Russia Says Debut Yuan Bond Possible by Dodging 2016 Debt Limit

Russia can sell a “pilot” issue of debut yuan notes on China’s mainland market even after exhausting its $3 billion limit for borrowing abroad this year, according to the head of the Finance Ministry’s debt department.

As long as the government stays within the upper cap for state debt, it has “a certain flexibility” to switch borrowing volumes it targets selling domestically to external markets, Konstantin Vyshkovsky said in an interview in Washington on Saturday. Its first sale of yuan bonds is possible this year or next, he said.

After fighting a boycott by foreign banks and some investors by returning to international markets in 2016 with its first Eurobond deal in three years, Russia is testing a new source of capital as its budget deficit swells to the widest in half a decade. The Finance Ministry will ask lawmakers for permission to boost its domestic borrowing target by 200 billion rubles ($3.2 billion) this year, and part of the increase can be used to sell the equivalent of $1 billion of yuan bonds, according to Vyshkovsky. 

“This year we’ve formally exhausted our external borrowing limit, but the government is able to transfer borrowing limits from domestic to external,” Vyshkovsky said. “Theoretically we can choose any option for issuance this year -- domestically or by reallocating externally.”

The yuan bond sale will target mainland Chinese investors, he said. The main hurdle at the moment is that the Chinese regulator has yet to allow investors to buy Russian debt instruments, according to Vyshkovsky.

Debt Appetite

If Russia uses part of the internal borrowing target to sell yuan bonds, that would leave the Finance Ministry with about 140 billion rubles for ruble bond auctions this year. The ministry set an initial target of 70 billion rubles of local-currency OFZ offerings for the last quarter of the year, a limit it may increase after changes to the budget law.

For next year, the government is preparing a fourfold increase in domestic borrowing while also raising the limit on international debt sales back to $7 billion after a decrease to $3 billion in 2016. Russia’s second Eurobond offering last month exhausted the maximum volume of $3 billion allowed for overseas sales this year.

VTB Capital, the investment banking arm of Russia’s second-biggest lender, was the sole organizer of both Eurobond sales after foreign banks shunned the deal.

“We aren’t planning to bring in foreign banks for Eurobond issuance next year,” Vyshkovsky said.

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