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Ukraine hryvnia at 7-year low after Moscow recognizes separatist regions

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Ukraine’s assets came under pressure on Tuesday after a sharp escalation of tensions with Russia, sending the hryvnia tumbling to levels last seen in 2015 when the country was headed for default.

Russia’s formal recognition of two breakaway regions in eastern Ukraine late on Monday has raised the specter of war on Europe’s eastern flank and rattled global financial markets.

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Ukraine’s hryvnia weakened as much as 1.4 percent to 29.1196 to the dollar - its weakest level since the currency dropped sharply in 2015 as the country hurtled toward a debt restructuring.

The currency has weakened nearly 10 percent since end-October, when the conflict with Moscow intensified as investors ditched Ukrainian assets amid growing concerns over a Russian troop buildup near Ukraine’s borders and fears Russia is preparing for a military attack against Ukraine. The Kremlin has denied that.

Ukraine’s dollar-denominated sovereign bonds also stumbled. Its 2032 bond dropped two cents in the dollar to trade at a record low of 71.694 cents, Tradeweb data showed. Ukraine’s 2040 GDP-linked bond slipped more than three cents to trade at 58.303 cents, having lost around half its value since June last year.

Dennis Shen at Scope Ratings in Berlin said a further escalation could pressure Ukraine’s credit rating.

“There is still a number of available scenarios, including those observing de-escalation as long as negotiations continue,” Shen said in emailed comments. “However, such scenarios have narrowed in view of Russia’s most recent actions.”

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