Government-debt markets shrugged off earlier Russian troop buildups but this time is different, some investors say

By Matt Wirz

Nov. 26, 2021

The Wall Street Journal


Escalating Russian military activity on the border with Ukraine is rattling foreign investors, pushing prices of Ukrainian government bonds to their lowest levels in more than a year.

Warnings by U.S. government officials about the potential threat of a Russian invasion worsened the selloff in recent days.

The price of Ukraine’s $1.3 billion 7.75% bond due 2024 fell to around 100 cents on the dollar on Wednesday from around 107 cents two weeks earlier, its lowest level since October 2020, according to Advantage Data. A bond due 2040 with payments linked to Ukraine’s economic performance has fallen about 16% since mid-November to 89 cents on the dollar.

Emerging-markets investors have been willing to buy Ukrainian debt this year despite simmering tensions with the Kremlin because it pays high interest. Russian military exercises on the border in April and September weighed prices down slightly, but they quickly recovered.

“Ukraine has been the second- or third-most crowded trade in emerging markets,” said Dan Shaykevich, co-head of emerging markets at Vanguard Group. “It’s a country that has plenty of risk but is generally on a positive trajectory. Fundamentally, we think there is value.”

Still, bond prices have dropped further and for a longer period in November, reflecting fears of an attack akin to Russia’s annexation of Ukraine’s Crimean Peninsula. Moscow also supported a separatist movement in eastern Ukraine with troops and weapons in a long war with Ukraine’s army.

“I do think there is significant risk of escalation,” said Tim Ash, a strategist at BlueBay Asset Management. “This is very different from April and September.”

Russian President Vladimir Putin has added a new “red line” warning Western countries not to supply Ukraine with military equipment to his previous doctrine against Ukraine integrating with the North Atlantic Treaty Organization, Mr. Ash said. The recent warnings from U.S. officials are also different in their tone and their specificity about the potential threat, he said.

Energy politics may also have emboldened Mr. Putin concerning Ukraine.

“There’s a significant gas shortage in Europe and Ukraine, and Russia holds the key,” said Kaan Nazli, a London-based bond portfolio manager at Neuberger Berman Group.

Russia supplies almost half of the gas imports in Europe, and an energy crunch has sent prices soaring across the continent. Russia has slowed gas deliveries to Europe, leverage it can use to pressure countries such as France and Germany in diplomacy over Ukraine, investors said.

Neuberger still sees value in Ukraine bonds, in part because Russian aggression—short of war—tends to have unintended consequences, Mr. Nazli said.

“It’s a reform story,” Mr. Nazli said. “Any tension with Russia makes the West more likely to support Ukraine and gives the government ammunition to go after domestic oligarchs.”

The International Monetary Fund announced on Nov. 22 the release of a long-awaited $700 million portion of its standby arrangement with Ukraine. The IMF provided the financial lifeline after Ukraine’s government adopted measures to combat corruption.


Write to Matt Wirz at