Photographer: SeongJoon Cho/Bloomberg

Russia Plans Yuan Bond Sale With Sanctions Threat Nearing

Updated on
  • Finance Ministry hires banks to arrange 6 billion yuan sale
  • Russia seeks alternative financing amid U.S. penalties

Russia’s Finance Ministry has hired banks to organize its first-ever sale of yuan bonds as the government braces for possible U.S. sanctions on its sovereign debt markets.

Russia hired Bank of China Ltd., Gazprombank and Industrial & Commercial Bank of China Ltd. to arrange investor meetings for the sale of 6 billion yuan ($907 million) in five-year notes, according to people familiar with the plans. The issuance is slated for the end of this year or beginning of 2018, they said, speaking on condition of anonymity because the deal isn’t yet public.

The press office of Russia’s Finance Ministry declined to comment.

The sale has been under discussion since U.S. and European sanctions in 2014 over the takeover of Crimea blocked many state-owned Russian companies’ access to Western capital markets. A report due next quarter from the U.S. Treasury on the potential consequences of extending penalties to include Russian sovereign debt has increased pressure on the Finance Ministry to seek out alternative means of borrowing.

“It would be wise of Russia to tap the yuan market now,” said Vladimir Miklashevsky, a senior economist at Danske Bank A/S in Helsinki. “China remains Russia’s biggest trade partner, China’s enormous financial system has lots of buying potential, too.”

While Bank of Russia Governor Elvira Nabiullina has said there will be “no serious consequences” from U.S. sanctions on new domestic government debt, economists in a Bloomberg survey estimate the move could add 50 basis points to 150 basis points to borrowing costs. Currently foreign investors hold about a third of the outstanding bonds.

The yield on Russian ruble bonds maturing in 2027 has plunged 1.3 percentage points in the past year to 7.56 percent amid a rise in demand for emerging-market debt.

The yuan bond, which will be traded on the Moscow Exchange, will aim to tap mainland Chinese investors as well as international and Russian borrowers, the people familiar said.

The bond would allow Russia to access onshore Chinese investors while using its own infrastructure and legal structure, Finance Ministry’s debt department chief Konstantin Vyshkovsky said in an interview in March. China’s preference was for the bond to be traded on its mainland market as a so-called panda bond, but Russia wants to have easy access to the funds it raises, he said.

Chinese investors are interested in investing abroad and Russia’s debt has attractive yields, Igor Marich, managing director for FX and money markets at the Moscow Exchange, said in an interview. The bourse is “completely ready” for a yuan-denominated bond placement, he said.

— With assistance by Evgenia Pismennaya, and Andre Tartar

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