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Rosneft, Russia’s largest oil and gas company, issued a record amount of RMB bonds totaling US$2.17 billion. This follows a record increase in trade between Russia and China, which will increase by 34.3% in 2022. Is this the carrier of RMB internationalization?
Raising funds amid Russian financial deplatforming
Companies typically raise cash by issuing bonds. Investors purchase these debt securities based on the promise of future profits, while companies obtain funds in the present to expand their operations. In return, investors receive bond interest that reflects the company’s risk level.
On March 15, Russian gas and oil major Rosneft issued its first coupon (interest payment) on a 10-year bond denominated in yuan at an annual rate of 3.5%. In September last year, Rosneft issued its first yuan-denominated bond, with the same amount and term, but a lower interest rate of 3.05%. The second phase of placement is the first phase of bond issuance, with an amount of 15 billion yuan, equivalent to ~2.17 billion US dollars. The actual bond issuance is scheduled for March 20.
With a 10-year maturity and an interest rate of 3.5%, Rosneft’s bonds are a relatively low-risk investment option, reflecting investor confidence. Since Rosneft is a state-owned enterprise, and the issuance of yuan-denominated bonds for such an important infrastructure company has reached a record high, it marks a strategic tightening of relations between Russia and China.
Other Russian commodities giants are also yuanizing their bond issues
In addition to Rosneft, the world’s fourth largest gold mining company also used renminbi last August. It was Polyus, Russia’s largest gold miner, which issued five-year bonds worth 4.6 billion yuan ($666.4 million) with an annual interest rate of 3.8 percent.
Similarly, Russian aluminum group Rusal last July issued two five-year yuan-denominated bonds worth 2 billion yuan ($289.7 million) each. This is the first time that Russia has issued RMB bonds. It created such high demand that rates were cut by more than a percentage point to 3.9%.
China’s trade with Russia will peak at 1.28 trillion yuan ($190 billion) in 2022. According to Gazprom, the flow of Russian gas through the Siberia pipeline alone increased by 50% in the same year.
Sanctions + Russian goods = RMB internationalization
The yuan is gaining global attention thanks to Western sanctions on Russia and Russia’s abundance of natural resources that China needs as a world manufacturing powerhouse. By mid-2022, Russia has become the third largest RMB payment market.
The yuan jumped from eighth place in 2019 to become the fifth most active currency for global payments in 2022, according to the Bank for International Settlements (BIS). The RMB market share jumped from 4% to 7%. While this still lags far behind the most traded currencies, the dollar, euro, yen and pound, it is the start of an important de-dollarization trend.
What about Russian sanctions?
When the West (US/EU) removed the platforms of major Russian banks from SWIFT, it was similar to banning cryptocurrency exchanges. While the latter would put up a wall on the fiat-to-crypto track, the former makes it extremely difficult to obtain USD liquidity internationally.
However, even before the unprecedented sanctions, Russia had significantly reduced its holdings of US government debt. By May 2018, Russia held just $14.9 billion in US Treasuries, compared with $96.1 billion in March of the same year. Although the public has been told that these sanctions are severe, the opposite is true.
Thanks to its abundance of natural resources, Russia has amassed a record windfall worth $227 billion from merchandise exports by 2022, according to Bloomberg Economics. Russia ranks third (approximately $80 billion) in cash reserves in offshore accounts and investments.
The ruble has outperformed the Dollar Strength Index (DXY) +4.6% year-to-date as Russia forges closer ties with China. Meanwhile, Germany faces a shortage of liquefied natural gas (LNG) next winter after the Nord Stream 2 gas pipeline was damaged.
According to the recent budget letter of German Deputy Chancellor Robert Habeck, the current LPG agreement ensures a supply of 86 bcm, a deficit of 11 bcm compared to what is needed.
“For the economy, that would mean less output,”
Mark Helfrich, member of the Energy Affairs Committee of the German Bundestag.
Given that Germany is Europe’s economic engine, the entire EU economy is at a disadvantage. It is unclear how to secure more expensive LNG imports. By some estimates, the energy crisis in the EU will end in 2026, taking into account the increase in LNG terminals.
So far this year, the Russian ruble has outperformed the euro by 8.5 percent in foreign exchange markets. With China, Russia, India and other BRICS and candidate countries allied together, de-dollarization seems inevitable, but it is still many years away from posing a significant threat.
Can technical currencies such as bitcoin compete with political currencies such as the yuan or dollar? Let us know in the comments below.
about the author
Tim Fries is the co-founder of The tokenist. He holds a Bachelor of Science degree. BS in Mechanical Engineering from the University of Michigan and MBA from the University of Chicago Booth School of Business. Tim was a Senior Associate in the investment team of RW Baird’s US Private Equity division and co-founder of Protective Technologies Capital, an investment firm focused on sensing, protection and control solutions.
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