Russia Stocks Slide With Bonds as Ukraine Offensive Turns Deadly

Russian stocks slid to a month low and government bonds declined as President Vladimir Putin warned Ukraine against continuing its offensive on pro-Russian separatists after troops killed five rebels in an eastern city.

The Micex Index fell 2.2 percent to 1,300.54 by the close in Moscow, taking its decline in the past four days to 4.1 percent. The ruble weakened and local-currency bonds maturing in February 2027 decreased for a fourth day, sending the yield up 19 basis points, the biggest increase since March 14, to 9.36 percent. Higher yields prompted the Finance Ministry to scrap a bond auction yesterday.

Russian assets have come under pressure as an accord to disarm rebels, signed last week in Geneva by Ukraine, Russia, the European Union and the U.S., faces collapse. Ukrainian Interior Ministry and army troops destroyed three road blocks as they went into separatist-held Slovyansk in the Donetsk region. Putin called the Ukraine offensive a “very serious crime against its own nation.”

“Once again, politics and Ukraine are impacting the market,” Stanislav Kopylov, who helps manage 45 billion rubles ($1.26 billion) at UralSib Asset Management in Moscow, said by e-mail. “After gunfire was renewed it became clear that the agreement doesn’t work and everyone continues to insist on their own position.”

President Barack Obama said today the U.S. and its allies have additional sanctions against Russia ready to go because Putin’s government has yet to abide by the April 17 Geneva accord. Ukraine hasn’t fulfilled a single clause of the pact, Russian Foreign Minister Sergei Lavrov said in an interview yesterday with state-run broadcaster RT.

Scrapped Sale

Russia began new drills in a response to events in eastern Ukraine which involve warplanes near the border, Defense Minister Sergei Shoigu said, according to Interfax.

OAO Magnit, the country’s biggest food retailer, slumped 4.9 percent to the lowest level since July, while OAO Uralkali lost 3.7 percent on concern MSCI Inc. may cut the company’s weighting in its Russia index. United Co. Rusal pared a gain of as much as 4.4 percent that was spurred by Goldman Sachs Group Inc. and VTB Capital recommending buying the shares. It closed 0.5 percent higher.

Russia pulled a bond auction yesterday after investor bids for the 20 billion rubles in five-year and nine-year OFZ notes on offering didn’t “adequately represent” the nation’s “credit quality.” The Finance Ministry has canceled seven of its last eight sales.

Higher Yields

Yields on the 2027 securities have surged 100 basis points since Putin first intervened in Ukraine’s Crimea peninsula on March 1, just days after Viktor Yanukovych was ousted as the nation’s president following three months of protests. Crimeans later voted in favor of joining Russia, and separatists in other parts of eastern Ukraine took over official buildings.

The rebels say they’re not subject to the Geneva accord, which called on illegal groups to disarm and return seized buildings. The government in Kiev accuses Putin of instigating turmoil to possibly lay the groundwork for an invasion.

“The real selloff started after news on casualties in Slovyansk and Mariupol,” another city in eastern Ukraine, Roman Dzugaev, a fixed-income trader at BFA Bank in St.Petersburg, said by e-mail. “If we see bloodshed on the weekend, the yield on 2027 bond might easily rise toward 9.40 percent to 9.60 percent.”

Conflict ‘Escalating’

The ruble, which dropped 8.1 percent versus the dollar this year in the second-worst performance among 24 emerging markets, decreased 0.3 percent to 41.9346 against the central bank’s target basket of dollars and euros by 6 p.m. The currency fell by the same amount versus the greenback to 35.7880.

Russian companies are paying as much as 485 billion rubles in taxes this week, including as much as 240 billion rubles in mineral extraction levies, potentially boosting demand for the local currency.

Forty-three of the 50 shares traded on the Micex dropped today, led by a 6 percent retreat in OAO Novorossiysk Commercial Sea Port. Uralkali’s weighting in MSCI Russia will probably fall to 2.4 percent from 3.1 percent as a result of the change in the company’s ownership structure, VTB Capital said today in an e-mailed note.

The dollar-denominated RTS Index tumbled 2.3 percent, the most among more than 90 equity gauges tracked globally by Bloomberg.

“Renewal of the operation to clear militants signals the conflict is escalating and there will likely be new sanctions,” Andrey Vashevnik, who manages $25 million as chief investment officer at R&B Investment Fund Ltd. in Moscow, said by phone. “This conflict will go on for a while, the market will be trading in a narrow corridor.”

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