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Russia’s dim sum craving will not be sated

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By Virginia Furness
05 Aug 2014

Russia is now subject to its toughest economic sanctions since the end of the Cold War. With the US and Europe effectively closed to them, Russian borrowers are searching for other options. Asia is top of their list, but they are unlikely to find the support they want.

Last week the European Union and the US added a number of Russia’s largest state-owned banks to their blacklist of sanctioned entities and further restricted Russia’s access to the capital markets. The development means that state-owned banks and key companies are not allowed to issue equity or long-term debt in either the EU or US.

While many believe Russia has the financial capacity to support itself, at least in the near term, issuers cannot rely on the central bank to solve all their funding problems. The Bank of Russia has burnt through about $40bn in reserves over the last few months and bankers are questioning how deep and how long this level of support can go.

With other funding channels closed, Asia appears a logical option. Russian banks – Gazprombank and VTB included – have successfully issued bonds in the offshore renminbi market in the past.

And borrowers have been quick to act, with a number of Russian names meeting the region’s investors in recent weeks. Gazprombank held a roadshow in Korea, RosinterBank has been soft marketing bond of up to Rmb500m ($80.7m) and Vnesheconombank (VEB) also announced its intentions to court Asian investors. Some corporates are positioning themselves too: Gazprom recently secured a listing in Singapore.

While other currencies like the Korean won are being considered, offshore renminbi bonds — the most international of Asia's local currency markets — are the most logical choice.

But that doesn't make them an easy one. Ongoing political risk and the possibility of escalating volatility will ensure it is very difficult for Russian issuers to raise substantial funds in the dim sum market, if at all.

Global banks are no more able to support a transaction originated out of Asia for a Russian issuer than they could anywhere else. And without their expertise and distribution, any bond issue is likely to be limited in size.

Chinese banks do not face restrictions on who they can work with, but a Russian borrower has never issued a dim sum bond without the support of at least one international bank.

Even if a deal was brought to market, many investors across Asia are simply not willing to take on the risk. They’re concerned that the situation may worsen – as indicated by the way in which RMB bonds from Russian issuers have started to sell off. Not to mention that many of them belong to global funds headquartered in Europe or the US.

And if there were investor appetite, it would probably be at a steep price. An issuer would have to pay up significantly to compensate investors for volatility risk. Eye-watering yields would damage not only balance sheets but also future funding. Any issuer setting new benchmarks at those levels would surely find it tough to convince investors to accept much less for a while.

Any Sino-Russian deal is likely to be incredibly small and incredibly expensive - and would perhaps be driven more by Russia’s desire to make a statement to the West than by any capital markets logic.

But this is a battle of wills. A successful dim sum bond from a Russian issuer led by Chinese banks would send a message that there is a limit to how far sanctions can reach.

By Virginia Furness
05 Aug 2014