Goldman Sachs Sees Risks for Russia in Ukraine Bond Investment

Russia’s plans to spend $15 billion of its oil wealth buying Ukrainian bonds is a risky bet that is “becoming a concern of investors,” according to Clemens Grafe, Goldman Sachs Group Inc.’s chief economist in Russia.

Russia yesterday committed $15 billion, primarily from its $88 billion National Welfare Fund, to buy Ukrainian bonds as part of an aid package for its former Soviet neighbor. The sovereign vehicle is a rainy-day fund built up to stabilize retirement provisions.

“The numbers aren’t insignificant,” Grafe said by phone about the deal. “Most of the exposure is coming from the state and the state-controlled banks. If the bet goes wrong, it will be seen on the balance sheet.”

Russian President Vladimir Putin agreed on the deal with Ukrainian President Viktor Yanukovych yesterday, after the smaller country suspended plans to sign a trade agreement with the European Union. Ukraine is a crucial pipeline transit nation for Russian natural gas exports to western Europe, while Russia accounts for about 25 percent of its exports.

Moody’s cited Putin as saying Ukrainian borrowers owed Russia about $28 billion, according to a report this month, before the $15 billion of bond purchases. Ratings agencies will “eventually” have to look at this exposure, Grafe said.

‘Spectacularly Wrong’

Charles Seville, director of Fitch Ratings’ sovereign rating group in London and Kai Stukenbrock, head of sovereign ratings for the Commonwealth of Independent States and at Standard & Poor’s, didn’t immediately return calls.

Russia’s investment “can go spectacularly wrong if Ukraine fails to refinance it by 2015,” Maxim Tishin, who helps manage $1 billion as a portfolio manager at UFG Asset Management in Moscow, said in e-mailed comments. “If it places at par, that would be a bad trade financially, that’s for sure.”

Ukraine’s dollar bonds extended the biggest jump on record, with the yield on notes due in June falling 28 basis points, or 0.28 percentage points, to 8.48 percent by 6:41 p.m. in Kiev, the lowest since June on a closing basis. The rate dropped more than six percentage points yesterday. The hryvnia, which is managed by the central bank, gained 0.1 percent to 8.2850 per dollar.

The funds may help the smaller nation avoid a default after its economy sank into the third recession since 2008 and its foreign reserves sank to a seven-year low.

‘Political Moves’

Even so, Ukrainians are staging the biggest protests in almost a decade in Independence Square in Kiev after Yanukovych rejected signing the EU integration and trade accord last month to deepen ties with Russia, which had opposed the deal.

“Decisions like we have seen yesterday are clearly dominated by political motives only,” Sergey Dergachev, who helps oversee about $9 billion as a money manager at Union Investment Privatfonds GmbH in Frankfurt, said in e-mailed comments. “Russia bonded Ukraine much closer to herself, thus distancing Ukraine from the EU.”

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