The cost of renminbi-denominated financing is rising in Russia, and the yuan’s liquidity is drying up. Access to foreign currency has become more difficult for Russian companies, which face much higher domestic interest rates and face a spate of debt maturities this year.
Two years after the invasion of Ukraine, Russia’s major energy and mining companies, cut off from the Western financial system, have turned to the yuan for much of their foreign currency needs. But a lack of renminbi liquidity in Russia and demand from importers are pushing up the cost of yuan-denominated borrowing, even as China’s benchmark government bond yields are near their lowest levels in nearly 20 years.
These dilemmas are forcing companies in need of financing, such as Russia’s largest mining company Norilsk Nickel, to choose between the expensive ruble or the increasingly expensive yuan.
Yuan Debt More Costly in Russia Despite Drop in Chinese Rates
Source: Bank of Russia
Russia’s central bank more than doubled its policy interest rate over the past year. This has increased companies’ interest costs by up to 1.2 trillion rubles (about 2 trillion yen), according to Moscow-based consulting firm Yakov & Partners.
“Given current realities, the average cost of debt will rise,” Norilsk Chief Financial Officer Sergei Malyshev said in a statement distributed to reporters last month.
The company’s interest expense was $800 million (approximately 120 billion yen) last year, but is expected to reach $1 billion this year. In 2021, the last year before the invasion, it was $315 million. Rosneft, Russia’s largest oil company, is accelerating debt repayments after interest costs rose 50% in the fourth quarter of last year compared to the same period last year.
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In a report released on the 4th, Russia’s central bank said that although renminbi-denominated bonds were first issued in the Russian market in 2022, they are “not yet widely available.” It cited the limited free liquidity of the renminbi among financial institutions and the need to offer relatively high yields as factors “suppressing investor and issuer interest.” Ta.
All Russian companies’ renminbi-denominated bonds are sold domestically. According to Russia’s central bank, issuance rose sharply in the first three months of last year, but remained largely stagnant for the remaining nine months. Although renminbi-denominated loans nearly quadrupled last year to a record $46 billion worth of loans, they still account for just a single-digit percentage of corporate credit portfolios.
According to Russia’s central bank, the average issuance yield on renminbi-denominated corporate bonds has risen by about 2 percentage points over the past year, approaching 6%.
Short-term borrowing costs in the renminbi on the Moscow Stock Exchange have been highly volatile, soaring to 15.7% on the first day of this month and falling to 4.1% three days later, according to calculations by Bloomberg Economics. The main factor is likely to be the reluctance of China’s major banks to connect Moscow’s yuan market with offshore markets, said Bloomberg economist Aleksandr Isakov.
news-rsf-original-reference paywall">Original title:Russia’s Chinese Yuan Funding Lifeline Is Getting Too Expensive(excerpt)
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2024-03-05 12:35:34
