Turkey Rift Erases Russian Five-Year Bond Rally as Ruble Weakens

  • Bonds drop for worst week since August, ruble falls third day
  • Bank of Russia to resume FX repurchase operations from Dec. 14

Russian government bonds posted the biggest weekly decline since August after the downing of a warplane by Turkey increased geopolitical tension. The ruble ended a four-week advance.

Five-year government bonds erased last week’s rally as the yield on the notes surged 35 basis points in the period to 10.06 percent in the five days through Friday. The ruble weakened 2.5 percent, the fourth-worst performance in emerging markets, while the benchmark Micex Index slid 1.7 percent.

The downing of the Su-24 warplane in northern Syria soured optimism that the Paris terror attacks will lead to improved ties between Russia and the West. As the government prepares to impose economic penalties on Turkey, the slump in Russian assets is being compounded by falling prices for crude.

“Russian assets are pricing two things -- further weakening of the oil price and open geopolitical issues with Turkey,” Vladimir Miklashevsky, strategist at Danske Bank, said by e-mail.

The ruble weakened to 66.42 against the dollar and the Micex stock index fell to 1,795.70. While bonds lost their position of the top-performing emerging-market debt this year to Nigeria, they have still handed investors a 22.4 percent return from the beginning of the year through Thursday.

Political Risks

The government has two days to develop economic measures to respond to Turkey’s action and the response may affect flights, trade and investment, while bilateral projects may be frozen or canceled, Russian Prime Minister Dmitry Medvedev said on Thursday. Brent, which is used to price Russia’s main oil export blend, fell for a second day, declining 1.3 percent to $44.89 per barrel in London.

“This isn’t the first correction this autumn, but this time around the profit-taking is amplified by higher political risks,” Ivan Guminov, manager of fixed-income portfolios at Ronin Trust Asset Management in Moscow, said by e-mail. “Foreign investors are undoubtedly increasing the political-risk estimates after the incident with the shot-down Su-24.”

One-Year Repos

The ruble pared earlier declines after the Bank of Russia said it will resume auctions for 12-month repurchase agreements with foreign currency, raising the minimum rate by 50 basis points to the London interbank offered rate plus three percentage points. The central bank is resorting to the instrument to give comfort to lenders, Bank of Russia First Deputy Governor Ksenia Yudaeva told reporters on Friday in Moscow.

“Overall, we think that the decision will help to neutralize much of the potential negative impact on the ruble of upcoming repo maturities,” Bank of America Corp. analysts, including Vladimir Osakovskiy, said in an e-mailed note.

The total amount outstanding in one-year foreign-currency loans stands at about $18.6 billion, according to the central bank. Russian lenders have to repay $2.8 billion in 12-month foreign-currency repos that they borrowed last year, the central bank’s press service said by e-mail in response to questions sent by Bloomberg News.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE