China Will Lay a Yuan Pipeline to Moscow

The Chinese press, and also Russian and Chinese officials, report about a project that, by and large, can be compared in terms of its importance to the “Power of Siberia” gas pipeline — only this “pipe” is under construction not in the physical world, but in the financial one, and its not billions of cubic meters of gas, but billions of yuans — from China to Russia. This project, as the Hong Kong South China Morning Post fairly notes, has a distinct anti-dollar component and even distinct geopolitical flavour. “China and Russia [are] to reduce reliance on the US dollar,” emphasises the agency, and reports that Moscow and Beijing are finally close to the launch of the “Russian yuan-denominated bond”.

At the financial level, the launch of this project will be a very important step in Russian-Chinese relations and evident confirmation of the gravity of intentions in the matter of real de-dollarisation.

The project of Russian yuan government bonds (aka “Yuan federal loan bonds”) has a difficult fate, and this is the case when a financial instrument is born as a result of political events. “Yuan federal loan bonds” could be called “Crimean debenture” or “Crimea bonds”, because the idea to issue Russian government bonds in the Chinese currency became the most attractive after the events of 2014 and the introduction of the western anti-Russia sanctions. Within the framework of the “turn to the East” strategy that began after the return of Crimea, it was supposed to find ways to switch investment streams so that Russian companies, which had previously focused exclusively on obtaining loans and issuing debt obligations (bonds) on the American and European platforms, could gain access to Chinese capital, having at the same time minimised the risks connected to using the American and European financial systems.

In order to complete this task it was necessary to take several important and difficult steps, but the most important step can be considered the issue of Russian government bonds in yuan, which is needed not to finance the Russian surplus budget, but to create a so-called benchmark — a kind of debt tool that the assessment of Russian corporate yuan bonds will be based on.

If this “benchmark” (a kind of financial reference point) is absent, then it is very difficult to place corporate bonds in the corresponding currency and in the corresponding markets. Moreover, even if the Ministry of Finance couldn’t overcome all regulatory barriers to issue government bonds in a particular market in the corresponding currency, then it’s unlikely that a separate corporation will be able to cope with such a task.

In this context, the issue of Russian yuan government bonds seemed quite logical, but for several years now the project wasn’t able to move off dead center. China is a quite difficult jurisdiction for issuing bonds by foreign issuers, and the specifics of Russia and Russian companies as issuers created additional difficulties. In a quite long list of problems with the launch of “yuan federal loan bonds”, it is possible to identify two especially important ones. Firstly, the government in Beijing does not like to create situations in which it is possible to easily export capital from the country (even if the capital will then returns), and exceptions are projects within the framework of the “One belt — one way” strategy. Otherwise, capital can be exported, but it is difficult: even private Chinese companies that are actively involved in purchasing foreign assets periodically come under the pressure of Beijing financial regulators.

The second important problem: in order to work with Russian financial instruments in the Chinese market, it is necessary that Chinese banks and finance companies want to work with these tools, otherwise the conditional ordinary Beijing or Shanghai investor or investment fund will not be able to buy them or will not know about their existence, and here the risk of the American and European sanctions came into play, which limited the appetites of some Chinese financial structures.

However, at the end of August the situation moved off dead center, and after another meeting between representatives of the Russian and Chinese Ministries of Finance, a joint statement spoke about progress concerning this key question: “The Russian Federation will actively consider the question of issuing on the Moscow Exchange bonds nominated in yuan in accordance with Russian legislation. China welcomes such an outcome and urges investors in China to invest in the bonds issued by the Russian side according to the existing regulatory framework”.

After the meeting the Deputy Minister of Finance of the Russian Federation Sergey Storchak placed important emphasis: “From what happened behind closed doors, I will say that colleagues from the Ministry of Finance of China, to our great satisfaction, said that the not very high pace of decision-making regarding promoting our option of issuing bonds is their zone of responsibility. They said that they understand that they were held up with their decisions,” he said.

In this context information published by the South China Morning Post that allows to see concrete steps in respect of the implementation of this project and the fact that specific performers have already been found for it is especially important: “Currently, several banks led by Gazprombank and [China International Capital Corporation] are making efforts to realise this first yuan bond, [but] there are still some technical details we are working on,” said Cheng Daming, executive director at the China International Capital Corporation, one of China’s leading investment banks. “With some push, and joint efforts, we do believe we will realise this deal within the year or the beginning of next year.”

The launch of yuan government bonds, especially in the Moscow market, will be the great success of Russia and a very serious signal of the long-term economic rapprochement along the Moscow-Beijing line. Perhaps our Chinese partners learned from their own experience (beginning with the trade war with the US and ending with the sanctions against ZTE and Huawei) that the American sanctions don’t depend on behaviour of a specific country in any way, but depend only on the desire of Washington to strangle competitors. In conditions where the US clearly demonstrates a full readiness to use the dollar system as a geopolitical weapon, and as well as its readiness to actively use “Maidan technologies” against China (for example, in Hong Kong), work on rapprochement with Russia and work on dedollarisation is a correct and very logical step, which others will surely follow.


Ivan Danilov

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