Renminbi-denominated bonds are gaining popularity among Russian issuers, and are set for another boost following the recent meeting between the presidents of China and Russia. But the market’s further development hinges on deepening the liquidity pool.
State-owned shipping company Sovcomflot, which is subject to US and European sanctions due to Russia's invasion of Ukraine in February 2022, sold a Rmb2.6bn (US$380m) 4.95% three-year bond on March 23, joining a dozen Russian companies which have tapped the market since July.
Thirteen Russian issuers have sold a total of 24 tranches since then, with the volume reaching Rmb76bn, according to data provider CBonds. Aluminium producer Rusal was the most active, printing eight bonds.
Fertiliser producer PhosAgro is also understood to be planning a renminbi bond placement to help refinance a US$500m bond maturing on April 24.
A jump in the volume of trade settled in renminbi, especially since Russian banks were cut off from the Swift payment network last year, has increased companies’ need for the currency.
“The reason for issuance is a very large increase of foreign trade transactions settled in CNY,” a Russia-focused analyst wrote in an email to IFR, adding that Russia's share of total foreign trade settled in renminbi has increased to 33.3% this year from 25% in the second half of last year.
Most of the issuers, including oil producer Rosneft, gold miner Polyus and Rusal, are big exporters, and tend to use the proceeds to finance their trade with China.
“Russian issuers are willing to sell renminbi bonds to finance their trade activities linked with China, while the increased trade has accumulated renminbi which Russian companies and banks are willing to invest,” said Anton Kazantsev, head of the Asia fixed-income group at CBonds.
Chinese president Xi Jinping’s meeting with Russian leader Vladimir Putin between March 20 and 22 is expected to strengthen ties. Cooperation in various areas including trade and finance were announced during Xi’s visit to Moscow.
Putin also said Russia would increase the use of renminbi settlement in its trade with countries in Asia, Africa and Latin America, according to state news channel RT News.
“There has been a consistent increase of yuan-denominated bonds issued by the Russian side and the leaders' meeting is set to boost this trend even more as there is a convergence of interests,” said Matteo Giovannini, senior finance manager at Industrial and Commercial Bank of China.
Although many Russian companies are keen to tap the market, a limited liquidity pool is a challenge. The market is mainly supported by Russian banks using their renminbi reserves, and the liquidity is drying up quickly.
“The appetite for Russian issuers to tap renminbi-denominated issuance is there, but the market liquidity or the availability of renminbi is the bottleneck,” said Terry Zhang, head of global strategy and business management at CSPI Credit Ratings.
Russian lenders who bought those bonds barely trade them, according to the Russia-focused analyst. He believes banks need renminbi assets to close their open currency positions due to the increase in liabilities denominated in the currency.
Some Chinese banks used to buy Russian companies' renminbi bonds, but are now shying away due to concerns that they could be penalised if they channel funding to Russia.
“Chinese banks are restricting funding to Russia to avoid the risk that US sanctions could potentially deprive them of access to the dollar. China remains highly dependent on the dollar and on the access to America's financial system,” said ICBC's Giovannini.
Kazantsev believes Chinese banks' entry as investors would greatly support the development of the currently small and new Russian renminbi bond market. “But due to the sanctions, this scenario is unlikely at the moment,” he said.
Additional reporting by Robert Hogg