Ukraine Bonds Drop to Month-Low as Eastern Offensive Restarts

Ukraine’s benchmark Eurobonds fell to the lowest level in a month as the government renewed a push to oust militants from eastern cities and Russia revived its threat of intervention in the conflict.

The yield on dollar bonds due 2023 rose 16 basis points to 10.1 percent, the highest since March 20 on a closing basis, as of 3:24 p.m. in Kiev. The hryvnia gained 1.7 percent to 11.55 per dollar, paring its decline this year to 29 percent, the most among more than 100 currencies tracked by Bloomberg.

Ukraine started an offensive against pro-Russian militias operating in Kramatorsk, Slovyansk and other cities, signaling an international accord last week to disarm militias is unraveling. Russia threatened to retaliate if its interests are attacked.

“Diplomatic channels look exhausted,” Simon Quijano-Evans, a London-based analyst at Commerzbank AG, wrote in an e-mailed report today. “The direction of events still points to an escalation of risks.”

The developments intensify the worst standoff between Russia and the U.S. and its European allies since the fall of the Iron Curtain. Russia has continued previously unscheduled military drills with exercises of its naval forces in the Caspian Sea that started today, according to the southern military district’s press service.

The U.S. said airborne infantry will arrive this week in Poland, Lithuania, Latvia, and Estonia for exercises.

Ukrainian Debt

It costs $2.4 million in advance and $500,000 annually to protect $10 million of Ukraine’s debt for five years, according to CMA data. That’s up from $1.1 million in advance at the start of the year and $2.2 million in advance yesterday, and signals a 55 percent probability of default during the period.

The authorities in Kiev haven’t fulfilled a single clause of the April 17 Geneva agreement, Russian Foreign Minister Sergei Lavrov said in an interview with state-run RT television, according to a summary on the channel’s website. Lavrov drew a parallel with Russia’s actions during a 2008 war over the Georgian breakaway region of South Ossetia.

“Russia will try to destabilize the situation,” Viktor Szabo, who helps manage more than $11 billion in emerging-market debt at Aberdeen Asset Management Plc, said by phone from London yesterday. “There is also the tail risk of the situation getting out of control, that may easily happen. The Russians wouldn’t mind a bit of a civil war, where they could march in as peace keepers.”

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