Russian banks hobbled by sanctions are exploring funding sources in Hong Kong to help the nation’s companies refinance $117 billion in external debt due in the coming year.
OAO Gazprombank, Russia’s third-largest lender, is applying for licenses to offer securities services in the city, while Vnesheconombank and OAO Sberbank said they are monitoring opportunities. The yield on October 2015 yuan bonds of VTB Bank JSC, the nation’s second-largest, was 8.04 percent on Tuesday, 121 basis points below its similar ruble debt. Moscow Exchange forecast last week that Russian companies and banks will list yuan-denominated bonds on its bourse.
Russian companies have been able to win loans from Chinese banks even as U.S. and European sanctions shut many out of global markets since conflict broke out in Ukraine in 2014. China is encouraging international issuers to sell Dim Sum notes, denominated in offshore yuan, as it seeks to make the yuan a rival for the U.S. dollar as a reserve currency. The renminbi has the second-lowest volatility in major currencies and is the world’s second most-used currency for trade finance.
“Russian corporates have a hard time issuing U.S. dollar bonds as several companies are excluded from the primary market because of the U.S. and European sanctions,” said Victor Verberk, Rotterdam-based global co-head of credit at Robeco Groep NV. “It makes sense that Russian corporates are looking for alternate sources of funding for their business. Using the Dim Sum market may be one of them.”
VTB Bank was the first Russian Dim Sum issuer, raising 1 billion yuan ($161 million) in a three-year debt sale in 2010 at 2.95 percent. Since 2012, lenders from the nation including Gazprombank and Russian Standard Bank have raised 7.5 billion yuan in the market, data compiled by Bloomberg show.
Yuan bonds sold by Russian companies tumbled in December when the ruble plunged to an all-time low and oil prices slumped. They haven’t sold any new debt in the market since January 2014.
Gazprombank plans to organize a yuan bond sale of about $500 million in Hong Kong for Russian state-owned gas producer OAO Gazprom, a bank official said on June 19. It is also discussing financing plans for a client, Petroleos de Venezuela SA, including a possible 10 billion yuan sale this year, he said. Gazprom spokesman Sergei Kupriyanov declined to comment when asked for updates on the sales.
“The sanctions are having an impact in the West and there is thinking that it will be easier to break through in China, which has funds available for investments,” said Egor Fedorov, a Moscow-based analyst at ING Groep NV. “State banks have suffered from a weaker ruble and sanctions and would be interested in a channel to access hard currency.”
Russian banks will remain loss-making in 2015, despite a significant reduction in interest rates this year because of increased provisioning, according to a Moody’s report this month. Total bad loans will “likely” rise to 13-14 percent of overall lending over the next 12 months, compared with 9.5 percent at the end of 2014, Moody’s said. OAO Sberbank said in May its first-quarter profit slid 58 percent.
Any issuers may face higher borrowing costs. The yields on outstanding yuan bonds sold by Russian companies ranged from 7.6 percent to 8.8 percent, compared with an average 4.3 percent on Dim Sum bonds, according to data compiled by Bloomberg and a Deutsche Bank AG index.
Higher costs have also dragged on overall offshore yuan bond sales. Issuance has dropped 33 percent in the first seven months from a year earlier, data compiled by Bloomberg show.
“Russian issuers have been cost-sensitive and the market is not favorable” as a whole, said Steve Wang, Hong Kong-based head of fixed-income research at BOCI Securities Ltd., a subsidiary of China’s third-largest bank.
Closer ties between Russia and China help. The Asian country was Russia’s biggest trading partner in the first five months, accounting for 11.2 percent of total turnover compared with 8.7 percent each for Germany and the Netherlands. Russia’s trade slid 32.8 percent from the year-earlier period.
Chinese investors bought as much $1 billion of ruble debt this year, Finance Minister Anton Siluanov told state channel Rossiya 24 at a BRICS summit on July 9 that brought together leaders from Brazil, Russia, India, China and South Africa. This month, VTB became the first Russian bank to win a license to trade in China’s interbank bond market. Iron-ore miner Metalloinvest Holding Co. borrowed $750 million from a syndicate including Chinese banks this month.
The yuan has been held at around 6.2 a dollar in the past four months as China hopes a stable exchange rate can bolster its reserve-currency bid and ease capital outflows. Its one-month implied volatility was 1.25 percent, the second-lowest in major currencies except the greenback-pegged Hong Kong dollar. That compares with 19 percent for the ruble. The yuan was little changed at 6.2091 in Shanghai Wednesday.
“It is important for many corporates that potential currency risks can be hedged,” said Robeco’s Verberk. “The fact that the yuan is still managed toward the U.S. dollar makes it a more reliable market with manageable foreign-exchange risks.”