After a contraction in investment levels since 2014, Russia’s first renminbi-denominated bond could signal the beginning of a new age of Chinese interest in the country’s financial potential. Stefanie Linhardt reports.

China Russia salvation

Russia is edging towards China – or so the story goes. And the politicians are doing their part. Russian president Vladimir Putin and his Chinese counterpart Xi Jinping have met in China five times since Mr Jinping came to power in 2013, which crucially also includes the period since the introduction of Western sanctions on Russia in early 2014.

But what impact do Chinese investors actually have on Russia? And what is being done to attract them?

Change of heart?

The Russian government’s change of heart regarding investment from China into Russia was signalled by the first steps towards co-operation between Russia’s largest oil producer, Gazprom, and China National Petroleum Corporation (CNPC) on a gas pipeline in Siberia.

“There was a dramatic U-turn in May 2014 when the famous gas deal was brokered by President Putin,” says Andrei Akopian, managing partner at Russian-Chinese advisory business Caderus Capital. “Since then, Russia started negotiating with the Chinese at all levels: from the governmental level all the way down to individual investments.”

The result was a whopping $6.6bn of foreign direct investment (FDI) from China into Russia in 2014, according to data from greenfield investment monitor fDi Markets, but investment levels contracted in 2015 and 2016. Chinese investment in 2015 reached $1.7bn, making it the second largest country for FDI into Russia behind Vietnam, while up to September 2016, $1.25bn put it in second place behind Germany.

“After 2014, Chinese investors don’t invest easily,” says Mr Akopian. “They sit on huge piles of cash but they are very, very cautious investors.”

Russian targets

Mr Akopian, who founded Caderus in 2003 in Moscow, started focusing the firm’s investment consulting work on relations between Russia and China in 2013. Since February 2016, Caderus is working with the Moscow Exchange (MOEX) as its official representative for China.

In Mr Akopian’s experience, for the Chinese, investing is less driven by profit than by an interest in access to natural resources such as forests, oil and gas, as proven by the 2015 acquisition of a 10% stake in Russia’s gas processing and petrochemicals company Sibur by China Petroleum and Chemical Corporation.

Investing also means access to technology and new, specially protected markets, as well as the creation of global brands through acquisitions. Some investment is driven by government policies.

But as Oleg Khokhlov, a partner in banking and finance at Moscow-based law firm Goltsblat BLP, points out, investment goes beyond even this. “We are seeing an interesting trend of Chinese companies transacting with other Chinese companies with assets in Russia,” he says. “In those cases, the fact that the business is in Russia is just a coincidence. They know the business is run by Chinese people and that they work to a Chinese codex.”

Such business hubs exist, for example, in the Far East in Russia, he adds, where Chinese investors are active in the forestry sector, are transacting between each other and are building local infrastructure, which is lacking.

Leasing financing

Chinese influence also extends to Russia’s banking sector, where Chinese financial institutions have been setting up shop since 2013. Banks such as ICBC, Bank of China, China Construction Bank and Agricultural Bank of China are largely seeking to participate in lending and leasing activities, according to Mr Khokhlov.

“Chinese banks are slowly but incrementally increasing their capacity to do onshore deals in Russia,” he says. The banks are particularly interested in stronger credits or familiar names, he adds, such as aircraft finance transactions for Russian majority state-owned airline Aeroflot.

Most Chinese banks follow Western sanctions, especially those with subsidiaries in the US and Europe, but some, including China Development Bank (CDB), have decided to disregard the restrictions.

“From the early days of sanctions, CDB had sign-off from the Chinese central government to lend to sanctioned Russian entities,” says Mr Khokhlov. “It would lend to the likes of VTB and Sberbank regardless of EU and US sanctions, which meant that CDB became an important source of funds for sanctioned banks.”

For example, CDB signed Rmb28bn ($4.2bn) in loan agreements with three Russian banks in 2015, according to CDB’s website, with the aim of further promoting the internationalisation of the renminbi.

Attracting investment

Direct investment is one thing, but Russia’s capital markets are also keen to attract additional investment, especially in the context of Western sanctions.

