Yuan Trading to Expand on Micex as China Market Ties Deepen: Russia Credit

Russia, the first country to offer direct trading of yuan outside of China, plans to extend dealing hours as increased exports spur demand for the currency.

“The potential is as big as the trading between the countries,” said Ruben Aganbegyan, president of the Micex Stock Exchange, where the trades take place, said in an interview in Moscow. “People need to see that it’s a real market and that they can buy size.”

Banks led by OAO Sberbank and VTB Group have been buying and selling yuan for rubles since Dec. 15. Transactions exceeded the Micex’s estimate by 64 percent in the first day of trading at 4.92 million yuan ($738,185). Trading currently lasts for one hour from 10 a.m. in Moscow.

China, the fastest-growing major economy, and Russia, the biggest energy exporter, are challenging the international role of the dollar. Russian President Dmitry Medvedev called in June for the ruble to become a regional reserve currency and Chinese Premier Wen Jiabao said in March he was “worried” holding U.S. assets after the financial crisis hobbled the world’s largest economy.

Chinese exports to Russia surged 74 percent last month, the biggest increase of the 20 nations and trade groups tracked by the Beijing-based Customs General Administration, while Russian trade flows to China hit a monthly record of $2.6 billion in May this year. China overtook Germany to become Russia’s largest trading partner along with the Netherlands in the first 10 months of this year as trade climbed 53 percent from the same period last year to $47.5 billion, according to Russian customs service data.

Cost Saving

Exporters will shave as much as 5 percent in transaction costs by dealing in the local currency rather than in dollars, Viktor Melnikov, a deputy chairman of Russia’s central bank, said at a conference in Moscow on Dec. 6. Russian importers of Chinese manufactured goods and Chinese importers of Russian products including timber, seafood and coking coal will be the main clients of yuan-ruble trading, Melnikov said.

As much as 30 percent of all trade with China will be conducted in the yuan within five years, said Oleg Radichkin, HSBC Holdings Plc’s head of development and sales of bank products in Moscow.

Rusal Yuan Bond

HSBC, Europe’s biggest bank, concluded on Dec. 13 what it said was the first Russian trade transaction in yuan for Moscow- based sporting goods retailer Sportmaster.

United Co. Rusal, the world’s largest aluminum producer, plans to hire banks this month to sell yuan-denominated bonds as early as the first quarter of 2011, said Oleg Mukhamedshin, head of capital markets at the Moscow based company.

A “reasonable” amount to raise would be about 1 billion yuan, Mukhamedshin told reporters in Moscow today.

VTB, Russia’s second-largest bank, became the first company from an emerging market outside Asia to sell bonds denominated in Chinese yuan on Dec. 10. The three-year bonds were priced to yield 2.95 percent, compared with a yield of 5.395 percent for Moscow-based VTB’s five-year bonds in dollars, according to data compiled by Bloomberg.

Eurasian Development Bank, a lender run by the Russian and Kazakh governments, based in Almaty, may issue part of its planned $500 million of debt next year in yuan, Chairman Igor Finogenov said Dec. 13.

China, Russia Ties

Operations with the yuan “have a future” even if demand isn’t so high at the moment, German Gref, chief executive officer of Russia’s largest lender, Sberbank, told reporters in Moscow on Dec. 13. “There is no alternative for the dollar, but the world is moving in a different direction, not toward a single reserve currency.”

Rusal raised $2.2 billion in January in the first initial public offering by a Russian company in Hong Kong.

“The relationship between Russia and China on the business side is getting closer,” said John-Paul Smith, a London-based emerging markets strategist at Deutsche Bank AG, the world’s largest currency trader. “You’ve got these Russian IPOs either achieved or attempted in Hong Kong so relations have taken on momentum.”

