Ukraine Fatigue Pulls Rug From Under Russian Bond Trading

Traders driven weary by the ups and downs of Russia’s conflict with Ukraine are pulling out of the ruble bond market, sending volumes to a four-year low.

Secondary-market bond trading on the Moscow Exchange slid 34 percent in the first eight months of the year to 5.8 trillion rubles ($157 billion), the lowest level since 2010, according to data on the bourse’s website. The government’s ruble-denominated notes lost 14 percent in dollar-terms this year, the worst performance among 31 nations in the Bloomberg Emerging Market Local Sovereign Index, which gained 6.1 percent.

“Investors are very tired of the market behavior because they take a position and then there is one headline and a big move down,” Sergey Volkov, a fixed-income trader at Russian Standard Bank ZAO in Moscow, said by phone yesterday. “It has been a very hard market this year.”

The fighting in eastern Ukraine between government forces and pro-Russian separatists has sent the nation’s bonds tumbling as U.S. and European sanctions propel the economy toward a recession. The drop in volumes comes a year after foreign investors gained direct access to the market, stoking a 22 percent jump in turnover, as part of President Vladimir Putin’s plans to make Moscow a global financial hub.

Sales Slump

Bond sales by Russian issuers have tumbled as the crisis in Ukraine drove up borrowing costs, with domestic sales of debt plunging 61 percent to $14.3 billion in 2014 compared with the same period in 2013, data compiled by Bloomberg show.

The yield on the government’s local-currency bonds due in February 2027 jumped 1.56 percentage points this year as Putin’s annexation of Ukraine’s Crimea peninsula in March prompted the U.S. and European Union to impose sanctions on individuals and companies. Bonds also came under pressure as the central bank, seeking to shore up the ruble, increased its key policy rate three times by a total of 250 basis points.

“The fluid market situation and the rise in interest rates during the first half of 2014 led to a drop in the volume of borrowing in the debt market,” the Moscow Exchange said in a statement yesterday. “As a result of that the volume of bond trading dropped.”

The collapse upended a market that last year saw volumes in domestic bonds, known as OFZs, reach a record 12.7 trillion rubles. Foreign investors were drawn by simplified settlement and tax procedures as Euroclear Bank SA and Clearstream International SA began exchange-based operations.

‘Noticeable’ Change

“We make money from trading volumes, so for us this change is very noticeable,” Evgeny Shilenkov, the head of trading at Veles Capital LLC in Moscow, said by phone. “We have been forced to become more creative and look at other market segments like foreign exchange and stocks.”

Spokesmen for Euroclear and Clearstream declined to comment on how the drop in volumes was affecting their business in Russia when contacted by Bloomberg News yesterday.

Russian assets rose this week after Putin and Ukrainian President Petro Poroshenko agreed on steps toward a cease-fire. Ukraine and separatists signed a truce that will start today at 6 p.m. local time, Heidi Tagliavini, a representative of the Organization for Security and Cooperation in Europe, told reporters in Minsk today.

Volumes are “still comfortable from a liquidity point of view,” Dmitry Trenin, a money manager at Otkritie Capital in Moscow, said by e-mail. “The supply shortage could offset the capital outflow so the outcome is likely to be rather positive.”

The European Commission said this week it will continue preparations for the next round of Russia sanctions. The yield on the 2027 debt, which was 9.46 percent at 6 p.m. in Moscow, remains more than a percentage point higher than before Putin’s Crimea incursion.

“In order for the trend to reverse, the conflict in Ukraine has to end, sanctions need to be lifted, non-residents have to come back, rates need to be cut,” Shilenkov of Veles Capital said.

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