Ukraine dollar bonds extend gains after Russian bailout

LONDON Wed Dec 18, 2013 5:13am EST

A man wearing a Ukranian flag walks past a currency exchange in central Kiev December 3, 2013. REUTERS/Sergii Polezhaka

A man wearing a Ukranian flag walks past a currency exchange in central Kiev December 3, 2013.

Credit: Reuters/Sergii Polezhaka

LONDON (Reuters) - Ukrainian markets extended gains on Wednesday in response to a $15 billion bailout by Russia, driving prices of public dollar bonds and the hryvnia currency higher after the move headed off months of uncertainty over government financing.

The deal, under which Russia may buy $3 billion of Ukrainian Eurobonds at 5 percent interest as early as the end of the week, pushed prices of Kiev's 2014 debt above the issue price for the first time since June.

But it also left analysts warning of the longer-term risks to a Ukrainian economy that they say needs to turn towards the West and a more economically liberal model if it is to modernize successfully and end its dependence on steel and grain.

The deal announced on Tuesday keeps Kiev firmly in Moscow's orbit and out of the European Union's grasp. It also sowed doubts in some Ukrainians' minds about what President Viktor Yanukovich might have agreed to in secret.

The impact on Ukrainian markets late on Tuesday and early on Wednesday was all positive. Ukraine's 2014 bond was up 3.6 points from Tuesday's close to rise above par for the first time since June, according to Tradeweb.

"The news reduces the likelihood of a sharp devaluation and makes a sovereign default less likely," said Tatiana Orlova, senior economist for Russia and CIS at RBS in London. "This is going to relieve the pressure on the government in the short term and is also positive for Ukraine's balance of payments."

Ukraine's state energy firm Naftogaz 2014 bond rose more than 4 points to 99.0, its highest since August, according to Reuters data.

The hryvnia currency rose a quarter percent against the dollar to 8.27.

The cost of insuring Ukraine's debt against default also fell after the news of the bailout but remains generally high. Five-year credit default swaps fell more than 250 basis points on Tuesday to close at 797 bps, their lowest since early August, according to Markit.

Ukraine 1-year dollar/hryvnia forwards eased on Tuesday to 9.8650 per dollar. But they also still price in a depreciation of 16 percent in a year's time, compared with 19 percent on Monday.

Ukraine needs money to cover an external funding gap of $17 billion next year - almost the level of the central bank's depleted currency reserves - and avoid defaulting on its debts.

(Reporting by Natsuko Waki and Carolyn Cohn; editing by Patrick Graham)