Micex Drops With Bonds as Auction Pulled Amid Ukraine Violence

Russia’s benchmark equity gauge slumped while bonds slid with the ruble as a debt sale was canceled and Ukraine unleashed an offensive to dislodge militants from towns in its eastern Donetsk region.

The Micex Index dropped 2.5 percent to 1,311.01 by the close in Moscow, the biggest decline since March 12. The yield on Russia’s ruble debt due February 2027 rose 11 basis points to 9.24 percent after jumping 21 basis points in the previous two trading sessions.

The European Union will increase sanctions against Russia if this week’s multilateral talks in Geneva fail, according to French Foreign Minister Laurent Fabius. Ukrainian forces started military operations and the authorities in Kiev said elements of Russian special forces were identified among the anti-government forces. Four militants were killed and two wounded when Ukrainian troops stormed an airport in Kramatorsk, Russia’s state-run RIA Novosti news service reported.

“A military operation has begun in Ukraine and this is sinking the market,” Aleksei Belkin, who helps manage about $4 billion in assets as chief investment officer at Kapital Asset Management LLC in Moscow, said by phone. “It’s scary.”

Ukrainian units backed by armored personnel carriers blocked all approaches to the town of Slovyansk, RIA said, citing pro-Russian activist Sergey Tsyplakov. Part of Russia’s 45th Airborne Regiment was spotted in both of the towns, Ukrainian First Deputy Prime Minister Vitali Yarema said on Channel 5.

‘Civil War’

“Blood was spilled once again in Ukraine,” Russian Prime Minister Dmitry Medvedev said on Facebook today. “There’s a sense in the country that a civil war could break out.”

The U.S. and EU states say Russia is behind the turmoil that has fueled their worst standoff since the Cold War. Russia, which NATO says has 40,000 troops massed on Ukraine’s border, denies involvement and says the government in Kiev isn’t protecting Russian-speaking citizens. In warnings similar to those that preceded its annexation of Crimea last month, it insists it has the right to protect them with force if needed.

“Investors are afraid of a military conflict, of sanctions that could hurt the biggest companies, banks, metal producers,” Anvar Gilyazitdinov, who manages a $10 million portfolio of Russian stocks at Rye, Man & Gor Securities, said by phone from Moscow.

The U.S. and Russia plan to proceed with four-party talks in Geneva with EU and Ukrainian officials in two days, even as the EU and the U.S. are considering widening sanctions against Russian individuals and possibly companies.

‘Too Expensive’

The ruble weakened 0.3 percent against the central bank’s target basket of dollars and euros to 42.3058 by 6 p.m. It declined 0.4 percent to 36.1275 per dollar. Yields on benchmark debt climbed 53 basis points in March, the biggest monthly increase since May, as Russia annexed Ukraine’s Crimea region, prompting the U.S. and EU to level sanctions on some individuals. The government won’t sell bonds when prices are too high, Finance Minister Anton Siluanov said April 1.

“It’s still too expensive for them,” Yulia Safarbakova, an analyst at BCS Financial Group in Moscow, said in e-mailed comments.

Russia is facing the toughest economic conditions since 2008. Growth may slow to less than 0.5 percent this year and may even be flat versus last year, Siluanov said today. The nation can’t boost budget spending amid geopolitical risks, he said.

“Yesterday we saw a sharp drop following the violent events over the weekend,” Sergey Vakhrameev, an analyst in Moscow at AnkorInvest LLC, said by phone today. “Over the last two months the market has been following the news flow from Ukraine.”

Preferred Sberbank

OAO Sberbank, Russia’s biggest bank, fell 4 percent, while OAO Gazprom, the world’s largest exporter of natural gas, slid 2.5 percent. Sberbank’s preferred shares slumped 7.5 percent to 60.11 rubles, the biggest decline since March 3. Deutsche Bank AG recommends switching into ordinary shares following Sberbank board’s plan to equalize dividends for preferred and ordinary stocks, Bob Kommers, a Moscow-based analyst at the bank, said by e-mail today.

Equities on the Micex trade at the cheapest valuations among 21 developing countries monitored by Bloomberg. Aluminum producer United Co. Rusal gained 3.4 percent to 142.55 rubles and 5.3 percent to $HK3.21. Rusal is the best performer on the Micex this year, rallying 50 percent. Bank of America Merrill Lynch increased its price estimate for the stock to HK$3.1 and kept its neutral recommendation, according to an e-mailed note today.

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