Crisis capital

“Buy when there’s blood on the streets”—investors in Ukraine are taking the advice literally

December 13, 2013
December 13, 2013

Baron Rothschild’s purported adage on investing, “buy when there’s blood in the streets,” is generally taken as a euphemism by contrarian investors. But as the anti-government protests in Ukraine enter their fourth week, with sporadic bouts of violence, some bond investors are taking the advice literally.

Since the unrest began, foreign buyers have been piling into Ukraine’s local-currency government bonds, more than doubling the amount of hryvnia-denominated debt they hold in a matter of days:

Non-resident-holdings-of-Ukrainian-government-debt-bonds_chartbuilder

So what gives? It’s important to note that even after this buying binge, foreigners still hold under 4% of Ukraine’s local debt. Their enthusiasm also doesn’t extend to Ukraine’s foreign-currency bonds, thanks to the country’s dangerously low foreign-exchange reserves.

Still, these intrepid investors clearly believe that, even as protests drive the capital to a standstill, Ukraine will be able to pay its bills—those denominated in hryvnias, anyway. The reason is, paradoxically, the very thing that sparked the protests: the competition between Russia and the EU to woo cash-strapped Ukraine into their orbits. The news today suggests that Ukraine will sign a trade pact with Russia next week, which could include big discounts on the price of gas it buys from its eastern neighbor. The EU says its offer of closer cooperation still stands, even after Kiev’s reported demand for €20 billion ($27.4 billion) in aid in return for signing an agreement with the union.

Either way, these bond investors are reasoning, Ukraine will end up with a chunk of money. And if some investors are spooked by the scenes in Kiev, that just makes for a even bigger discount. Ukraine sold a seven-year issue at a hefty 14.3% yield recently, which is an enticing return if you believe that foreign financial support for Ukraine—from Moscow or Brussels—makes repayment a sure thing. And some truly brave souls are even eyeing Ukraine’s foreign-currency debt as an outside bet worth taking; Bank of America Merrill Lynch upgraded its recommendation on these bonds this week.

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