VTB Capital Investment Management, Russia’s largest asset manager, seeks to be a gateway both for Russian investors interested in the global market and international investors looking to access Russia. Chief executive Vladimir Potapov says that interest from Asian investors in Russia is growing, but that there is a need for a further push into China.

“There is not a single fund [in Russia] which offers traditional Chinese investors the option to invest. We want to be in this niche,” he says.

According to Thomson Reuters data compiled by Caderus, at the end of September 2016, seven Chinese asset managers had long investment positions in Russian blue-chip equities, totalling $8.78m, only 0.017% of the seven managers’ combined assets under management of $50.6bn.

The very low degree of interest is related to different investor attitudes in China, where it is more important for investors to have a personal relationship with individuals within a business rather than simply be aware of the company’s key data. Also, there is a lack of expertise among Chinese investors, according to Mr Akopian, because it is often deemed easier to focus on an English-speaking market than contending with Russia.

Nevertheless, VTB’s Mr Potapov believes the foundations for more co-operation are in place. “The China story is now coming together both from the top down and the bottom up,” he says, pointing out that co-operation between Russia and China is in progress all the way to government level.

Investment in equity

Of the few Chinese investments made in the Russian stock market to date, the majority of funds are parked in Russia’s oil and gas majors, alongside some stakes in metals and mining businesses, retailer Magnit and the country’s largest banks, Sberbank and VTB.

China’s sovereign wealth fund, China Investment Corporation (CIC), has led some of the strategic investments in Russia’s equity markets, “a few quite sizeable deals” that can be characterised as part portfolio and part strategic investments, according to Mr Akopian, including equity issuance in Russia’s second largest bank, VTB, and MOEX itself, although CIC sold the stake in MOEX in January 2016.

It is important for the Chinese market to see a sovereign fund investing first, adds Mr Akopian, as this indicates to other investors that portfolio investments in the Russian market are considered acceptable. But those who arrange placements of new equity say that Chinese investments have failed to make an impact on the Russian capital market.

“There is a lot of talk about Asia but little action,” says Anton Malkov, head of capital markets at Sberbank CIB. “In fact, three years back, Asian investors had a greater appetite towards traded stocks.”

Mr Malkov notes that in the publicly listed equity markets, it has been Middle East investors that he has been watching the most over the past few years, as well as in relation to anticipated new equity placings in 2017, after investors from the region took larger stakes in blue-chips such as diamond mining company Alrosa and MOEX during their part-privatisations.

In the Russian fixed-income market, Chinese influence is still lacking, according to Olga Gorokhovskaya, managing director for debt capital markets at Sberbank CIB, despite the fact that Russian Eurobond issuance has been recovering in 2016. 

A new renminbi hub?

But there are concrete plans to attract Chinese portfolio investments into fixed income. Russia’s ministry of finance is looking at issuing the country’s first renminbi-denominated bond, starting a so-called Baikal bond market of renminbi-denominated bonds issued in Russia. The Rmb6bn placement is to be sold before the end of 2016 with the aim of listing on the MOEX.

“The government is doing that to start a new offshore renminbi market in Moscow, so that Russian companies can come and issue renminbi bonds either in Moscow or Shanghai and have a point of reference in terms of the yield curve,” says Mr Akopian, adding that several major Russian businesses are closely monitoring the developments.

Russia’s renminbi debut seems to have widespread support within China, among investors, but crucially also among officials. In a meeting with Russia’s prime minister Dmitry Medvedev, his Chinese counterpart Li Keqiang noted that “the Chinese side supports the issuance and listing of renminbi bonds in Russia”.

This would be a big step towards obtaining necessary regulatory clearance for the bond issue, as well as towards making Moscow an offshore centre for renminbi, according to Mr Akopian. It could also facilitate the goal of listing equities of Chinese companies in Moscow.

“Clearly, politically the two countries are getting closer. The worse it gets with the Western set-up, the better it seems to get with China,” says one senior Russian bank executive. “But I don’t think China will ever replace Western capital markets.”


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