Unlocking the potential of Russia-Asia cooperation

Unlocking the potential of Russia-Asia cooperation

President Xi Jinping’s recent visit to Moscow for the Victory Day parade to mark 70 years since the end of the Second World War illustrates the booming business ties between Russia and China.

Billions of dollars of deals promoting bilateral trade and investment were signed in sectors from financial services to electricity infrastructure to helicopter manufacturing. VTB – the only CIS bank with a licence to operate in China – inked agreements with China Development Bank, Export-Import Bank of China and China Export & Credit Insurance Corporation.

These deals expanded upon previous announcements, including a $24.5 billion currency swap agreement between the countries’ central banks to help facilitate the continued growth of bilateral trade.

The dialog will continue at the June 18 to June 20 St. Petersburg International Economic Forum, which is expected to have a bigger Chinese presence than ever before, and then at July’s BRICS Summit in the Russian city of Ufa.

The current rapprochement is not a new phenomenon. Russia has been an admirer of fast-growing markets across Asia for many years, and business relations with China in particular have been developing apace.

VTB was one of the first to appreciate the potential of Asia’s capital markets. The bank has so far issued seven bonds denominated in yuan, Singapore dollars, Hong Kong dollars, and Aussie dollars.

Chinese banks also participate in our syndicated loans. We are the only Russian investment bank to have arranged debt capital market transactions for issuers on regional markets, including five high-yield bonds for Chinese clients in the real-estate and utilities sectors.

The potential is clear for Asian investors looking at opportunities in Russia, as well as for Russian companies looking to Asia. According to China’s Ministry of Commerce, non-financial direct investments into Russia grew by 250% in 2014, topping $8 billion.

That interest is broad-based and deep. Over the past year we have seen a surge in interest from Chinese clients looking for merger and acquisition opportunities in Russia and the other markets that it serves, such as Africa and Turkey. Currently VTB is involved in about a dozen live situations spanning the oil and gas, metals and mining, industrial, transport, and agricultural sectors.

Meanwhile, Russian issuers in sectors including transportation, oil and gas, and financial services are exploring fundraising opportunities in Asia and doing non-deal roadshows in Hong Kong and Singapore.

Sticking points

The relationship is not without its sticking points. China’s ambiguous position regarding Russian banks in the wake of US and EU sanctions is a key issue holding back progress toward greater bilateral cooperation. Most Chinese banks will currently not execute interbank transactions with their Russian peers. In addition, Chinese banks have significantly curtailed their involvement in interbank foreign trade deals, such as providing trade finance.

China’s domestic capital markets are another area of untapped potential. Currently, foreign companies are barred from raising equity or debt capital on China’s local yuan markets.

From our partners in China we understand that non-Chinese issuers require approval from the State Council, Central Bank and Finance Ministry to be able to undertake fundraising efforts. However, there is no clearly formalised procedure for obtaining these permissions, and only international financial institutions such as the International Finance Corporation and Asian Development Bank have been able to do so.

We are dedicated to working with our counterparts to resolve current challenges, and also seeking to diversify our list of partners in China. VTB stands ready to contribute its experience to any negotiations and discussions of these issues at the government level.

Based on its established and positive track record in China’s offshore markets, VTB believes there could be significant demand from onshore investors too. Greater clarity on how to obtain the needed permissions to sell bonds onshore would enable VTB to meet with investors and better assess our investment case.

On the equity side, Shanghai could also be a potential alternative trading venue for global depositary receipts, where VTB could retain significant portions of its current investor base.

Continuing to grow its business in Asia is one of VTB’s priorities but it is important not to forget the wider context; fundraising is not the be-all and end-all. Both Russia and China will benefit from stronger relations across the board. In that context, the recent string of major announcements is all-important.

Clearly, nothing happens overnight. But Russia is looking to Asia over the long-term as a counterbalance and complement to its traditional markets. VTB is no exception.

Yuri Soloviev is the first deputy chairman and president of the management board, VTB Bank

 

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