Russia Stocks Drop on Ukraine as Yields Tempt Investors to Bonds

Russian stocks fell for the second day as deadly clashes in Ukraine raised the prospect of tougher sanctions. Government bonds climbed as yields near a record high lured investors.

The Micex Index declined 0.5 percent to 1,298.29 by the close in Moscow. The yield on ruble-denominated sovereign debt due in February 2027 dropped six basis points to 9.61 percent, 10 basis points below a March 14 peak. Russia’s currency rose 0.1 percent to 42.0471 against the central bank’s target basket of dollars and euros at 6 p.m. local when the central bank stops its open market operations.

Dozens were killed in violence in eastern and southern Ukraine over the holiday weekend, less than three weeks before a presidential vote in the country. President Barack Obama and German Chancellor Angela Merkel said the elections, scheduled for May 25, are the next trigger point determining whether the U.S. and its allies slap broader sanctions on Russia.

“While there is a visible escalation of the Ukrainian conflict, there is a speculative interest as the yield closes in on the year-high level,” Roman Dzugaev, a fixed-income trader at BFA Bank in St.Petersburg, said in e-mailed comments.

The ruble has lost 8 percent versus the dollar this year, the second-worst performer among 24 developing-country currencies monitored by Bloomberg, after Argentina’s peso. It gained 0.2 percent to 35.8025 versus the dollar and was little changed at 49.6820 per euro.

The selloff has made Russian debt “attractive,” according to Jan Dehn, the London-based head of research at Ashmore, which has about $70 billion in assets.

Higher Stakes

The Finance Ministry will hold no debt auctions this week, with the next sale scheduled for May 14. Markets in Moscow will be closed on May 9 for a public holiday.

“We are cautious on Russia as a quick political solution to the crisis becomes less probable,” Martin Marinov, a money manager overseeing $1 billion in fixed-income emerging-market assets at Raiffeisen Kapitalanlage GmbH, said by e-mail from Vienna.

With Ukraine on an offensive to uproot pro-Russian insurgents from its eastern industrial region, dozens were killed in Odessa on May 2 after Russia sympathizers seeking to escape clashes took refuge in a building later engulfed by fire.

OAO Sberbank declined 0.3 percent to 71.99 rubles per share, dropping for a fourth day. Morgan Stanley analysts removed Russia’s largest lender from their Focus List of preferred stocks in emerging markets, citing a heightened risk of sanctions against Russia.

The dollar-denominated RTS stock index has dropped 21 percent this year, the world’s worst performance in dollar terms, as the Ukraine crisis prompted the worst standoff with the U.S. and its allies since the Cold War. The gauge declined 0.5 percent today to 1,143.44

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