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Russia & CIS

Russia eyes up Chinese capital

The Russian sovereign is looking to tap the yuan markets with a bond issuance. Although the pricing will differ slightly from euro or dollar sovereign bonds, there would likely be large demand from China. The bond could also open the door for Russian corporates to access Chinese capital by setting a pricing benchmark.

Apr 28, 2016 // 2:52PM

The Russian government could return to the international capital markets for the first time since 2013 with a yuan denominated CNY6bn bond, which would be the largest yuan denominated foreign sovereign issuance.

Being denominated in yuan, the pricing of the bond will likely differ from euro and dollar sovereign issuances. “There would be a premium over dollar issuances because the bond would not qualify for index inclusion (restricted to dollar bonds). However, I think the bond would be priced not far above the current yield curve,” said Jan Dehn, Head of Research at Ashmore Investment Management.

He said that this is a political as well as an economic project, as China wants to expand the use of the yuan in global finance, and Russia wants to tap primary markets outside of the sanction-afflicted markets.

Both sides therefore have an incentive to make this bond look good, and have it priced close to the curve, he added.

Much of the demand for the bond will come from Chinese investors, and especially Chinese investment banks which constitute the main investor base that will be targeted by the bond issuance.

“I suspect demand will be very good. China’s onshore investors have very little access to foreign assets, so they will welcome the diversification from local assets,” Dehn stated.

The depth of China’s fixed income market also easily allows for the size of the issue. “A CNY6bn bond size seems perfectly reasonable. China’s total fixed income market is US$7.4tn in size, so this bond will be a drop in the ocean,” he noted.

Successive interest rate cuts by the People’s Bank of China (PBOC) would also raise demand, as yields in the domestic market have fallen. Chinese government bonds currently yield around 2.9% compared to Russia’s benchmark lending rate of 11%.

However, concerns over currency volatility could prove problematic, as the yuan to rouble exchange rate is relatively unsteady. The rouble is currently trading at 10.04029 to the yuan.

Despite this, Dehn stated that trade is rising between Russian and Chinese names, and many corporates will want to hedge trade exposures using financial instruments in both yuan and roubles. In addition, there will be demand simply from those who wish to diversify FX exposure, he added.

The deal has the potential to set a benchmark price and credit terms, from which other large Russian corporates would be able to tap the yuan market.

“The West maintains sanctions against Russia, and Russia does not need to issue sovereign debt. The purpose of this bond would be to create a sovereign benchmark against which Russian corporates could price corporate bonds in the yuan or rouble market,” Dehn said.

“I think this is the main purpose of the bond,” he added. “Not financing for the Russian state per se.”

The Industrial Commercial Bank of China (ICBC) and the Bank of China alongside Gazprombank are said to be the lead managers on the deal.

Although the aim is for the bond to be issued by the end of this year, regulatory procedures could delay any issuance until next year. 

Russia & CIS

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