation a clear electoral verdict would spur talks on calming the crisis and re-establish rapport with President Vladimir Putin.

“This is the most positive outcome the markets would wish for at the moment,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by phone yesterday. “Hopefully, it de-escalates” the situation and “we’re going to see a strong market, both in Russia and in eastern Europe,” he said.

Russia’s dollar government notes returned 6.1 percent in May, while Ukraine’s advanced 7.8 percent, the two leading performers among 56 sovereigns in the Bloomberg USD Emerging Market Sovereign Bond Index. The securities had slumped earlier this year as Putin annexed Ukraine’s Crimean peninsula and the U.S. and European Union slapped sanctions on his inner circle in retaliation, with threats to add additional penalties.

Putin’s Recognition

The yield on Russia’s dollar note due in September 2023 dropped to 4.55 percent at 7:28 p.m. in Moscow, the lowest since Jan. 22. Ukraine’s benchmark Eurobonds extended two weeks of gains, cutting the yield on the dollar note due in April 2023 by one basis point to 9.02 percent, the lowest since April 4. The return on Russian dollar bonds this month is the biggest since at least February 2010, the Bloomberg index shows.

The election will draw a line under the rule of ousted President Viktor Yanukovych, the Russian-backed leader who fled in February after three months of deadly street protests in support of closer European ties. Putin, who doesn’t recognize the government in Kiev, has said he would work with the winner. His foreign minister Sergei Lavrov reiterated the pledge today, saying Russia was ready for talks with Poroshenko. The U.S and its allies said they’d tighten sanctions against Russia if voting was disrupted.

‘Daunting’ Challenges

With continuing fighting in east Ukraine that also hampered yesterday’s voting there, Poroshenko may face questions over his legitimacy, Neil Shearing, London-based chief emerging-market economist at Capital Economics, wrote in an e-mailed report today.

“The challenges facing Mr. Poroshenko are daunting to say the least,” Shearing wrote.

Poroshenko pledged to work with Russia to end “war, chaos and disorder,” while the White House said in a statement that “the U.S. looks forward to working with the next President.”

Russian assets have been rallying as international sanctions bypassed the country’s major companies and banks and Putin didn’t send troops into eastern Ukraine where pro-Russian separatists this month declared independence.

The ruble strengthened 4.3 percent in May to 34.1825 per dollar today, the best performance among more than 170 currencies tracked by Bloomberg. That’s brought the appreciation since Putin’s incursion into Crimea on March 1 to 4.7 percent. The yield on benchmark local-currency bonds due February 2027 fell four basis points to 8.74 percent today, giving it a 73 basis-point drop this month. The rate stood at 8.36 percent on Feb. 28.

Poroshenko’s election victory is “quite positive for the Ukrainian investment case,” according to Ovanes Oganisyan, a strategist at MidLincoln Research in Moscow. “In Russian bonds there was a move already, but Russia will also be in a much better spot. There is reason to be slightly more optimistic.”

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; Daniel Tilles at dtilles@bloomberg.net Chris Kirkham

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