Russia’s financial markets are suffering another blow to growing tensions in Ukraine

Russian stocks and bonds hit further Monday as the ruble also sank as investors responded to warnings of a growing threat of military action against Ukraine.

Moscow’s Moex stock index fell more than 7.5 percent, with losses so far reaching more than 16 percent this year following a partial withdrawal from their embassies in Ukraine from the United States and the United Kingdom. Russia’s public debt has also declined, rising to its highest level in six years as the potential for strong Western sanctions prompted investors to dump Russian assets.

“All the news over the weekend is pretty bad,” said Victor Szabo, emerging market fund manager at Aberdeen Standard Investments. “Nobody wants to stay in long positions in Russia, so today everything is sold out.

The roll lost 1.5% in trading at 78.9% per US dollar, down more than 10% since October and its weakest level since November 2020. Russia’s 10-year government debt yield on local currency is falling rose to 9.67% from 7.5% three months ago and the highest since early 2016.

Line chart of the Moex index showing the decline of Russian stocks

The latest sale came when the United Kingdom ordered some embassy staff to leave Ukraine after the United States ordered family members of embassy staff to leave Kiev because of the risk of Russia taking “significant military action.” NATO has also said its members are alerting forces and “sending additional ships and fighter jets” to allied countries in Eastern Europe.

Russian assets have come under increasing pressure during weeks of growing tensions along Ukraine’s eastern border, where Russia has amassed about 100,000 troops as it makes extensive security demands on the United States and NATO. The growing threat of conflict has shaken Western investors, who burdened Russia’s assets last year, attracted by the country’s high interest rates and conservative management of its economy compared to many other emerging markets.

Russian bonds and their currency are now extremely cheap, but investors are preparing for the possibility of tougher Western sanctions – such as a ban on trading in Russian bonds on the secondary market – leaving them to hold assets in rubles, Sabo said. The United States and the EU have threatened tighter restrictions in response to any attack, which could include measures to cut Russian banks off the global financial system and restrictions on oil and gas exports, which account for half of the Kremlin’s budget revenues.

“It has the best economic policy that can be found in emerging markets,” he said. “But if things develop in the form of a pear, it will be very difficult to talk to customers if you are trapped on the shore.

Russia’s debt accounts for more than 7% of JPMorgan’s widely held index of local currency bonds in emerging markets, which means that many large investors are effectively forced to hold bonds or risk not performing below their benchmark. This would leave many potential forced sellers of Russian bonds in the event that the new sanctions lead to their expulsion from the indices.

Additional reports by Henry Foy in Brussels.

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