Ukrainian assets fell sharply amid tensions in Crimea

Ukrainian assets have fallen rapidly this week amid fears that the escalation of tensions in the East could escalate into full-scale military conflict. At the auction on 19 August, the hryvnia fell to three-month low: the dollar in relation to the Ukrainian currency rose in price from 25.03 to 25.33 of the hryvnia to 19:00 MSK adjusted to 25.25 hryvnia. According to the degree of riskiness of the Ukrainian international bonds was worse than the Iraq papers, says Bloomberg. The yield on 10-year bonds of Ukraine has exceeded the yield on the relevant securities Iraq — of 8.61% against to 8.41%. Since August 17, when the yield went up, the rate of Ukrainian bonds rose 32 basis points. The yield of Ukrainian Eurobonds maturing in 2019 on August 19 grew from 7.98% to 8.76%, to 19:00 MSK amounted to 8,51%.

According to Bloomberg, among the countries with credit ratings similar to the Ukrainian, government bond yield of the country is ranked third after Ghana and the Republic of the Congo. Now Ukraine’s sovereign rating, according to S&P Global Ratings, six levels below investment grade — “B-“. Issued by Ukraine last year warrants tied to GDP growth (allow investors to receive payments for the country’s economic growth), since mid-July has lost about one seventh of its value. According to issue terms, payment on these instruments will start, if the size of Ukrainian GDP will exceed $125.4 billion (currently the rate is $90,5 billion). In the second quarter of 2016, the country’s GDP increased by 1.3% yoy, the strongest gain since 2013, to be published on Monday data of the state statistics service of Ukraine.

A sharp decline in the prices of Ukrainian assets occurred after the statements of the President of Ukraine Petro Poroshenko, who on Wednesday 18 August estimated the probability of escalation of the conflict in the East of the country as “very significant” and did not rule out the possibility of a “full-scale Russian invasion”. Last week FSB said the organized Ukrainian intelligence agencies trying to penetrate to the Crimea saboteurs who allegedly planned on the Peninsula of the attacks.

“We attribute the sale of Ukrainian assets primarily to the continued uncertainty over the next tranche from the IMF,” said RBC chief economist Danske Bank Vladimir miklashevskii. — After the aggravation of the situation in Crimea and yesterday’s commentary Poroshenko about the possibility of full-scale war with Russia geopolitical fears increase pressure on the market — this is especially evident by the drop in value of government bonds”. “The next tranche from the IMF immediately would calm volatility in asset prices,” says miklashevskii.

With Miklaszewski disagreed trader in Eurobonds in ICU (Investment Capital Ukraine) Vitaliy Sivach. “I doubt that the sales by the real risk of escalation in the East of the country, — he said RBC. — The escalation continues for some time, and investors are apparently already used to it”. According to the trader, the current sale is a normal correction, which contribute to the illiquid market and delay approval of the next tranche from the IMF. Under these conditions some investors decided to take profits. “In mid-August, the market is very illiquid, so to change the situation on the market is large demand is not necessary, — said Sivach. — As soon as the market aktiviziruyutsya, buying will be resumed and thus support prices. The race for high yield continues.”

The IMF wants Ukraine’s significant progress in certain things, with which the country is not yet going smoothly. The conflict between the Prosecutor General and the anti-corruption Agency only exacerbates the situation. “But I am sure that everything will be resolved and ultimately will affect the price. The current situation offers good opportunities for asset purchases”, — the expert believes.

According to Gintaras Shlizhyus, analyst at Raiffeisen, the tension in the East is the only prerequisite for the beginning of sales of Ukrainian assets, but there are other factors that reduce their attractiveness. “Sale more determined by speculative trade, as well as a number of other factors: first, the Ukrainian assets was relatively expensive, if we analyze the fundamentals of the market; secondly, the internal political confrontation in Ukraine has worsened, people understand that the political situation can change, and Poroshenko will lose support; thirdly, the reforms have stalled and there is still uncertainty around the next tranche from the IMF,” — said RBC Sligos. Reform, in turn, has stalled, as they are a heavy burden on ordinary citizens of the country, the expert added.