Ruble Slides as Russia Credit Risk Worsens on Ukraine Tensions

Updated on
  • Default swaps climb most in seven weeks on sanction concern
  • Bonds fall, sending 10-year yields up first time in seven days

Escalating tensions with Ukraine sent the ruble tumbling and drove the cost of insuring Russian debt against default up the most in seven weeks.

The currency slid 1 percent, the steepest drop since Aug. 1, as the diplomatic standoff worsened, with President Vladimir Putin bolstering air defense in Crimea and the European Union calling for calm. Russia said Thursday the deaths of two servicemen in Crimea would carry consequences and Ukraine put its troops on high alert, warning that Putin sought to reignite the conflict over disputed territories.

A deepening crisis and potential for tougher sanctions against Russia threatens to halt a recovery in the country’s assets that sent the ruble to the strongest level this year as investors hunting higher returns poured cash into emerging markets. It’s a good time to hedge ruble risks amid the worst standoff between Russia and Ukraine since a truce signed last year, according to Danske Bank A/S.

“The renewal of geopolitical tensions may add to pressure on the ruble that has been looking strong relative to oil in last few weeks,” said Piotr Chwiejczak, an analyst at BNP Paribas SA in London. 

Putin said this week Ukrainian agents had engaged in “terror” activities in Crimea and vowed a “very serious” response. The EU said there was no independent confirmation of claims that Ukrainian troops had killed the servicemen and Ukraine Petro Poroshenko dismissed Russia’s accusations as “fiction” that could be an “excuse for further military threats” against his country.

The ruble weakened to 64.9775 against the dollar at 7:13 p.m. in Moscow, while the yield on 10-year ruble bonds rose six basis points to 8.36 percent, the first increase in seven days. Credit-default swaps jumped 11 basis points to 232, the highest since Aug. 3.

Violence Surges

Russia deployed S-400 Triumph air defense systems in Crimea, the Moscow-based RIA Novosti news service reported on Friday. Escalating tension between Kiev and Moscow coincided with a surge in violence in Ukraine’s eastern territories, where government troops have been locked in a struggle against pro-Russian separatists.

Monitors for the Organization for Security and Cooperation in Europe registered a sharp increase in cease-fire violations in the eastern Luhansk region, which along with Donetsk makes up Donbas. Pro-Russian rebels attacked government troops near the separatist-held cities of Donetsk and Luhansk and the Black Sea port of Mariupol overnight, Ukraine’s military said.

Russian markets have rallied this year, with bonds trading at levels not seen since before Putin annexed Crimea and international sanctions were introduced more than two years ago that helped push the world’s biggest energy-exporting economy into recession.

“Further escalation could lead to a significant selloff on the threat of additional sanctions,” Sberbank CIB analysts Tom Levinson and Iskander Lutsko wrote in an e-mailed note.