Russian Markets Have Worst Week Since Crimea as S&P Cuts RatingNatasha Doff
Russian bonds and stocks suffered their worst weekly rout since mid-March as the truce forged to ease tension in eastern Ukraine unraveled, fueling concern that President Vladimir Putin faces stiffer international sanctions.
Benchmark ruble bond yields climbed to the highest since March 14, prompting the Finance Ministry to abort plans to return to the local debt market on April 23, two days before Standard & Poor’s cut Russia’s credit rating to one level above junk. The central bank’s surprise half-point interest-rate increase yesterday failed to stem the ruble’s weekly retreat, the biggest among 24 emerging markets after South Africa’s rand.
“The past few days have been particularly painful for Russian fixed income,” Benoit Anne, the London-based head of emerging-market strategy at Societe Generale SA, said by e-mail yesterday. The failed debt auction “badly damaged investor confidence. In addition, the geo-political situation continues to deteriorate with a war of words and a tougher rhetoric employed between various parties,” he said.
The Micex Index dropped 5.6 percent for the week, the most since the period ended March 14, the last trading day before the Crimean referendum that paved the way for Putin to annex the Black Sea peninsula. The yield on government bonds due February 2027 jumped 29 basis points yesterday to 9.65 percent, extending the weekly increase to 65 basis points, following the central bank’s move to raise its key rate to 7.5 percent.
The ruble suffered its steepest weekly retreat against the dollar since the five days ended March 9, depreciating 1.2 percent to 36.0450 by 9:08 p.m. in Moscow yesterday. The currency, whose three-month implied volatility rose to an almost six-week high, slumped 8.8 percent this year, the most for an emerging-market currency after Argentina’s peso.
Russia’s interest-rate increase, predicted by just one of 23 economists in a Bloomberg survey, failed to support the ruble because investors are focusing on political events, according to Przemyslaw Kwiecien, chief economist at X-Trade Brokers Dom Maklerski SA.
X-Trade, the most-accurate forecaster for the currency in the first quarter, expects the ruble will weaken to 36.42 per dollar by the end of June. Kwiecien said he may downgrade his estimates during a monthly review in the coming week depending on how sanctions unfold.
The Group of Seven nations are preparing new measures against Russia, German Chancellor Angela Merkel said yesterday, after U.S. Secretary of State John Kerry accused Russia of trying to impose its will on Ukraine at “the barrel of a gun.”
President Barack Obama discussed deepening sanctions against Russia with Merkel and leaders of France, the U.K. and Italy in a conference call, a day after Kerry said Russia was running out of time to ease tensions in Ukraine.
“If there are any financial sanctions on Russia, then market pressures might be too high for the central bank to resist,” Kwiecien said by phone yesterday. “The U.S. seems to be closer to implementing financial sanctions against Russia, which would probably spark capital outflows and put negative pressure on the currency.”
The exchange rate may weaken 7.6 percent from current levels to 39 per dollar by the end of 2014, Liza Ermolenko, a London-based emerging-market economist at Capital Economics Ltd., said in a research note yesterday. Yields on Russia’s 2023 dollar-denominated bonds jumped 42 basis points last week to 5.76 percent.
The conflict escalated this week when Putin warned Ukraine against continuing an anti-separatist offensive that killed five rebels. The accord signed April 17 by Ukraine, Russia, the EU and the U.S. is on the verge of collapse.
The crisis is pushing the Russian economy to the brink of recession with inflation above the central bank’s target for a 19th month. Growth in the country of 140 million people will slow to 1 percent in 2014, the lowest since the 2009 contraction, according to the median of 40 forecasts compiled by Bloomberg.
“We continue to see mostly downside risk in the ruble and Russian markets in general,” Lars Christensen, chief emerging market analyst at Danske Bank A/S in Copenhagen, said by phone yesterday. “What we’re seeing now is a pretty permanent exodus from Russia and it will be very difficult for the Russian central bank to fight it because a consequence of this is a further drop in economic activity.”