Aug. 15 (Bloomberg) -- The ruble weakened while government Eurobonds retreated after Ukraine said it had destroyed part of a Russian military convoy, wiping out a weekly rally spurred by speculation the conflict would ease.
The currency fell 0.5 percent to 36.2000 per dollar at 5:51 p.m. in London, reversing a gain of as much as 0.4 percent. Russia’s dollar-denominated bonds due in March 2030 fell for the first time in six days, sending the yield up 23 basis points to 4.73 percent. Local markets had closed before Ukraine announced the attack, with the Micex Index completing its best week since March and 10-year ruble bond yields sliding the most since 2009.
Investors dumped the ruble late in the trading session amid concern the assault could signal a new phase in the conflict, with Ukrainian forces directly clashing with Russian soldiers just a day after President Vladimir Putin pledged to work toward ending the bloodshed. Ukraine’s military spokesman Andriy Lysenko said troops partially destroyed a column of armed vehicles that had arrived overnight through the rebel-held section of the border.
“It certainly has the potential to be the start of something much bigger and more serious than we’ve seen so far, given that it puts Ukrainian forces into direct conflict with Russian forces,” Neil Shearing, the chief emerging-market economist at Capital Economics Ltd., said by phone from London. “It now seems to be fairly clear that Russian military vehicles have passed into Ukraine. If this is the beginning of something more serious, it would have serious market implications.”
One-week historical price swings for the ruble jumped after the announcement to 9.14 percent, a 55 basis-point increase. The yield on Ukrainian dollar bonds due in July 2017 climbed 16 basis points to 10.19 percent, trimming the weekly decrease to 100 basis points, the biggest drop since May.
The government in Kiev has for months said that separatist rebels in its easternmost regions are receiving support from Russia, which backs them with artillery fire. Russia, which annexed Ukraine’s Crimea peninsula in March, has repeatedly denied any involvement in the unrest. The U.S. and European Union have imposed sanctions on Russia, which retaliated this month with a food-import ban.
The hryvnia, the world’s worst-performing currency this month, lost 1.3 percent versus the dollar today and has slid 4.4 percent since the end of last week in what the central bank described as a “panic” selloff spurred by bets among citizens that Russia may invade.
Putin pledged yesterday to “do all we can” to bring the bloodshed to an end in comments made during a visit to the Crimea peninsula that he annexed in March. Bonds retreated in the previous six weeks as the sanctions cut off Russian companies from U.S. and European debt markets and threatened to exacerbate the economy’s worst performance since the 2009 recession.
The Micex climbed 0.7 percent to 1,417.82 at the close in Moscow, bringing its increase this week to 5.2 percent, the most since the five days ended March 21. Ruble-denominated bonds rose for the fifth day, sending 10-year yields sliding 63 basis points in the period, the biggest retreat since November 2009.
“It’s clear that markets have been downplaying the gravity of the rapidly escalating situation for some time now,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in e-mailed comments. “Russian assets are a proxy for perceived east-west tensions, and what we’ve seen over the last several hours shows that Russian assets are once again at enormous risk of selling off fairly dramatically.”
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