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28 July 2015
Russia's VTB Capital betting on closer China ties, as RMB business soars

The announcement of a partnership between the China Financial Futures Exchange (CFFEX) and Moscow Exchange (MOEX) on July 15 comes on the back of rapid growth in RMB usage for trade and investment in Russia. And closer ties are on the cards now that infrastructure is being put into place to make Moscow an RMB hub, Riccardo Orcel, Deputy CEO of VTB Group and Head of Global Banking at VTB Capital, told GlobalRMB.

VTB says it is the only Russian bank with a branch in Shanghai and with significant credit lines with Chinese banks. It has seen a sixfold increase in foreign exchange transactions on the onshore RMB (CNY) and rouble (RUB) pair between the first quarter of 2015 and a year earlier.
"Many Russian companies are switching to local currencies — CNY and RUB — in contracts with Chinese counterparties," said Orcel.
He added that the already dramatic improvement in relations between China and Russia over the past decade still left room for bilateral trade to grow further, with the local currencies taking a growing share of trade away from the dollar and providing transaction cost reductions and savings on hedging costs for Russian importers.

Political agreements were also likely to push the agenda further. "Use of local currencies in trade agreements will be further stimulated by the implementation of bilateral projects that were signed during the visit of Chinese delegation in May, including cooperation in infrastructural projects," said Orcel.

He also reckoned that the announcement in February that the Russian central bank would join the International Organization of Securities Commissions (IOSCO) could yield results in terms of access to Chinese markets. "Bank of Russia joined IOSCO, which enhances international cooperation among financial market regulators, meaning less regulatory barriers for Russian companies willing to tap Chinese financial markets."

Russian banks have been considering the China funding option for quite some time, with banks like Gazprombank rumoured to have looked at the possibility of issuing RMB denominated bonds in the onshore Chinese markets, known as the panda bond market.

No deal materialised in Gazprombank's case, but more recent changes in regulation on foreign access to the domestic bond market could signal that a revival of panda bonds is closer. GlobalRMB recently reported that the new regulation could allow offshore financial institutions to tap the panda market.

One issue to overcome for Russian issuers and investors looking at China, however, would be the typical size and maturities of Chinese bonds. "The Chinese financial market is less liquid, typically allowing shorter maturities — rarely exceeding three to five years — and only limited volume, typically less than Rmb1bn ($160m)," said Orcel. "However, these issues aside, we are confident that this relationship is rapidly growing and will continue to deliver real benefits to both Russia and China."

In the first half of 2015, just 20% of bonds issued in China and traded on the interbank bond market via China Central Depository and Clearing (CDCC) were in the three to five year bracket, but the ratio grows to 87% for nonstate owned commercial bank bonds, according to CDCC data. Among corporates, the most popular tenors in H1 2015 were between five and seven years, covering 83% of all issues.

Moscow catching up

VTB Capital, the investment banking arm of VTB, of which Orcel is also Head of Global Banking, boosted its Asian footprint with a Singapore branch in 2008, where it runs a wholesale banking business, and in November 2011 it added a Hong Kong office. Orcel said the two offices offered Asian investors a window into Commonwealth of Independent States (CIS) markets, and vice versa. "The company continues to develop its capabilities to allow Russian and CIS clients to access capital from investors in the Asian region and allow investors in the region superior access to Russian and CIS opportunities," said Orcel. "This is aimed at helping our Russian clients to access local institutional investors and also facilitate local Asian capital to find its way to Russia."

The bank has also taken part in the offshore RMB (CNH) market since launching a presence in Asia. Most recently, VTB Capital acted as joint lead manager and bookrunner on the Rmb1.5bn Reg S highyield bond issue by Powerlong Real Estate in September 2014, acting on a syndicate alongside Bank of America Merrill Lynch, Credit Suisse, Guotai Junan Securities, Haitong International Securities, HSBC and UBS.
In the equities market, VTB Capital also scored an important first in 2010 with the $2.24bn IPO of aluminium giant Rusal, the first Russian company to list on the Hong Kong Stock Exchange.
With VTB's strategy reflecting a growing interest in Russia for China and RMB business, the question becomes whether Moscow has the potential to join London and Singapore as a key offshore center for RMB business, a position which could help its ambitions.

So far, however, there has not been much action aside from a currency swap line for Rmb150bn established in October 2014. Russia has yet to receive the appointment of an official RMB clearing bank or a quota in the RMB qualified foreign institutional investors (RQFII) programme.
Orcel said that the interest in a Moscow RMB hub was indeed there, but that local infrastructure had yet to catch up.

"Moscow has the potential to become a local hub for RMB liquidity based on RMB/RUBrelated flows," he said. "The constantly growing trade balance between Russia and China, as well as a demonstrated trend to switch to payments in local currency will further expand this sector. "Russia is currently developing a financial market infrastructure which will be crucial to adapt to new market conditions. One recent development is the launch of the RMB/RUB futures contract on the Moscow Exchange, which presents a solid example of how RMB liquidity can be introduced in Russia."
A number of RMB products have been introduced on the Moscow Exchange (Moex), all seeing considerable success. CNY/RUB spot trading in the first six months of this year totalled Rb138.8bn ($2.4bn), twice that of the first half of 2014, according to CEIC data.

CNY/RUB swaps contracts volume was Rb53.4bn in H1 2015, compared to Rb13.8bn last year.

Overall, volumes for the CNY/RUB pair increased 130% in the first half of 2015, with an average daily trading volume of Rb1.6bn, according to Moex, with eight market makers maintaining RMB market liquidity and more than 130 banks and brokerage firms trading the currency.

Futures MoU

The memorandum of understanding (MoU) between CFFEX and Moex was signed less than ten days ahead of the July 24 announcement by People's Bank of China about new oil futures contracts to be traded in RMB on the Shanghai Futures Exchange, one of CFFEX's founders, by local and international players. "With the State Council clearly emphasising the importance of further developing financial derivatives in China in its 2015 annual government work report, CFFEX presses on with its efforts to facilitate the healthy and regulated growth of China's financial futures market," said Shenfeng Zhang, chairman of CFFEX, in a press release. "To that end, it is crucial to draw from advanced overseas experience and strengthen crossborder communication and cooperation so as to seek global development. The signing of this MoU will further cement the relationship between CFFEX and Moex, generating new opportunities for the two exchanges to step up cooperation in the common pursuit for development."

Alexander Afanasiev, CEO of Moex, added that China is now Russia's biggest trading partner and that more and more bilateral trade was being settled in both rouble and RMB. "Likewise, YuanRouble trading on Moscow Exchange has grown rapidly, increasing sevenfold last year alone," said Afanasiev in the statement. "Based on client demand, we additionally launched YuanRouble futures trading earlier this year, and in just a few months the instrument has become a core offering on our FX derivatives platform. "Today’s MoU with CFFEX is the first step in exploring new opportunities for cooperation on various fronts."
Corporate Communications VTB Capital