Ruble to Micex Rally as Sanctions Risk Eases Before Debt Sale

The ruble strengthened to a three-month high while Russian stocks climbed on speculation the U.S. and European Union won’t rush to impose tougher sanctions. Bonds gained before the government holds a debt auction tomorrow.

The currency strengthened 0.9 percent to 40.6185 against the central bank’s target dollar-euro basket by 6 p.m. in Moscow, the strongest level since Feb. 12. The benchmark stock gauge added 0.7 percent to 1,385.29 by the close, the highest since Feb. 28. Yields on ruble-denominated debt due in August 2023 declined one basis point to 8.96 percent, the lowest level in more than four weeks on a closing basis.

The Finance Ministry will offer 10 billion rubles ($287 million) of the 2023 bonds tomorrow as it returns to the debt market after a string of canceled sales due to a lack of demand. While the EU expanded its sanctions list yesterday, EU and U.S. policy makers say they are concerned broad penalties on the country’s energy and financial sectors risk provoking retaliatory measures from Russia.

“It looks like the risks of an escalation in Ukraine and introduction of additional sanctions against Russia seem to have been reduced,” Dmitry Mikhailov, who helps oversee about $3 billion as a money manager at Alfa Capital Partners Ltd. in Moscow, said by e-mail today.

The ruble appreciated 0.7 percent to 34.7840 versus the dollar and traded 1.1 percent stronger at 47.7495 per euro. Russia’s currency has retreated 5.6 percent per dollar this year, the second-worst performance after Argentina’s peso among 24 emerging-market currencies tracked by Bloomberg.

‘Restoring Positions’

The advance may be due to “massive buying by foreign investors, who may be willing to restore their positions in government bonds,” Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Bank Eurasia Zao in Moscow, said in an e-mailed note.

Russia hasn’t placed any bonds since the start of April and canceled its last auction on April 23 due to a lack of “adequate” bids, according to the ministry.

Borrowing costs fell after President Vladimir Putin called on May 7 for east Ukraine separatists to delay votes on independence, easing concern over sanctions. The yield on the 2023 bonds has declined 72 basis points in the last six days.

At the same time, the size of the offering shows there is “no massive demand given the lingering threat of sanctions and geopolitical risks,” Yulia Safarbakova, analyst at BCS Financial Group, said by e-mail.

Foreign investors’ share of local debt dropped to 22 percent in February from 26 percent in October, according to the latest data available from the central bank.

Gazprom Jumps

The Micex Index jumped as much as 1.5 percent today and closed at the highest level since Feb. 28, the day before the Russian parliament’s authorization for the use of force in Ukraine.

“It’s time to buy,” Jack Arnoff, a partner at Elbrus Capital Partners in London, said by e-mail today. “It is clear now that Russia has no intention of invading or annexing parts of Ukraine. And that is still a risk that needs to be priced out of the market.”

Russia’s state gas monopoly, OAO Gazprom, said yesterday Ukraine must pay for next month’s supplies by June 2 or face a shutoff the next day. Gazprom added 2 percent to 138.46 rubles, the highest since Feb. 28.

The “unprecedented” Gazprom decision may help bring Russia’s and Ukraine’s positions closer, Deutsche Bank AG analysts Pavel Kushnir and Tatiana Kapustina said in a note to clients.

Asset Freeze

“Any settlement of gas debt by Naftogaz of Ukraine to Gazprom would be a positive development,” they said.

The nation’s equities trade at five times estimated earnings, the lowest valuation among 21 emerging markets tracked by Bloomberg.

The EU yesterday froze assets of two Crimea-based companies and added 13 people to a list of individuals facing travel bans.

“The latest round of sanctions turned out to be rather insignificant,” Oleg Kouzmin, an analyst at Renaissance Capital in Russia, said in e-mailed comments today.

Putin and Didier Burkhalter, chairman of the Organization for Security and Cooperation in Europe, agreed on the need for talks in Ukraine after weekend referendums on independence in two eastern regions, the Kremlin said in an e-mailed statement yesterday.

“There’s a feeling that the situation won’t escalate,” Vladimir Bragin, head of research at Alfa Capital Partners Ltd. in Moscow, said by phone. “Sanctions weren’t serious.”

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