Ukraine Election to Cast Vote on Bond Rally: East Europe Credit

Investors in Ukraine bonds will have an idea in three days’ time whether the rally they have enjoyed this month is likely to be sustained.

Billionaire presidential candidate Petro Poroshenko, who leads in opinion polls before Ukraine’s May 25 vote, says he’s seeking to ease tension with Russia, helping spur a 7.4 percent gain in the debt in May, the most among 56 nations in a Bloomberg emerging market bond index. The notes sank 3.6 percent in the first four months as the former Soviet republic lurched toward civil war and President Vladimir Putin annexed Crimea.

Poroshenko, who said May 10 the goal has to be to get Russia “back on the path of dialog,” is leading rivals including former Premier Yulia Tymoshenko. While Putin hasn’t signaled if he will recognize the outcome of the vote, Russia was angered by the February ouster of ally Viktor Yanukovych and has even banned imports of chocolates made by the billionaire’s Roshen Confectionery Corp.

The market will react to Poroshenko’s election “more positively than Tymoshenko,” Ivan Tchakarov, the Moscow-based chief economist for Russia at Citigroup Inc., said in e-mailed comments May 20. “While the former has been sending more conciliatory signals, the latter has been using much more fiery rhetoric in order to help close the gap with Poroshenko.”

First Step

The yield on Ukraine’s 2017 dollar-denominated Eurobond slid for a nineth day to 10.3 percent, the lowest since April 4. The April 2023 security yielded 9.05 percent. Dollar notes due 2017 issued by Jamaica, which shares Ukraine’s Caa3 rating at Moody’s Investors Service, yielded 5.68 percent.

The hryvnia gained 0.1 percent to 11.945 per dollar at 12:54 p.m. in Kiev, having plunged 31 percent this year, the most among currencies tracked by Bloomberg.

After annexing Crimea in March, Russia was accused by the government in Kiev and its U.S. and European Union allies of fomenting unrest in the nation’s mostly Russian-speaking east. Putin said this week he’s pulling back Russian troops from the border to improve conditions for the presidential vote.

The elections represent a “first step towards political stabilization,” analysts at Goldman Sachs Group Inc. including Andrew Matheny in Moscow, wrote in an e-mailed report dated May 21. “Russia has not fully specified if, or under what conditions, it would recognize the vote,” Goldman said.

Continuing Violence

Poroshenko, 48, is worth a net $1 billion, according to the Bloomberg Billionaires index. His wealth derives from a 91 percent stake in Roshen, Ukraine’s largest candy company which produces 450,000 tons of sweets per year. A former minister of economic development and trade, he left the government last year and took part in protests demanding Yanukovych’s ouster.

Violence between loyalists and pro-Russian separatists in the east flared yesterday, clouding the election campaign. The government in Kiev accused Russia of trying to disrupt the vote.

Ukraine bonds aren’t good value as the election probably won’t solve tensions in the country, according to Aberdeen Asset Management Plc. The government has received a bailout to help pay more than $7 billion in debt and interest due this year.

“Yields below 10 percent at the long end don’t compensate you for the risk of holding the debt of a country that might eventually fall apart,” Viktor Szabo, a London-based money manager who helps oversee more than $12 billion of emerging-market debt at Aberdeen, said by e-mail May 19.

‘Remain Volatile’

While Bank of America Corp. upgraded Ukraine’s bonds to marketweight from underweight this week, the nation “is likely to remain volatile,” analysts including Jane Brauer in New York and Arko Sen in London, said in an e-mailed report yesterday.

Michael Hasenstab, who manages the $70.1 billion Templeton Global Bond Fund at Franklin Resources Inc., said he is “more excited” about the prospects for Ukraine than a year ago. Franklin is the world’s largest mutual-fund investor in offshore debt from Ukraine, according to data compiled by Bloomberg.

“The transition government has done an exceptional job making tough reforms,” said Hasenstab, speaking yesterday at San Mateo, California-based Franklin’s Investor Day.

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