Ruble Resists Oil Rally as Ukraine Warns of Russia Invasion Risk

  • Currency little changed as Brent crude rises above $50/barrel
  • Exchange rate gave up gains after Poroshenko statement

The ruble resisted oil’s rally above $50 a barrel as Ukrainian President Petro Poroshenko said he wasn’t ruling out a full-scale invasion by Russia, stoking concern an escalation in the two-year conflict will reverberate across the region.

Russia’s currency reversed an advance of as much as 0.7 percent to trade little changed at 63.82 per dollar by 4:42 p.m. in Moscow. The benchmark Micex Index also erased gains, while Poland’s zloty weakened against the euro. The cost of insuring Russian debt against default for five years rose for a second day.

Poroshenko said Ukraine may institute a military draft if the situation with its neighbor worsens after three soldiers were killed in a spate of shelling by pro-Moscow separatists in a year. The comments pulled investor attention away from the six-day rally in Brent crude. Oil has been outperforming the ruble this month in part as the conflict in Crimea, which Russia annexed in 2014, started to deepen.

“Tension is rising rapidly,” said Piotr Matys, a strategist at Rabobank in London. “A full-scale military conflict between Russia and Ukraine would not only cause a sharp fall in the Russian ruble, but the Polish zloty and other currencies from the central and eastern Europe region would be vulnerable as well.”

Credit Risk

Credit default swaps on Russian debt increased five basis points to 229. The contracts rose last week after President Vladimir Putin accused the government in Kiev of engaging in “terror” tactics in Crimea and vowed to respond with “serious measures.”

Russia’s annexation of Crimea in March 2014 and the subsequent insurgency in Ukraine’s east sparked U.S. and European sanctions that have locked some of the nation’s biggest state companies out of international capital markets. Investors have rushed back into Russia in the past year as a cease fire took hold and oil, the nation’s biggest export earner, recovered from 12-year lows.

As Brent crude jumped 18 percent in August, the ruble appreciated 3.5 percent. On Thursday, government Eurobonds due in September 2023 declined, sending the yield up two basis points to 3.45 percent. Similar-maturity Ukrainian debt also fell, driving the yield up 10 basis points to 8.39 percent, the seventh day of increases.

The 50-member Micex Index, which closed at a record high earlier this week, lost 0.3 percent.

"This is the strongest statement from Poroshenko since the latest escalation of situation around Crimea," Vladimir Miklashevsky, senior strategist at Danske Bank A/S in Helsinki, said by e-mail. "It triggered some profit-taking as investors want to be sure they keep the beef from the recent ruble rally."

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