UPDATE 2-Russian shares fall further after Medvedev orders import bans

Thu Aug 7, 2014 5:40am EDT

(Adds details, comment, updates prices)

By Jason Bush, Alexander Winning and Polina Devitt

MOSCOW Aug 7 (Reuters) - Russian stocks and bonds fell on Thursday after Moscow announced food import bans on countries that have imposed sanctions on Moscow over the Ukraine crisis.

Prime Minister Dmitry Medvedev said Russia will ban fruit, vegetables, meat, fish, milk and dairy imports from the United States, the European Union, Australia, Canada and Norway for one year starting immediately.

That followed an order from President Vladimir Putin to ban food imports to punish countries that imposed sanctions on Moscow for its support of rebels in eastern Ukraine and the annexation of Crimea.

"There is nothing good in sanctions and it wasn't an easy decision to take, but we had to do it," Medvedev said.

Russia will be able to meet its needs with local production except for milk and beef, he added.

At 0930 GMT, the dollar-denominated RTS index was down 1.3 percent at 1,146 points, while its rouble-based peer MICEX also traded 1.3 percent lower at 1,318 points.

This follows steep falls on Wednesday, when the RTS fell 2.6 percent and MICEX fell 1.7 percent, amid pessimism over the escalating East-West stand-off on Ukraine, where fighting between government forces and separatist rebels is continuing.

"The domestic share market remains under selling pressure against the background of strengthening fears of investors regarding a new turn in geopolitical tensions," Promsyvazbank analyst Oleg Shagov said in a note.

Shares in leading Russian retailer Magnit fell 3.6 percent, illustrating fears that the ban on western food imports will raise costs.

Russia's leading banks Sberbank and VTB were also down sharply, falling 2.9 percent and 3.3 percent respectively.

Falls in domestic-focused stocks such as retailers and banks may reflect concerns that the food import ban will lead to higher inflation, cutting into consumer spending power.

However, Alexander Baranov, deputy director at Pallada Asset Management, said that a more important factor weighing on markets was the government's decision on Tuesday to divert pension savings from the financial system for a second year to plug budget holes amid slowing economic growth.

Yields on Russia's ten-year treasury bonds reached 9.87 percent, the highest since late 2009 and a rise of 150 basis points since July.

The rise in bond yields is a direct consequence of the government's decision on pensions, which means that the financial system will be short of funds needed to buy bond issues next year, said Baranov.

Share prices of major Russian banks were are also impacted as falling bond prices will hurt their financial results, he said.

The rouble was little changed, with potential benefits to Russia's balance of payments from the import ban weighing against the negative consequences for inflation.

The rouble was 0.1 pct weaker against the dollar at 36.23 but steady against the euro at 48.45. It fell 0.07 percent to 41.73 against the dollar-euro basket, its weakest level for three months.

The food import ban is expected to add to the problems of the Russian economy, where the central bank has already hiked interest rates three times in recent months in an attempt to rein in high inflation.

"In connection with the decision about limiting the import of particular products an increase in inflation expectations is expected, which will put additional (downward) pressure on the Russian rouble," Rossiysky Capital analyst Anastasia Sosnova said in a morning note.

ING economist Dmitry Polevoy said that food import bans could add around 1.5 percentage points to the annual inflation rate.

The central bank aims to reduce inflation to 4.5 percent in 2015, but Alfa Bank analysts said that because of the trade restrictions "even our above-consensus 7 percent CPI growth expectations for 2015 may be too optimistic". (Reporting by Alexander Winning and Jason Bush; Editing by Janet McBride)

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