Is it time to buy Ukraine debt?

Leslie Shaffer | Writer for
Vincent Mundy | Bloomberg | Getty Images

Tensions between Russia and Ukraine may have spurred many investors to pull funds out of the region, but some are sensing it's time to pounce on Ukraine's bonds.

"Russia is unlikely to intervene in the eastern part of Ukraine," said Regis Chatellier, an analyst at Societe Generale, in a note.

"As geopolitical uncertainties ease in the region, we believe, Ukrainian assets should substantially outperform," he added, upgrading Ukrainian sovereign debt to an overweight.

(Read More: Wall Street wary of potential escalation in Ukraine)

Russia's decision earlier this month to sign a treaty to annex the Ukrainian region of Crimea after a referendum held under Russian military occupation showed overwhelming support for the move, has increased geopolitical tensions globally as well as spurred a fund outflow from the region. The West has responded with a series of sanctions on Russia.

Emerging Europe bond funds have seen around 5.3 percent of their assets head for the exits so far this year, according to data from Deutsche Bank.

Ukraine desperately needs IMF bailout: Pro

Chatellier expects the international community's $27 billion financial aid package to Ukraine to dramatically lower the risk the country may default on its debt.

Austerity measures, including hiking heavily-discounted household natural gas prices, are a key tenet of the deal, but this will go alongside "scaled-up social protection," according to the IMF.

(Read More: Ukraine and IMF announce up to $18 billion bailout)

"To the extent that no debt re-profiling is envisaged, the downside on Ukrainian bonds may be limited," he said. "Although we remain concerned regarding a prolonged recession scenario, the austerity measures should have a very positive impact on the fiscal deficit. Closer ties with the EU may also boost investors' confidence on Ukraine."

He likes Ukraine's July 2017 euro bonds, which have been trading at a discount even as they offer a 9.25 percent coupon, noting the tenor is also more liquid, which reduces trading costs. By contrast, even as SocGen turned positive on emerging market debt as a whole, its most underweighted credit is Russia.

(Read More: $3 billion for Ukraine to go straight to...Russia)

SocGen isn't alone in seeing value in Ukraine's shorter-dated bonds.

"The likelihood is relatively high that a default in the short term will be avoided," Barclays said in a note this week. But it advised sticking to the shorter-dated bonds.

"The longer-term economic challenges and political risks make us reluctant to turn more positive on longer-dated bonds," it said, noting it expects the conflict with Russia will damage investor sentiment and lead to a decline in foreign direct investment and portfolio flows.

Russia not interested in eastern Ukraine: Pro

(Read more: Obama on Ukraine crisis: 'This is not another cold war')

Barclays expects Ukraine's economy will contract by 4-5 percent this year, with the Crimea secession amounting to an additional around 3 percent decline in gross domestic product (GDP).

To be sure, stepping into Ukraine debt remains a risky play. Even as Barclays sees some value in Ukraine's bonds, among global emerging market high-yield sovereigns, it prefers Venezuela's debt, which it gives an overweight call.

Venezuela currently faces a strong repressive stance against large political protests over the economy's steep deterioration, it noted, with inflation at nearly 60 percent and the currency likely to be devalued by around 49 percent.

By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1