Russia’s bonds are set to extend the best rally in at least four years as exit polls showed Petro Poroshenko winning Ukraine’s presidential ballot with a mandate to resolve the crisis that’s roiled the nation since November.
The polls showed the billionaire garnered more than 50 percent of the vote in yesterday’s election, dodging a run-off that Bank of America Corp. said would have triggered more market volatility. Russian and Ukrainian assets rallied this month amid speculation a clear electoral verdict would spur talks on calming the crisis and re-establish rapport with President Vladimir Putin.
“This is the most positive outcome the markets would wish for at the moment,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by phone yesterday. “Hopefully, it de-escalates” the situation and “we’re going to see a strong market, both in Russia and in eastern Europe,” he said.
Russia’s dollar government notes returned 6.1 percent in May, while Ukraine’s advanced 7.8 percent, the two leading performers among 56 sovereigns in the Bloomberg USD Emerging Market Sovereign Bond Index. (BEMS) The securities had slumped earlier this year as Putin annexed Ukraine’s Crimean peninsula and the U.S. and European Union slapped sanctions on his inner circle in retaliation, with threats to add additional the penalties.
Putin’s Recognition
The election will draw a line under the rule of ousted President Viktor Yanukovych, the Russian-backed leader who fled in February after three months of deadly street protests in support of closer European ties. Putin, who doesn’t recognize the government in Kiev, has said he would work with the winner. The U.S and its allies said they’d tighten sanctions against Russia if voting was disrupted.
It’s not clear if the Kremlin will fully recognize the election result because some people in the Russian-speaking regions of east Ukraine didn’t take part in the vote amid violence, according to Nomura Holdings Inc. The U.S. has blamed Russia for backing separatists in Donetsk and Luhansk.
The question of whether the election was “really representative” is a “critical point” that Russia may raise, Dmitri Petrov, a London-based analyst at Nomura, said by phone yesterday. “If that happens, markets may take it negatively.”
U.S. Support
Poroshenko pledged to work with Russia to end “war, chaos and disorder,” while the White House said in a statement that “the U.S. looks forward to working with the next President.”
Russian assets have been rallying as international sanctions bypassed the country’s major companies and banks and Putin didn’t send troops into eastern Ukraine where pro-Russian separatists this month declared independence.
The ruble strengthened 4.4 percent this month to 34.1563 per dollar on May 23, the best performance among 24 emerging-market currencies tracked by Bloomberg. That’s brought the appreciation since Putin’s incursion into Crimea on March 1 to 5 percent. The yield on benchmark local-currency bonds due February 2027 has dropped 69 basis points this month to 8.78 percent. The rate stood at 8.36 percent on Feb. 28.
Poroshenko’s election victory is “quite positive for the Ukrainian investment case,” according to Ovanes Oganisyan, a strategist at MidLincoln Research in Moscow. “In Russian bonds there was a move already, but Russia will also be in a much better spot. There is reason to be slightly more optimistic.”
To contact the reporters on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net; Andras Gergely in Budapest at agergely@bloomberg.net
To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; Wojciech Moskwa at wmoskwa@bloomberg.net
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