Russia Ruble Yields Rise as Obama Meets Ukraine Leader

Ruble bonds fell, driving yields to a record, and stocks slumped as Russia showed no signs of abandoning its ambitions in Crimea.

Government bonds due February 2027 slid for a fourth day, lifting the yield 40 basis points to 9.36 percent, the highest since the securities were issued in February 2012. The Micex Index lost 2.6 percent to 1,274.21 by the close in Moscow, the lowest since May 2012. The ruble weakened for a fourth day against the central bank’s dollar-euro basket.

Russia’s stocks retreated the most since May 2012 last week and yields jumped as troops loyal to President Vladimir Putin surrounded military bases and airports in Ukraine’s Crimea region. European Union sanctions against Russia are “unavoidable” if Moscow doesn’t de-escalate the crisis, German Chancellor Angela Merkel said today. Ukraine’s interim Prime Minister Arseniy Yatsenyuk is due to meet U.S. President Barack Obama and Secretary of State John Kerry in Washington today.

“What other reaction would you expect?” Vladimir Bragin, head of research at Alfa Capital Partners Ltd. in Moscow, said by phone today. “Investors are better off ditching Russian assets at the moment. The market is scared of the uncertainty, whether there’ll be a conflict escalation or sanctions from abroad.”

The crisis in Ukraine has spurred the worst tension with the West since the end of the Cold War. Crimea’s residents will vote in a March 16 referendum about whether to join Russia.

Rates Concerns

One-year ruble dollar cross-currency swaps, a derivative contract exchanging cash flows in the currencies, rose 90 basis points to 9.38 percent, the highest level since 2009. Bank Rossii increased its main lending rates by 150 basis points in a surprise decision on March 3 to prevent further “financial instability” stemming from the ruble’s decline. The regulator next meets on March 14.

“Market participants are betting on further rate increases,” Alexander Losev, chief executive officer at Sputnik Asset Management in Moscow, said in e-mailed comments. “Nothing stops the central bank from putting the interest rate at 9, 10 or 11 percent for some time, in order to stop the ruble’s decline.”

The ruble slid 0.1 percent to 42.8676 against Bank Rossii’s target basket of dollars and euros. The local currency has slumped 9.9 percent against the dollar this year, the worst-performer after Argentina’s peso among 24 emerging-market currencies tracked by Bloomberg.

The central bank may have sold as much as $3 billion today to slow the ruble’s slide, Dmitry Dorofeev, a money manager at BCS Financial Group in Moscow, said in e-mailed comments.

Sinking Ship

Chinese exports plunged 18 percent last month and credit growth trailed estimates amid a crackdown on the nation’s $6 trillion shadow-banking industry. Industrial-production growth slowed to 9.5 percent in the January-February period from 9.7 percent in December, according to the median of 47 estimates in a Bloomberg survey. The data will be released at 1:30 p.m. Beijing time tomorrow.

The sell-off “is Asia-driven,” Joseph Dayan, the head of markets at BCS Financial Group in London, said by e-mail. “We’re busy without a tiny altercation on the deck of the Titanic when the whole ship is sinking.”

The dollar-denominated RTS gauge sank 12 percent into a bear market on March 3 and was 3 percent lower at 1,098.69 today.

The yield on the sovereign’s dollar bond due in 2020 rose 11 basis points to 4.44 percent in Moscow. State ruble debt due in August 2023 fell, lifting the yield 56 basis points to 9.47 percent, the biggest increase since the notes were sold last year.

Military Drills

“Unfavorable market conditions” forced the Finance Ministry to scrap a ruble-bond auction, it said in a statement yesterday. The ministry has axed five debt sales this year as the U.S. Federal Reserve pared its bond-purchase program, reducing appetite for riskier emerging-market assets, while the crisis in Ukraine deepened.

Ukraine, which says almost 19,000 Russian troops are in Crimea, began military drills to test combat readiness. The European Union told Russia it must switch course in Crimea by next week or risk more sanctions. Ukraine’s ousted President Viktor Yanukovych warned of a possible civil war at a news conference in south Russia yesterday.

The 14-day relative strength index for the Micex stock index fell to 25, a second day below the 30 level that indicates to some traders that a security is oversold.

OAO Gazprom, the world’s biggest producer of natural gas, dropped 1.7 percent to 119.01 rubles today, a fifth day of declines. OAO Sberbank dropped 5.2 percent to the lowest level since October 2011. OAO Lukoil slid 2.3 percent.

Russia’s equities have the cheapest valuations among 21 developing countries monitored by Bloomberg, with shares on the Micex trading at 4.6 times projected 12-month earnings, compared with a multiple of 10 for the MSCI Emerging Markets Index.

(Corrects time period for China data in 10th paragraph.)
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