Russian and Ukrainian Financial Markets

by Pater Tenebrarum

A Quick Overview

Below are the latest charts of the Ukrainian hryvnia, the Russian ruble, the stock markets of both countries and the default probabilities indicated by CDS spreads (standard recovery assumption of 40%).

Noteworthy is that stock markets in both countries have initially declined sharply on Friday, only to recover in late trading. As of Monday's open, Ukrainian stocks were roughly unchanged, while Russian stocks were strengthening in spite of the threat of further EU sanctions (which are likely to be toothless in the bigger scheme of things anyway). Both the ruble and the hryvnia have been weak lately. The hryvnia has initially strengthened on the outlook for IMF funding, but has since given back some of that recovery. The ruble continues its recent downtrend, but the momentum has probably been slowed by the recent repo rate hike (+150 bp to 7%). The ruble currency area is about to increase, as it will shortly include the Crimea.

Default probabilities on the sovereign debt of both countries keep rising as CDS spreads continue to be bid up.

Currencies:

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Hryvnia ($/UAH), daily – weakening once more – click to enlarge.

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A long term chart of the hryvnia showing the moves since the 2008 crisis. The currency has never properly recovered from the crisis-induces weakness. One could say it is lurching from crisis to crisis … - click to enlarge.

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The Russian ruble ($/RUB), daily – still in a downtrend, but the momentum seems to be weakening in light of the recent rate hike – click to enlarge.

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A long term chart of the ruble, covering the same time span as the LT hryvnia chart. The ruble recovered after the 2008 crisis, but similar to other EM currencies has been in a downtrend since 2011. The recent lows exceed the 2008 lows – click to enlarge.

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Stock Markets:

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The Ukrainian UAX index, daily. The initial post revolution euphoria has given way to a pullback, but Ukrainian stocks are so depressed (especially in foreign currency terms) that they are probably a buy no matter what happens … - click to enlarge.

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A weekly chart of the UAX provides perspective. Note that the 2012 intra-week bear market low has not been undercut since – click to enlarge.

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Russia's RTX index, daily. This may well be the cheapest stock market in the world right now (trailing P/E less than 5). On Friday, an initial large sell-off has been reversed by the close. After half an hour of trading, Russian stocks were up by 1% on Monday – click to enlarge.

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The RTX weekly – the index has fallen below lateral support on the weekly chart, but the decline from the 2011 high so far has a corrective look – click to enlarge.

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Credit Markets:

Credit markets in both countries have been under pressure. CDS spreads on Ukrainian debt are almost at a new all time high, and those on Russia have been rising sharply as well. Below are charts of the respective annual default probabilities reflected by 5-year CDS spreads,  based on the standard 40% recovery assumption.

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Default probability, Ukraine – almost back at previous highs – click to enlarge.

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Russian default probability is of course far lower, but has been rising sharply since the crisis took a turn for the worse – click to enlarge.

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Lastly, here is a chart of Russia's 10 year government bond yield, which has been rising sharply as well:

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Russia, 10 year government bond yield, daily. Quite  a big move since mid-November. Note that this yield reached nearly 16% at the peak of the 2008 financial crisis – click to enlarge.

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Conclusion:

All of it looks cheap, but there is of course a residual risk. Said risk consists mainly of the possibility that unrest in the Eastern Ukraine continues to flare up and that Russia begins to interfere there as well in order to 'help'. Somehow we cannot imagine Putin has designs on the Eastern Ukraine, not least as the Ukraine is a kind of financial black hole.

The Crimea is a special case, mainly due to the Sevastopol port. Incidentally, it is also a popular vacation destination, something that probably cannot be said of Donetsk. So this residual political risk is probably small, but it is not zero.

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