Russian Markets Hit By Fresh U.S. Sanctions -- Update

By Tommy Stubbington and Andrey Ostroukh 

A fresh round of U.S. sanctions once again ripped into Russia's markets, with stocks, bonds and the ruble taking a hit.

The new restrictions, which target Russian state-controlled oil giant OAO Rosneft and other top firms, follow weeks of U.S. threats that Russia would face repercussions unless it helped defuse the crisis in eastern Ukraine, where pro-Russia separatists have been fighting the Ukrainian government for months.

Moscow's MICEX index slid 2.7%, with investors interpreting the measures as more likely to hold back the Russian economy than previous sanctions.

Rosneft fell 4.5%, while gas company Novatek--also a target of the new sanctions--shed 4.0%.

The ruble fell 1.0% against the dollar to trade at 34.91, its weakest level in six weeks. Against the euro, the ruble shed 1.1% to 47.02 but was still far from its all-time low of 51.2 seen in early March.

Government bonds were also hit. The yield on a Russian bond maturing in 2023 climbed to 4.78% from 4.48%. Yields rise as prices fall.

The sanctions "tighten the screws on Russia," said Viktor Szabo, a portfolio manager at Aberdeen Asset Management.

"The weak point of the Russian economy is investment. For investment you need financing and this makes it more expensive for Russian companies in general," he said.

Despite a recent improvement in Russian economic data, Aberdeen remains underweight in its allocation to Russian bonds, Mr. Szabo added.

"The Russian economy had already slowed materially during the first half of this year, and the new more biting economic sanctions are likely to dampen investor expectations for an economic rebound in the second half of this year," said Lee Hardman, a currency analyst at Bank of Tokyo Mitsubishi UFJ.

Sanctions also hit Gazprombank, the bank connected with the country's gas-export monopoly; and Vneshekonombank, or VEB, a state-owned development lender that provided much of the backing for the Sochi Olympics construction project.

The U.S. Treasury Department will now limit the sanctioned firms' access to equity financing and medium- and long-term debt coming from investors and lenders with ties to the U.S.

The sanctions also cast a shadow over wider financial markets, with investors pulling back from risky assets.

European shares fell, with the Stoxx Europe 600 index 0.4% lower midmorning.

Austria's Raiffeisen Bank and German retailer Metro AG, which both have a large presence in Russia, fell 2.7% and 1.9% respectively.

Elsewhere, troubled Portuguese lender Banco Espirito Santo was under renewed pressure following a downgrade to its credit rating by Standard & Poor's. BES shares have collapsed in recent weeks amid concerns about the financial health of its parent companies.

U.S. stock futures fell, indicating a 0.3% opening loss for the S&P 500. Changes in futures aren't necessarily reflected in market moves after the opening bell.

In currency markets, the Japanese yen, which is seen as a haven by investors and typically rises in times of stress, added 0.2% against the dollar to trade at Yen101.48. Ultrasafe German government bonds climbed, pushing 10-year yields down to 1.17%.

The rally in government debt pushed French 10-year yields to a record low of 1.48%.

Gold, another safe harbor investment, climbed 0.5% to $1,305.70 an ounce.

European leaders meeting in Brussels agreed to further sanctions against Russia on Wednesday. The decision should allow for Europe to cast its sanctions net wider, although the specific names to be added their list have yet to be decided.

Write to Tommy Stubbington at [e-mail] and Andrey Ostroukh at [e-mail]