What to Expect From Ukraine Vote: The Bull and Bear Cases

As Petro Poroshenko faces off against
former Prime Minister Yulia Tymoshenko in this weekend’s
Ukrainian elections, investors are preparing for several
possible outcomes.

Ukraine’s dollar bonds advanced for nine straight days
ahead of the ballot on speculation that an elected leader would
be recognized by Russia and start negotiations to ease a three-month standoff triggered by President Vladimir Putin’s
annexation of the Crimean peninsula. Russian debt and Moscow’s
Micex stock index also rallied as the threat of further
sanctions from the U.S. and the European Union subsided.

* Bullish: Poroshenko wins outright; violence eases.

A “reasonably orderly” vote may trigger a rally in
Russian bonds as political uncertainty diminishes, Paul McNamara, investment director at GAM U.K. Ltd., which manages
$129 billion in assets, said by e-mail from London.

Outright victory for Poroshenko would be welcomed by
investors because he has shown a more conciliatory tone toward
Russia than Tymoshenko, said Ivan Tchakarov, an economist at
Citigroup Inc. in Moscow.

Poroshenko may “possibly” clinch the vote in the first
round, with Russia “appearing to accept” the result, Simon Quijano-Evans and Tatha Ghose, analysts at Commerzbank AG in
London, said in a May 23 note. They recommended a marketweight
position in Ukrainian bonds before the election and forecast
“some stabilization or recovery” in the hryvnia currency.

Tatiana Orlova, a senior economist at Royal Bank of
Scotland Group Plc in London, said Poroshenko “may even win”
in the first round, according to a May 23 research note.

* Neutral to Negative: Poroshenko fails to gain majority.

The most likely scenario is for Poroshenko to face a runoff
and win it, said Vyacheslav Smolyaninov, a strategist at UralSib
Capital in Moscow. This result wouldn’t lead to “significant
repositioning,” he said in an e-mail May 23.

A further round of voting would trigger at least three more
weeks of uncertainty and be “negative” for markets, Vadim Khramov, a London-based economist at Bank of America Corp., said
in a May 23 note.

* Bearish: Violence escalates and Putin rejects result.

“The biggest risk is that the election is accompanied by a
fresh escalation of unrest across the country, which would of
course mean more downside for Ukraine’s financial markets,”
Liza Ermolenko, a London-based emerging-market economist at
Capital Economics Ltd., said in e-mailed comments on May 23.
“If Russia does not recognize the result and decides to take
some action in response, Moscow stocks and the ruble will come
under renewed pressure.”

The Kremlin will probably only “tacitly” recognize the
result of the ballot, without any legal commitment, Deutsche
Bank AG analysts including Drausio Giacomelli and Hongtao Jiang
wrote in a report on May 23.

Lack of official recognition may later allow Russia to send
forces into Ukraine, as the country’s legislature cleared Putin
to do to protect the interests of Russian speakers. That may
probably trigger new sanctions on Russia. OAO Gazprom, OAO
Sberbank and VTB Group are among the stocks most sensitive to
potential further levies, UralSib said.

Aberdeen Asset Management, which oversees more than $12
billion of emerging-market debt, is steering clear of Ukrainian
bonds because the presidential vote is unlikely to ease pro-Russia separatism in the country’s east, Viktor Szabo, a London-based money manager, said by e-mail on May 19.

“I doubt the elections will change much, as Russia will
continue to pressure Ukraine,” Szabo said.

To contact the reporters on this story:
Andras Gergely in Budapest at
agergely@bloomberg.net;
Ksenia Galouchko in Moscow at
kgalouchko1@bloomberg.net

To contact the editors responsible for this story:
Wojciech Moskwa at
wmoskwa@bloomberg.net
Nikolaj Gammeltoft