Hryvnia Sinks With Ukrainian Bonds as Violence Sparks Warnings

The hryvnia weakened the most in the world as Ukrainian bonds and stocks sank on mounting concern that an insurgency in the country’s east is worsening.

The currency dropped 6.2 percent to an all-time-low 15.84 per dollar by 3:30 p.m. in Kiev, down 18 percent since the central bank loosened its management of the exchange rate a week ago. The Ukrainian Equities Index slid 6.4 percent, the most among 93 global gauges tracked by Bloomberg. The yield on the sovereign’s benchmark Eurobonds approached record highs.

Ukraine’s military said today the pro-Russian rebels in the eastern region known as Donbass are drafting civilians in the areas they control and five government soldiers have been killed over the past 24 hours. The EU and U.S. have threatened to tighten sanctions on Russia, saying yesterday the country keeps arming the insurgents across the border.

“The market moves that we’re seeing are predominantly driven by the fear that fighting would escalate significantly in Donbass following reports of reinforcements of separatists from Russia,” Fyodor Bagnenko, a fixed-income trader at Dragon Capital in Kiev, said by e-mail today. Hryvnia depreciation “feeds into anxiety on the local-stock market,” he said.

The National Bank of Ukraine scrapped its target exchange rate of 12.95 per dollar on Nov. 4 after interventions to prop up the hryvnia cut its foreign reserves to $12.6 billion in October, the lowest in more than nine years. A more flexible hryvnia rate is one of the conditions of the International Monetary Fund for keeping the country afloat with bailout loans.

‘Speculative Demand’

Investors ditched Ukrainian assets after German Foreign Minister Frank-Walter Steinmeier said today that “renewed preparations for violent conflict” were underway in eastern Ukraine. The yield on the nation’s dollar-denominated notes due July 2017 rose 14 basis points to 16.13 percent, approaching last month’s 16.32 percent closing record.

The hryvnia has lost 48 percent this year against the dollar, the most among all currencies worldwide tracked by Bloomberg, followed by a 29 percent slump for Russia’s ruble.

“Demand for foreign currency is considerably reduced at levels above 15.50, but the fear of military escalation is leading to some speculative demand,” Dragon’s Bagnenko said.

The hryvnia’s slump shows Ukrainians are buying foreign currencies on concern the conflict will worsen, according to Timothy Ash, London-based chief economist for emerging markets at Standard Bank Group Ltd. The depreciation will increase the cost of rescuing Ukraine’s ailing banks as non-performing loans will rise and capital shrink, he said by e-mail today.

“Ukraine and the hryvnia face a crisis of confidence” and “the market knows the NBU has limited foreign reserves to support the currency,” Ash wrote. “Ukraine needs a major step up in the Western financing package to convince the guy on the street that the West will stand behind Ukraine.”

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