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6 July 2016
Moscow lays foundations of RMB hub

Russian and Chinese authorities are working towards the establishment of a renminbi hub in Moscow, at a time when Russian bankers are seeking growth in RMB-related business and the central bank has begun investing in the currency.

The Central Bank of Russia signed a landmark agreement with its Chinese counterpart on June 25 that should lead to the establishment of a renminbi clearing bank in Moscow, as part of broader inter-government effort to boost Russia’s role as a RMB hub. 

The agreement were signed during Russian president Vladimir Putin visit to China during the last week of June. The memorandum of understanding between the central banks was for the establishment of clearing and settlement arrangement of RMB payments in Russia, though no bank has been appointed to the role of official clearing bank yet. 

“In the nearest timeframe the People’s Bank of China will choose and designate a clearing bank residing in Moscow in order to provide the RMB clearing and settlement services under the memorandum framework,” CBR said on a statement.

When asked about the timeline of the appointment of the clearing bank, CBR said it would be up to their Chinese counterparts. 

“It is a responsibility of the PBoC, but we hope it will be done soon,” a CBR spokesperson told GlobalRMB In a written response to questions.

The two central banks the agreement will further facilitate cross-border transactions in RMB between companies and financial institutions for trade and investment purposes. 

“We see the RMB clearing capacity in Moscow as a next level of financial cooperation between our countries,” the CBR spokesperson said. ‘An RMB business hub will be convenient for Russian-Chinese activities in the sphere of investment and capital markets’.

CBR, which also plans to establish its first overseas representative office in Beijing to further boost cooperation with China, also disclosed on July 4 that it had started accumulating RMB in its foreign exchange reserves last year, with the currency representing 0.1% of the total at the end of 2015.

The basics

Igor Golutvin, managing director, department of fixed income trading, VTB Capital, told GlobalRMB that there were good reasons “to push ahead with the plans for a RMB hub in Moscow”.

“This is a natural idea for Russia because a number of companies would be interested in doing direct payments in RMB, and it would be beneficial to have a clearing house in Russia to facilitate the use of RMB,” he said. 

Despite the agreements, putting in place the necessary infrastructure was likely to be a lengthy process.

“RMB clearing has been on the radar for quite some time already,’ he said. Given my experience those projects involving the central banks take a long time even after the signing of the memorandum to become a proper set up.”

As tor the RMB clearing arrangement, Russian companies and financial institutions would be likely to take advantage of it only it the conditions were clearly laid out and should cost at transacting in RMB not be too different from using other currencies.

But there were advantages to moving forward with the plans, with the sanctions against Russia and the broader political context among the considerations.

“One argument made in the past was that in case of changes in the geopolitical situation, companies can use this alternative channel,“ said Golutvin. “That would decrease operational risk.”

In terms or likely candidates for the role of clearing banks. thee CBR spokesperson said that subsidiaries of Industrial and Commercial Bank of China, Bank or China, China Construction Bank, and Agriculture Bank of China all hold banking licenses in Russia.

So bad it’s good

RMB business in Russia has certainly mode headways despite the lack of the typical RMB hub infrastructure. Trading on the Moscow Exchange of foreign exchange contacts for the rouble—RMB pair has grown rapidly. Spot trades were Rb41 7bn ($651m) in May 2016, more than double their turnover a year earlier, according to CEIC data. In the swap market, trading in the same month was Rb41bn, a growth at nearly eight times in just one year.

According to CBR data, average daily turnover of spot FX transactions for the pair was just $35m in January 2015, but ballooned to as much as S460m in August, in parallel with the People‘s Bank of China decision to change the fixing mechanism of the RMB end weaken the currency. before paring back to $99m as of April this year.

The surge in FX trading was, according to VTB’s Golutvin, down to changing attitudes of corporates trading with China.

“We noticed a strong correlation between the volatility of the rouble and turnover in the rouble-RMB pair. Companies involved in export and import operations, especially mid-sized ones, had no hedging positions before. So for them the devaluation of the rouble in the last two years had its impact, so after we have seen a lot of hedging and hedge-related flows.”

With the result of the Brexit referendum now putting volatility back at the forefront for global markets, other capitals are looking at how these developments will affect the role of London as the preeminent financial centre in Europe. And while Moscow is far behind the likes of Luxembourg or Paris in terms of RMB business, there are opportunities to be explored.

“The recent events demonstrate that you need to have an alternative in terms of clearing options, you cannot have all the eggs in one basket, it is a question of operational risk," Golutvin said. "Moscow can become a local hub for some of the Asia related flows, I don’t see any obstacles to that.”

Corporate Communications VTB Capital