Driven by its goal of diversifying away from conventional dollar and euro markets, Russia’s “Pivot East”, an increasingly common catchall connoting its cosying up to China, has gained pace in recent months.
In September last year it was revealed in an interview with CEO of the Moscow Exchange, Alexander Afanasiev, that Russia and China were nearing the completion of a trade clearing and settlements system, which is due to come online in the second quarter of 2017.
Several months later, China Investment Information Services (CISS) and SEE InfoNet, both owned by Shanghai Stock Exchange, announced plans to supply information on equities, bonds, FX, futures and options to domestic Chinese investors. The data, supplied by Moscow Exchange, will help provide Chinese investors with greater visibility of Russian assets, and help bolster linkages between Russian corporates and onshore investors.
Russia's National Settlement Depository (NSD), which provides settlement services for Russia’s financial markets, is central in those efforts. The body allowed the Russian sovereign to circumvent use of large Western clearing and settlements platforms – Euroclear and Clearstream - to sell US dollar denominated Eurobonds to global investors in May last year, a US$1.75bn deal that was heavily oversubscribed.
The NSD’s Chairman Eddie Astanin told reporters late last year that the body aims to create a direct link with Chinese investors in a bid to support the Russian Finance Ministry’s goal of selling yuan-denominated bonds in both Russia and China, and opening up the market for corporate issuers – some of which are already queuing up to pull the trigger.
The Russian Ministry of Finance revealed in December that it hopes to sell up to US$1bn in yuan-denominated debt sometime in 2017, without giving a specific timetable for the sale. At the time, Artem Sharibzhanov, a senior official at the Ministry of Finance's Department of Public Debt and Sovereign Financial Assets told reporters that the two countries still had to overcome a number of technical and regulatory hurdles.
The moves bolstered a range of existing initiatives aimed at settling bilateral transactions between the two countries, opening up a range of fresh options for Russian entities.
Some analysts think the onus is now on China to ease restrictions on domestic investors before Russian entities, sovereign or corporate, can make any meaningful foray into the market. The Chinese government recently imposed new restrictions on outbound investment, striking a more conservative tone. The country’s investors send about US$170bn in direct investment every year, according to the World Bank.
“I don’t really see any restrictions on the Russian side – there are no regulations or rules that would prevent Russian issuers from launching yuan-denominated bonds today,” explained Vladimir Osakovskiy, Bank of America Merrill Lynch’s Chief CIS Economist. “It’s really a question of China allowing or encouraging domestic investors to look at Russian assets. China obviously has considerable financial resources onshore, so naturally Russia and a number of large sanctioned corporate entities are, looking to tap into that as quickly as possible.”
An Unprecedented Move
The Russian government took a fairly sizeable leap towards overcoming those challenges in March when the country’s Central Bank announced it would set up an outpost in Beijing – a fairly unconventional move for any Central Bank, and a first for the CBR – to help boost dialogue between the two countries’ regulators. Sergei Shvetsov, First Deputy Governor at the Central Bank of Russia, said the move will be a critical step towards enabling Russia and Russian entities to access Chinese investment.
“There are plans to issue yuan-denominated sovereign bonds in Moscow. Since this would be a pilot issue – we had to create a certain market infrastructure for that purpose. This infrastructure includes legal framework, securities safekeeping mechanism for investors from mainland China, licenses for Chinese financial institutions in Russia. Now we can say that the infrastructure is technically ready for the issue. The Peoples Bank of China also confirms that they support Chinese institutional investors who would be participating in the issue and see no regulatory obstacles to that,” Shvetsov explained.
“In the absence of a yuan debt benchmark, Russian corporate bonds issuers may face pricing difficulties while doing their placements. The key goal of the Russian government yuan-denominated sovereign bonds issue is to give such price benchmark to the market.”
“We anticipate that the sovereign bonds would act as a trigger for Russian corporate debt placements in yuan both in Russia and in China. And once China focused investment banks start to release detailed coverage on Russia– we would see more yuan-denominated bonds from Russian issuers from various sectors of the economy,” he added.
Given the firm grip China’s regulators keep on the country’s economy – including outbound investment, that isn’t likely to happen until the sovereign tests the waters. Nevertheless, it hasn’t stopped Russian corporates from flirting with issuing in yuan.
Is Appetite is Building?
In September last year, Russia’s largest bank by deposits, Sberbank, told reporters it was working towards issuing its own inaugural yuan-denominated bond in 2017 in a bid to boost its capacity to lend in the currency to Russian corporates.
It also reaffirmed its aim to help Russian companies tap into the yuan market, an opportunity that is not lost on Chinese banks.
Industrial and Commercial Bank of China and Bank of China are currently in the process of acquiring brokerage licenses in Russia. The move would allow the two banks, which were tipped to be chosen by the Russian Ministry of Finance to be lead underwriters of the government’s inaugural yuan-denominated issuance, to help bring corporates to the market. The two banks, along with Export-Import Bank of China and China Development Bank, are already fairly active in Russia’s loan markets – particularly in trade finance and in the energy sector.
The Central Bank of Russia and the People’s Bank of China (PBOC) already have a CNY150bn (approx. RUB815bn) bilateral currency swap agreement, in place since 2014, which gives both countries preferential access to one another’s currencies. In March the PBOC confirmed Beijing had extended additional yuan to Moscow multiple times since the fourth quarter 2016, but so far those have only been used to help Russian banks lend on China-led projects in the country.
Rusal, one of the world’s largest aluminium producers, has also perennially hinted that it could look to tap the yuan market. In January, sources suggested the bank could look to place up to US$1bn in yuan-denominated notes as early as the third quarter of 2017.
“A sovereign issuance would definitely help in terms of pricing, and given the peculiarities of Chinese capital markets regulations and the lack of corporate placements or sovereign placements in that market, it would be fairly challenging to do so before,” Osakovskiy added. “Bolstering [Russia’s] institutional relationship with China will help ensure the Russian sovereign and corporate entities gain a good degree of access.”
While no specific timeline has been given for a sovereign yuan-denominated issuance out of Russia, it seems policymakers there and in China have positioned themselves well for the sale. So far, less than a handful of Russian corporates and banks have tapped into Chinese liquidity – and all of it via either Chinese banks or Hong Kong.
That could change once Russia sets a precedent with its debut, but that is not guaranteed either. Many observers see the Kremlin’s drive to boost the popularity of the yuan in Russia as a top-down effort aimed at hedging against unpopularity in the West and the effect of sanctions on its economy, rather than something driven by pent-up corporate appetite. For that reason among others, any Russian yuan-denominated bond will be closely watched.
