Hunting Ground for Putin's Tigers Is Now a Refuge for Bond Salesby
VTB lays groundwork for debut sale of notes in mainland China
Panda bonds could alleviate funding crunch of West's sanctions
Once a hunting ground for Vladimir Putin’s prized Siberian tigers, China is being touted as the place where Russia’s sanctioned borrowers can find new bond investors.
VTB Group is exploring a sale of onshore yuan bonds with major Chinese banks and regulators, Dmitry Alexeev, head of debt finance, said in an interview. The plans for so-called panda bonds are part of a wider pivot east towards Russia’s biggest trading partner after sanctions over Ukraine shut out the nation’s largest companies from U.S. and European bond markets.
Few borrowers illustrate the predicament better than state-controlled VTB, which halted bond sales entirely this year after being named under the penalties. The isolation has pushed Russia to nurture ties with China and develop an alternative financing avenue for exiled issuers. The government said in October it’s working on a pilot issue of mainland Chinese yuan bonds.
“Apart from focusing on the Chinese market, we do not see other markets that provide sufficient depth and are easily accessible to us in the foreseeable future,” Alexeev said by phone from Moscow. In July VTB got the first license for a Russian bank to operate on China’s national interbank bond market.
Although panda bonds could ease the pain of sanctions, they aren’t expected to replace the Eurobond market. The World Bank estimates sales of panda bonds worldwide will reach $50 billion in the next five years. Canada’s province of British Columbia said it got Beijing’s approval to sell the bonds and South Korea is preparing a 3 billion yuan ($465 million) sale.
“Yuan bonds can only be part of a broader strategy of diversifying away from U.S. dollar and euro markets at this stage, because the yuan market is still new and does not have the same broad institutional basis yet,” said Jan Dehn, head of research at Ashmore Group Plc, which oversees almost $51 billion of emerging-market assets including bonds in onshore yuan. “China wants to see countries and corporations abroad use the renminbi more, while Russian entities need the financing so it makes sense for Russians to issue in yuan.”
Russia is turning to Chinese capital markets to alleviate a funding crunch as its budget deficit swells in 2015 to the widest in five years. Offshore investors had bought about $1 billion in ruble-denominated government debt through October, according to Konstantin Vyshkovsky, the head of the Finance Ministry’s debt department. Russian companies have so far only tapped China’s offshore market, with sales from VTB as well as Gazprombank OJSC and Russian Agricultural Bank OJSC since 2010. Gazprombank’s January 2017 yuan bonds have fallen in five of the past six days, lifting the yield 35 basis points to 8.48 percent, the highest since Nov. 4.
In addition to trading interests, the two nations share a border that is the habitat of endangered Amur tigers whose plight Putin has championed. The Russian president helped release three orphaned cubs into the wild in 2014 as part of a rehabilitation project to rebuild a population of 360 tigers decimated by decades of illegal poaching and deforestation, according to the International Fund for Animal Welfare. Two of the big cats freed by Putin allegedly strayed into China and attacked a hen house and a herd of goats, China’s official Xinhua News Agency reported Nov. 25, 2014.
Though Russia isn’t prohibited by sanctions from selling sovereign bonds, it has stayed out of the Eurobond market for two years as borrowing costs jumped amid heightened political risk. Russian companies sold just $4 billion of bonds in 2015, down from the 2013 record when they raised $42 billion in dollar and euro-denominated debt. A few such as VTB retired Eurobonds early. The bank bought back about $1.6 billion of its debt this year, according to Alexeev.
Still, the yuan’s inclusion in the International Monetary Fund’s reserves basket earlier this month has created demand from foreign buyers for yuan bonds, according to Hua Jingdong, vice president and treasurer at the World Bank’s International Finance Corp. He estimates the panda-bond market will start to take off after 2017.
“International investors including central banks desperately need a wider choice,” he said in an interview last week. “My own hunch is, within one to two years we will see an explosion of issuers beyond the sovereign agencies, multinational corporations and international financial institutions.”