Russia’s Ruble to Bonds Drop on Ukraine Cease-Fire Ending

The ruble declined for a third day and Russian bonds fell on concern the country will face tougher sanctions after a cease-fire in Ukraine ended without a peace deal.

The currency weakened 0.8 percent versus Bank of Russia’s target dual-currency basket to 39.9743 by 6 p.m. in Moscow, when the central bank ends market operations. Russian ruble debt maturing in February 2027 dropped for a third day. Ukraine’s hryvnia slid 0.6 percent against the dollar and its Eurobonds fell.

Ukrainian President Petro Poroshenko ended a cease-fire with pro-Russian separatists yesterday, citing more than 100 violations, and pledged to retake the country’s easternmost regions. The crisis has triggered the worst standoff between Russia and the U.S. since the Cold War, and led the U.S. and European Union to impose sanctions on individuals and companies, exacerbating an economic slump in Russia.

“It can’t be excluded that as soon as the offensive starts and the Ukrainian army faces resistance, another round of economic sanctions against Russia will be triggered,” Vasily Oleynik, an analyst at OAO IT Invest in Moscow, said in e-mailed comments. “A third sanctions package can hurt the Russian economy.”

The ruble fell against the dollar, breaching its 200-day moving average, a technical indicator that signals a long-term weakening trend to some analysts.

Best Quarter

The Micex, which entered a bull market on June 6, rose 0.4 percent to 1,482.92 at the close in Moscow, reversing a 1 percent drop. OAO Lukoil, Russia’s second-largest oil producer, climbed 1.1 percent while OAO Surgutneftegas added 0.6 percent. A weaker ruble boosts exporters’ profitability because their revenue is in dollars and costs are denominated in the local currency.

The gauge yesterday capped the best quarter since the three months ended Sept. 30. The Micex trades at 5.5 times estimated earnings, the cheapest among 21 emerging markets tracked by Bloomberg. That compares with a multiple of 5.3 percent at the end of February, before Russian President Vladimir Putin’s incursion into Ukraine’s Crimea peninsula.

Putin today said the resumption of military operations was unfortunate and criticized EU policies aimed at containing Russia, saying his government would “energetically” defend the rights of “Russians abroad.”

The yield on the government’s 2027 ruble bonds rose nine basis points to 8.59 percent and the rate on Ukraine’s July 2017 Eurobonds increased 15 basis points to 8.96 percent.

Expanded Sanctions

With the EU poised to expand sanctions against Russia, Poroshenko ended a truce he called on June 20, rejecting pressure to extend it a second time. New penalties would threaten an economy forecast to grow 0.5 percent this year, the slowest pace since a contraction in 2009, according to the median estimate in a Bloomberg survey of analysts.

“The Russian economy is entering center stage, investors see serious problems in the economy and that will pressure the market,” Andrey Vashevnik, who manages $25 million as chief investment officer at R&B Investment Fund Ltd. in Moscow, said by phone.

The Finance Ministry said it will sell 10 billion rubles ($291 million) of bonds due May 2019 tomorrow. The ruble extended this year’s decline to 4.1 percent against the dollar, the fourth-worst performance among 24 emerging-market peers tracked by Bloomberg.

“The ruble is down on the resumption of military action in Ukraine,” Olga Sterina, an analyst at UralSib Capital in Moscow, said in e-mailed comments. “If this weakening continues, there may be questions about tomorrow’s auction.”