Yuan bonds debut in Russia as challenge to dollar dominance builds
Firms increasing use of Chinese currency to side-step Ukraine war-related sanctions
Sweeping sanctions imposed by Western countries on Moscow after its attack on Ukraine are prompting Russian companies to turn to China and the yuan to cut their dependence on the U.S. dollar and find alternative currencies to use for business and investment.
Aluminum producer United Co. Rusal International PJSC, which is listed in Hong Kong and Moscow, raised 4 billion yuan ($590 million) from the sale of the first-ever yuan-denominated bonds in Russia. The debt, which started trading on the Moscow Exchange Wednesday, was snapped up by local investors, according to Gazprombank, the lead manager of the placement, which said it received some 100 orders from banks, asset managers, investment and insurance companies, and individuals.
One 2 billion yuan bond was oversubscribed four times while the other 2 billion yuan bond was fully subscribed, Gazprombank said. The final coupon rate on both bonds, which have a maturity of five years, was set at 3.9%, 110 basis points lower than the maximum 5% offered when the sale of the bonds was first announced in mid-July. Major international ratings companies have suspended operations in Russia as a result of the war, but the bonds were rated A+ by Moscow-based Analytical Credit Rating Agency.
Rusal's bond sale "is a milestone and an important piece of the jigsaw in building cross-border circulation and use of the yuan," said Terry Zhang, head of global strategy and business management at Pengyuan Credit Rating (Hong Kong) Co. Ltd. Appetite for the Chinese currency in the international market has grown larger and more diversified since the beginning of this year, and the availability of the yuan has improved significantly due to the impact of multiple international political and economic factors, he said.
Sanctions imposed by the U.S. and other countries to punish Moscow for its invasion of Ukraine, including restrictions on the use of the U.S. dollar in international transactions, have made it difficult for Russian companies, banks and investors to do business. As a result, they've been seeking ways of trading internationally without settling in U.S. dollars.
"It seems natural to us to choose yuan-denominated bonds placement, given the current situation on the financial market," said Alexei Grenkov, head of corporate finance at Rusal. "We see a significant demand for such financial instruments, both from Russian banks and from private investors, for whom the transition to the yuan is a good alternative to traditional foreign exchange investments."
Trade settlement
The volume of yuan flowing into Russia's banking system has averaged around 10 billion to 15 billion yuan a month since February, when the war in Ukraine began, according to Gazprombank estimates, as Russian exporters have become increasingly willing to settle trade with Chinese companies in yuan.
But Chinese exporters still prefer to settle in the U.S. dollar, and there are few other options to invest the yuan, Gazprombank told Caixin. The Rusal bonds have now provided one channel for investors. Russian banks bought up 67% of the bonds while individuals accounted for 25% of purchases, Gazprombank data shows.
Russia's exports to China expanded from March to May before dipping slightly in June, after the two countries committed in February to strengthen their partnership in energy, including advancing major oil and gas cooperation projects and supporting each other in ensuring energy security.
Rusal will also issue a 100 billion ruble ($1.67 billion) bond and plans to use the proceeds from both the ruble and yuan bonds for general purposes, including refinancing and funding of capital expenditure, according to a July filing to Hong Kong Exchanges and Clearing Ltd. But its allocation plans may change in response to changes in market conditions and circumstances, it said.
This isn't Rusal's only "first" in terms of its financial relationship with the yuan. It was the first overseas company with operations outside of China to offer yuan-denominated bonds on the Chinese mainland, when it issued 1 billion yuan worth of "panda bonds" on the Shanghai Stock Exchange in 2017.
As well as helping Rusal's finances, the company's bond is also promoting China's long-standing efforts to internationalize the yuan. Beijing wants to decrease its dependence on the U.S. currency and to offer other countries and companies an alternative to the dollar, which dominates global trade settlement and the global financial system.
Chinese steel mills, for example, are increasingly using the yuan to settle iron ore deals with global suppliers. Baoshan Iron & Steel Co. Ltd. the listed arm of the country's largest steelmaker, told investors in March that about 6% of the company's 2021 iron ore purchases from overseas were settled in yuan and that it aimed to increase the proportion to 10% in 2022.
The yuan isn't only being used to settle bilateral trade with Chinese companies now. In a transaction that didn't involve China, Indian cement-maker UltraTech Cement Ltd. bought coal valued at $25.7 million from Russia using the yuan facilitated by Indian private lender HDFC Bank Ltd., Reuters reported in July.
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