Surging yields on Russian corporate bonds denominated in yuan are making the debt an expensive option for companies frozen out of markets in Europe and the U.S. because of sanctions over the conflict in Ukraine.
The yield on OAO Gazprombank’s 1 billion yuan ($162 million) of bonds due in January 2017 climbed 281 basis points last month to 7.6 percent, data compiled by Bloomberg show. VTB Group’s October 2015 note jumped 332 basis points in the period. The average rate for dim sum debt rose nine basis points, according to Bank of America Merrill Lynch data.
More companies will turn to China for financing as commercial ties deepen and funding options in the U.S. and European Union dwindle, said Ivan Tchakarov at Citigroup Inc. State-development bank Vnesheconombank, which is also subject to penalties amid the fighting between Ukraine forces and pro-Russian separatists, said it’s weighing a yuan bond sale, while lender ZAO Rosinterbank plans to issue dim sum bonds next month.
“If one assumes sanctions continue or even intensify, Russian companies may have no option but to issue in yuan, even if it’s more expensive to do so,” Tchakarov, the chief Russia economist at Citigroup in Moscow, said yesterday by e-mail. “It makes sense for this premium to exist.”
The latest round of EU sanctions accounced last week targeted Russian oil and gas, defense and financial industries, preventing the nation’s biggest lenders from selling bonds or shares in the 28-nation bloc.
Souring relations with Europe and the U.S. are adding impetus to the eastward shift of Russian companies, which have been bolstering ties with China. Russia reached a $400 billion agreement in May to supply natural gas to China through a new pipeline over 30 years, a boon for natural gas-export monopoly OAO Gazprom.
“Given all the sanctions out of the EU and the U.S., it would be no surprise to see Russian companies looking to do more business in Asia,” Simon Quijano-Evans, the London-based head of emerging-market research at Commerzbank AG, said in e-mailed comments on Aug. 4.
Vnesheconombank is considering placing yuan-denominated debt in the future, while it has no immediate plans to sell foreign-currency bonds, the bank’s press service said by e-mail yesterday. The lender and three other companies were included on a U.S. sanctions list last month limiting their ability to raise funds.
Rosinterbank held investor meetings in Singapore, Hong Kong and Macao last month and plans to raise as much as 500 million yuan in September, Deputy Chairman Konstantin Vorobiev said by e-mail yesterday.
Asian markets “may not be deep enough for the big Russian companies,” Viktor Szabo, a London-based money manager who helps oversee more than $13 billion in emerging-market debt at Aberdeen Asset Management Plc, said by e-mail yesterday.
Russian companies have the equivalent of $2 billion of debt in Asian and Pacific Rim currencies coming due before 2020, compared with $211 billion in dollars and euros, according to data compiled by Bloomberg.
Tapping Asian markets may also be tough since Russian companies aren’t well known there aside from the state-owned banks, according to Richard Segal, an international credit strategist at Jefferies International Ltd. in London.
The trend eastward has gained traction nonetheless since the downing of Malaysian Air flight MH17 on July 17, which the U.S. says was probably caused by a missile fired by the insurgents. The rebels and Russia blame Ukrainian forces.
Hostility toward Russians is acting as a “trigger for the re-allocation of assets” to banks in Singapore, Hong Kong and Dubai, Danilo Lacmanovic, chief executive officer of Third Rome LLC, a Moscow-based company that manages $400 million on behalf of high net-worth individuals, said by phone yesterday.
Trading volume in the ruble-yuan currency pair reached a record 3.8 billion rubles ($105 million) on July 31, Moscow Exchange data show. China was Russia’s second-biggest export market last year after Germany, up from fourth in 2010, according to data compiled by Bloomberg.
The ruble weakened for a fifth day versus the dollar, the longest streak of declines since June 17, losing 0.4 percent to 36.2165 by 5:11 p.m. in Moscow.
“The paradigm is steadily changing,” Aram Kazaryan, a foreign-exchange and interest-rates trader at OAO MDM Bank in Moscow, said by e-mail yesterday. “The sanctions have significantly worsened the diplomatic relations, so it’s very possible that we’ll see a significant pick up in trade volumes with China in place of the European trade.”