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7 December 2016
The Financial Times
Russia close to issuing first renminbi bond Premium
Beijing backs deal that helps to tighten relations and bypass western sanctions. Russia and China are close to another milestone of co-operation with the placement of an offshore renminbi bond in Russia by the Russian finance ministry that would open new funding options for the country’s issuers and bring Chinese investors one step closer to Russia’s equity market.

People involved say preparations for the issue are nearing completion and it should happen early next year — despite volatility in global bond and equity markets after the UK’s vote to leave the EU in June and Donald Trump’s victory in the US presidential election last month.

Under the proposal, first floated in December last year, the Russian finance ministry would issue Rmb6bn ($1bn equivalent) of bonds with multiple maturities to be listed on the Moscow Exchange (MOEX). This would establish benchmarks for a new funding option for large parts of Russia’s economy shut out of foreign-currency bond markets by western sanctions and give China a central role in making this possible.

“Despite the uptick in global interest rate levels since the US elections and the looming US Fed funds rate hike in December, the interest for this deal from the Chinese mainland investment banks is still very high,” said Andrei Akopian, managing partner at Russian-Chinese advisory business Caderus Capital. Caderus was appointed MOEX’s official representative for China in February 2016.

In a joint statement following a meeting of Russia’s prime minister Dmitry Medvedev and his Chinese counterpart Li Keqiang in early November, Beijing underlined its support for the issue.

Mr Akopian said this was “the last missing piece of the puzzle” to obtain the necessary regulatory clearance for the issue and towards making Moscow an offshore centre for the renminbi.

The Chinese-language statement said the aim of the initiative was “to increase co-operation between the [two countries’] banks and between financial institutions in trade finance, in capital raising for projects between the two countries, in insurance and in other areas, and to . . . promote the use of the countries’ domestic currencies in settlement of bilateral trade and investment”.

Mr Akopian said a number of Russian companies were lining up to issue renminbi bonds in Russia and help establish what he called a “Baikal bond” market.

This would not be the first offshore renminbi issuance by a foreign government, which was led by the UK in 2014 but — if sold as planned — it would be the largest to date (see table) and would mark a significant step in Chinese-Russian relations at a time when the US appears ready to give up some of its postwar lead in international affairs.

Significantly, the communiqué talks of a need to “reform the international financial system” and “raise the representation and the right to a voice of emerging and developing countries in the global system of economic governance”.

For Russia, the bond could also help attract much sought-after Chinese investors to Russian equities and, ultimately, achieve the goal of listing equities of Chinese companies in Moscow.

In September, Caderus reached agreement with BCS Global Markets, the largest securities broker on the MOEX, in a bid to bolster cross-border investment by attracting Chinese private and institutional money to the Russian market through BCS’s investment platform.
Today, private Chinese investors with money outside China typically invest through Russian brokers, while institutional investors typically prefer Russian global depositary receipts (GDRs) and American depositary receipts (ADRs) listed in London or New York.

At the end of September, only seven Chinese asset managers held Russian blue-chip equities, with a combined value of just $8.78m, according to Thomson Reuters data compiled by Caderus. This makes up a mere 0.017 per cent of the seven managers’ combined assets under management of $50.6bn — suggesting significant room for further investment.

Of the few such Chinese investments to date, most are in Russia’s oil and gas majors, with some stakes in metals and mining businesses, retailer Magnit and the country’s largest banks Sberbank and VTB, according to data from March 2016.

China Investment Corporation (CIC), China’s biggest sovereign wealth fund, has led some strategic investments in Russia’s equity markets, including equity issuance in VTB and MOEX, although CIC sold its stake in MOEX in January this year.

Vladimir Potapov, chief executive at VTB Capital Investment Management, Russia’s largest asset manager, said he was keen to attract further Chinese investors to Russian equity markets.
“The China story is now coming together both from the top down and the bottom up,” he said, suggesting that co-operation between Russia and China is happening at government and business level.
Stefanie Linhardt is Europe editor at The Banker.
Corporate Communications VTB Capital