Ukrainian Bonds Drop as Crackdown Sparks Russia Military Drills

Ukrainian bonds fell, driving yields to a one-month high, as Russia warned its western neighbor against continuing an anti-separatist offensive and began military drills near the border.

The yield on Ukraine’s dollar-denominated sovereign note due April 2023 rose five basis points to 10.11 percent, the highest since March 19, according to data compiled by Bloomberg. The bond advanced earlier in the day on speculation the International Monetary Fund will soon grant a $17 billion bailout to the junk-rated sovereign.

Russian President Vladimir Putin said the crackdown, in which Ukrainian forces killed five pro-Russian rebels, is “a very serious crime” and “will have consequences” for relations between the two nations. IMF staff have endorsed the bailout and proposed an April 30 board meeting to consider the package, government officials who have seen the recommendations said on condition of anonymity yesterday. The loan may clear the way for additional external financing for Ukraine.

“Just like the market, the IMF is also likely to be keeping a close eye on the tensions in eastern Ukraine,” Thu Lan Nguyen, a Frankfurt-based currency strategist at Commerzbank AG, said in an e-mailed note to clients today. “Should the situation escalate, the IMF aid and thus the stabilization of the hryvnia would once again be at risk.”

The hryvnia gained 2.2 percent to 11.30 per dollar, paring its loss this year to 27 percent, the world’s worst performance among currencies tracked by Bloomberg. It rallied 12 percent last week as the central bank raised its key interest rate and restricted trading on the interbank foreign-exchange market.

Ukraine can meet the requirements attached to the loan program even as tension rises, IMF spokesman Garry Rice told reporters today in Washington. Earlier, President Barack Obama said the U.S. and its allies are ready to impose additional sanctions against Russia as Putin begins military drills, involving warplanes, near the border.

“We expect the situation to escalate in the next few weeks,” Barclays Plc analysts wrote in a research note today.

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