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Ukraine Bonds Sink Most in 2 Months as Gazprom Dispute Escalates

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June 16 (Bloomberg) -- Ukraine’s government bonds slumped the most in two months as OAO Gazprom cut off supplies of gas to NAK Naftogaz Ukrainy and the two companies filed competing lawsuits, adding to worsening cross-border tensions.

The yield on Ukraine’s dollar-denominated debt due April 2023 climbed 35 basis points to 9.27 percent by the close in Kiev, the biggest jump since April 14. Naftogaz notes due Sept. 30 fell 0.69 cent on the dollar, the most in six weeks, to 97.02 cents, while the yield on Gazprom securities due July 2022 added 18 basis points to 5.29 percent.

Ukraine said today Russia cut natural gas supplies after demanding fuel payments be made in advance. The gas companies filed lawsuits in Stockholm for over $10 billion after failing to agree on energy payments. Gazprom said it is owed $4.5 billion by Naftogaz for gas already supplied, while Naftogaz asserted it wants to establish a fair market price.

“There could be potential for further widening of the spreads if we don’t see a quick resolution,” Tatiana Orlova, senior economist at Royal Bank of Scotland Group Plc in London, said by phone. The bonds are also reacting to “the escalation of fighting in the east of Ukraine,” she said.

The crisis in relations between Russia and Ukraine was reignited over the weekend after a Ukrainian military plane was shot down by pro-Russian separatists near the east-Ukrainian town of Luhansk on June 14, killing 49 people. Protesters in Kiev responded by attacking the Russian embassy in the city and Russian Foreign Minister Sergei Lavrov broke off communication with his Ukrainian counterpart.

Shares of Gazprom dropped 0.8 percent to 145.20 rubles by the close of trading in Moscow.

“A cut in gas supplies only adds to the forces pulling Ukraine’s fragile economy into an ever-deepening recession,” Neil Shearing, an emerging markets economist at Capital Economics, said in an e-mailed note today.

To contact the reporter on this story: Natasha Doff in London at ndoff@bloomberg.net

To contact the editors responsible for this story: Daliah Merzaban at dmerzaban@bloomberg.net Matthew Brown, Chris Kirkham

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