The ruble strengthened 0.3 percent to 46.1950 per 10 yuan yesterday. Transactions topped 4.25 million yuan, or 19.6 million rubles yesterday, according to the exchange’s data. The Micex, which is Russia’s biggest exchange by the amount traded, expects about 3 million yuan to change hands each day, Vice President Igor Marich said Dec. 6.

Extra Yield

The ruble snapped a three-day advance against the dollar yesterday, sliding 0.2 percent to 30.7127 by the end of trading. Non-deliverable forwards, or NDFs, which provide a guide to expectations of currency movements and interest rate differentials and allow companies to hedge against currency movements, showed the ruble yesterday at 31.0201 per dollar in three months.

Russia’s dollar bonds due in 2020 fell yesterday, sending the yield 6 basis points, or 0.06 percentage point, higher to 5.11 percent. The price of the country’s ruble notes due August 2016 rose for a second day, pushing the yield down 10 basis points to 7.59 percent, the lowest this week.

The extra yield investors demand to hold Russian debt rather than U.S. Treasuries rose 3 basis points to 204 yesterday, according to JPMorgan EMBI+ indexes. The spread compared with 137 for debt of similarly rated Mexico and 177 for Brazil, which is rated two steps lower at Baa3 by Moody’s.

The spread on Russian bonds is 37 basis points below the average for emerging markets, the widest since Nov. 18, according to JPMorgan indexes.

Default Swaps

The cost of protecting Russian debt against non- payment for five years using credit-default swaps was 141 basis points yesterday, down from this year’s peak of 217, according to data provider CMA. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Credit-default swaps for Russia, rated Baa1 by Moody’s Investors Service, its third-lowest investment grade rating, cost nine basis points less than contracts for Turkey, which is rated four levels lower at Ba2. Russia swaps cost as much as 40 basis points less on April 20.

VTB bought yuan on the Micex on the first day of trading and will “function as a market maker,” according to a statement issued Dec. 15. The state-controlled lender said it will use yuan to finance trade operations and tourism.

Bank of Moscow

“The volume in ruble-yuan will unquestionably grow significantly in the years to come,” Yury Gruzglin, global head of fixed income, currencies and commodities at Renaissance Capital in Moscow, said by e-mail on Dec. 15. “Bilateral trade will continue to grow between Russia and China and there seems to be support to move away from the dollar as a settlement currency for this.”

Renaissance has added the yuan-ruble cross-rate to the list of trades it offers and has had demand from clients, Gruzglin said.

Bank of Moscow has opened a trading account in yuan for OAO Kuibyshevazot, a Russian fertilizer maker that exports to China, in July, the lender controlled by the capital city’s government said Dec. 15. Deals amounted to 10 million yuan this year and allowed the company to “minimize the expenses tied to conversion and dollar rate fluctuations,” according to a Dec. 15 statement. The bank is considering taking part in yuan-ruble trading, it said.

Bursa Malaysia

For demand to increase, China’s government needs to encourage businesses to use the yuan in their dealings with Russia, Zhao Qingming, a senior analyst at China Construction Bank Corp., the country’s second-largest lender, said from Beijing yesterday.

“This is important in helping make the yuan a global currency,” he said. “If there is little demand for yuan in bilateral trade the trading volume between the yuan and ruble won’t pick up.”

The Bursa Malaysia Derivatives Berhad, which sets the global benchmark for crude palm oil, started accepting yuan as margin collateral for trading on the Malaysian derivatives market last month. The Chinese Gold & Silver Exchange will start the first international gold contract in yuan early next year, the Financial Times reported Dec. 14, citing exchange President Haywood Cheung.

China’s central bank set the ruble’s reference rate at 4.6246 per yuan yesterday, from 4.6229 on Dec. 15. The regulator may allow trading in forwards and swap contracts on yuan-ruble, Sergey Tsyplakov, the Russian trade representative, said this week, according to China Business News.

“We’ll just see how the market performs and what volumes are like and if the demand is there we’ll just extend it,” Micex’s Aganbegyan said. “We’re quite opportunistic like that.”

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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