RUSSIA - Putin's Bad-Call Threatens 'Pocketbook'

"UPDATE 2-Russian assets slide as EU sanctions threat looms large" by Alexander Winning, Reuters 7/25/2014

Russian assets slipped on Friday as investors took the view that a possible new wave of European Union sanctions over Moscow's involvement in the Ukraine crisis could cause severe damage to whole sectors of the Russian economy.

In a sign policymakers are nervous about the impact of sanctions - which are also being ratcheted up by the United States - the central bank unexpectedly raised its key interest rate by 50 basis points.

"It's clear that the key factor for market dynamics today is the expectation of EU sanctions. ...  All other information is for the moment beyond the border of what's influencing trades," said Artyom Argetkin from BCS brokerage.

The dollar-denominated RTS index was down 1.5 percent at 1248.3 points at 1200 GMT, while the ruble-based MICEX traded 1.4 percent lower at 1389.9 points.

Russian sovereign dollar bonds fell across the curve on the sanctions fears, while the ruble weakened slightly against the dollar, despite being boosted by the central bank rate decision and the end-of-month tax period.

Ambassadors of the 28-nation EU are discussing options to curb Russian access to capital markets, arms and energy technology in response to last week's downing of a Malaysian airliner in an area of eastern Ukraine held by Russian-backed separatists.

The EU is also expected to expand its list of those targeted by sanctions including asset freezes on Friday due to Moscow's perceived backing of the pro-Russian separatists fighting Ukrainian government forces.

Earlier, the United States said Russia was firing artillery across its border, targeting Ukrainian military positions, and that Moscow intends to deliver heavy weapons to separatist forces.

Russia's $1.5 billion 2043 dollar bond fell almost 2 cents while the 2030 issue fell half a cent. Russian yield spreads over U.S. Treasuries widened 7 basis points to 285 bps on the EMBI Global index.

The ruble, meanwhile, was down 0.08 percent against the dollar to trade at 35.07 but strengthened 0.08 percent versus the euro to 47.16.

"Markets-wise, the [central bank] move is marginally supportive for the ruble, even though it won't be able to stop foreign capital repatriation if bolder sanctions are approved," Dmitry Polevoy, chief economist for Russia and CIS at ING bank.

The Russian currency was 0.03 percent weaker at 40.51 against the dollar-euro basket the central bank uses to gage the rouble's nominal exchange rate.

Investors pulled $172 million from Russia-dedicated funds between July 17 and 23, the largest outflow since January, analysts at VTB Capital said in a note, citing data from Emerging Portfolio Fund Research released on Friday.