Azernews.Az

By Bloomberg

Russia’s most successful bond auction in four months is failing to win over ruble traders, underscoring just how fragile market sentiment remains even as oil prices bounce off their lowest levels in almost six years.

The government raised 7.34 billion rubles ($111 million) in the sale on Wednesday after five-year yields dipped below 14 percent for the first time since Dec. 12. The ruble’s slide on the day trimmed this week’s gain to 1.6 percent against the dollar as a four-day recovery in oil prices ended.

“Even if things in some parts of the market have calmed, the situation is still precarious and very fragile,” Neil Shearing, the chief emerging-markets economist at Capital Economics Ltd. in London, said by phone on Feb. 4. “It will all depend to a large extent on what happens to oil.”

The renewed pressure on Russian assets highlights the challenges facing President Vladimir Putin as the economy teeters on the brink of a recession amid the 52 percent collapse in oil since last year’s peak in June and sanctions arising from his support for the separatist insurgency in Ukraine. The government needs oil to reach about $90 a barrel to balance its budget. Brent crude, which climbed 19 percent during the rebound, dropped 1.1 percent today to $53.55 a barrel.

The Finance Ministry offered 10 billion rubles of December 2017 floating-rate notes. Before Putin’s incursion into Crimea last March, the OFZ tenders ranged from 20-30 billion rubles. Yesterday’s sale was at an average yield of 13.89 percent.

Sanctions Warning

Yields have dropped since the Bank of Russia lowered its key interest rate by 200 basis points to 15 percent on Friday, easing a surprise increase to 17 percent on Dec. 16 in a bid to shore up the ruble and tackle inflation at a 5 1/2-year high.

The ruble weakened 0.6 percent to 68.41 against the dollar at 11:44 a.m. in Moscow. The worst performing currency after Ukraine’s hryvnia last year with a 46 percent slump, the ruble is down another 11 percent in 2015.

Germany said Tuesday the European Union may slap new sanctions on Russia if the crisis in Ukraine worsens. Amnesty International warned of a “catastrophic” situation in Debaltseve, a strategic transport hub on a road connecting the rebel-held areas of Donetsk and Luhansk, where 2,500 residents have been evacuated.

At least 5,358 people have died in the conflict since mid- April, including 224 civilians in the three weeks to Feb. 1, the United Nations said in an e-mailed statement on Tuesday.

Rebel Decisions

“We see indications that pro-Russian rebels in Ukraine are increasingly making their own decisions,” Bryan Carter, who helps manage about $350 million of emerging-market debt, including OFZs, at Boston-based Acadian Asset Management, said by phone Wednesday. “There’s a bit of the tail wagging the dog as the rebels in Ukraine are driving Russian assets prices, but I think the market is increasingly appreciating that that’s the case, and so oil has the more important effect.”

Crude around $60 would probably result in Russia’s economy shrinking by 4.4 percent this year, Dmitri Petrov, an analyst at Nomura Holdings Inc. in London, said by phone Wednesday.

“The rally we have seen in the past couple of days has been entirely driven by oil,” said Petrov. “The core risks are still there with the currency and the geopolitics really quite tense.”