Russia has not been the easiest place to do business in the last few years. The collapse of energy prices in June 2014 had a major impact on the oil-rich economy. Moscow's annexation of Crimea in March the same year added a depressingly familiar dose of political tension.
In this environment, it should hardly come as a surprise that Russia’s biggest investment bank, VTB Capital — which advises on most of the cross-border deals and trade involving Russian companies — has seen its business with Europe and the US suffer.
This was not entirely unexpected by the bank’s executives. In the wake of the global financial crisis, VTB looked to Asia as the next source of revenue. The bank hoped that investment, trade and deal volumes between Russia and Asia would grow steadily, helping to offset the drop-off from the West.
But so far, that is not happening in a meaningful way.
Chinese and Indian companies have not invested in Russia as actively as many in Moscow had hoped they would. Those same tensions that have made Asian demand more important for Russia have also deterred some Asian companies and investors.
But there are signs that the situation is changing, according to Yuri Soloviev, deputy to VTB chairman Andrey Kostin. Soloviev sat down with FinanceAsia to talk about the difficulties Russia has had in attracting improving economic links with Asia, and why he thinks things will be different in the future.
Q How do you see business, trade and investment links between Asia and Russia these days?
A Right before the 2008 financial crisis, when business and investment activity globally and in Russia was very high, Asian investors were buying up to 30% of primary ECM [equity capital market] and DCM [debt capital market] issues by Russian companies. After the crisis, that figure has diminished dramatically.
And when the sanctions were imposed in July 2014, Russian issuers counted on Asian investors to replace their European and American counterparts. However, the international tensions related to geopolitics influenced Asian investors as well.
Q So business with Asia has not been as fruitful as you had hoped overall?
A After the imposition of sanctions, we were expecting an increase of business flow volumes with Asia. This was a great opportunity for capitalising bilateral trade, because as the West takes a step back, the East should take a step forward. But it didn’t develop as quickly and to the extent we were hoping for.
Q Can you give more detail about how the sanctions affected you?
A From the infrastructure point of view — payment services, transaction banking and so on — global banks were afraid to allow these sorts of operations. For example, just after the restrictions came into effect, it became very time-consuming to process payments in Asia; they would take several weeks to go through.
Over time, the situation has improved significantly, but it’s taken much longer than expected. Banks considered hiring additional compliance personnel to check payments.
Surprisingly, the American banks were the fastest to adapt and come back with higher volumes, because they knew exactly what the US sanctions meant and had easy access to local officials, who could guide them through what is permitted in terms of transactions with sanctioned entities.
Q How did you and others in Russia seek to address Asian concerns about the sanctions?
A The Russian government and business community have spent a lot of time with the Asian investment community and banking sector to clarify and strengthen ties over the past one-and-a-half years to make sure we see progress on that side.
Q Has that had an impact?
A Yes. Trade volumes between China and Russia are demonstrating positive dynamics. In particular, over the first nine months of 2016, imports from China to Russian increased by 6.4% compared to the same period in 2015. Chinese technology companies are trying to replace their American and European counterparts. [Shenzhen-based] Huawei is being particularly aggressive and looking to gain a global market share in this segment.
We clearly see a positive turnaround, including the trade flow dynamics and mutual strategic investments.
Q VTB has an office and local licence in China. How is your business developing there?
A We’ve seen a twofold increase in the number of overall renminbi remittances processed in the first 11 months of this year compared to the same period of 2015. This accounted for more than 12,000 operations, with the volume exceeding Rmb70 billion [$10.1 billion]. This is a record flow, and the bulk has been driven by Asian volumes.
VTB is the only Russian bank with licences to conduct renminbi business in China. We are the leading market- maker in the ruble-renminbi FX space, accounting for 83% of the local Chinese market — as of Q3 2016, the traded volume was close to Rmb8 billion.
We have also seen an increase in hedging volumes, with the volume of renminbi swaps going up by 39% compared to 2015. It was from quite a small base, but we were pleased to see those types of operations growing.
In addition, over the past two years, we have signed trade and export finance lines with major banks in China totalling more than Rmb28 billion.
We have also started direct gold supplies to China this year. We delivered our first five tonnes in April and expect delivery volumes to rise to 20 tonnes next year.
Q What about debt capital market deals in Asia?
A Over the past two years we’ve done 15 DCM deals, helping Asian clients raise approximately $3 billion, and we hope to bring the Russian Ministry of Finance to the domestic market with an renminbi-denominated bond.
That will act as a benchmark and will make it much easier to place Russian corporate bonds in the Chinese local market. It should also enhance the development of the swap market for borrowing renminbi and swapping it into rubles. We are very hopeful to see this happen as a source of diversification and liquidity for Russia.
VTB Capital has also been a joint bookrunner on a number of bonds in the Chinese real estate market, including HNA, Logan Property Holdings, Powerlong Real Estate and Beijing Capital, as well as some hospitality and tourist groups. We generally participate in four or five Chinese bond placement deals a year.
Q VTB was the placement agent for the two Eurobond issues by the Russian government this year. Was there Asian demand for the deals?
A Yes. When Russia came back to the Eurobond market this year after about three years, we launched one issue for $1.75 billion in May and tapped the global markets with another $1.25 billion issue in September. We had a $200 million order from a Taiwanese insurance company for the first placement, and that was great support from our Asian investor base.
This Eurobond deal was quite difficult, because the goal was to place it solely with foreign investors, and the Americans and Europeans decided not to participate very actively. Despite this, the bond was fully placed with international investors.
The investors were rewarded very highly, because the first bond yielded 4.75%. The second placement of $1.25 billion was six times oversubscribed, and over 50% was bought by American investors, with Asian investors participating as well.
In part two, Soloviev discusses the prospects for Asian companies investing in Russia, Russian deals in Southeast Asia and the equities market.