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De-Dollarization Marches On: Russia Is Now Issuing Yuan-Denominated Bonds

Russia looking for somebody to lend it some RMB

Originally appeared at Asia Times

On the heels of the International Monetary Fund’s approval for the yuan, Russia said it’s preparing to raise $1 billion in yuan-denominated sovereign bonds in Moscow, the Financial Times reported Monday.

Last week, the IMF made the yuan, also known as the renminbi, a world reserve currency by including it in its Special Drawing Rights basket. By integrating the yuan to the SDR, the IMF boosted the credibility of the currency and acknowledged it would be an accepted part of the global economic system.

The latest move by Russia will aid the yuan’s international expansion and could lead to ruble-denominated bonds being issued in China and help promote similar cross-currency issuance by other big emerging markets, eating into the dominant role of the US dollar in global capital, said the FT.

This isn’t just a diplomatic nicety by Russia, but an opportunity to do an end-around the sanctions imposed by the US and Europe. In September 2014, the US and EU imposed sanctions in response to Russia’s annexation of Crimea and its backing of separatists in eastern Ukraine. Since then many Russian companies have been barred from issuing foreign currency bonds in dollars or euros.

The yuan-denominated bonds would potentially open a new source of foreign funding for Russian banks and businesses shut out of capital markets in the US and Europe by the sanctions.

Denis Shulakov, head of capital markets at Gazprombank, which is providing informal assistance in preparing the issue, said the bond’s first objective would to set a benchmark interest rate in renminbi for the Russian Federation and, subsequently, for corporate issuers.

“The second [objective] is to diversify the investor base [for Russian borrowers] and bring in a new source of liquidity that comes with the internationalization of the renminbi,” Shulakov told the FT. He added that even if US and EU sanctions were lifted, Russia would still seek new funding options.

The Financial Times said Russia’s move could further the development of money-market instruments to allow more trade and investment between China, Russia and other emerging markets to be conducted in those countries’ own currencies, bypassing the need for foreign exchange contracts typically expressed in dollars.

Over the past two years, several Russian banks have issued renminbi-denominated bonds in Hong Kong, but the new bond would be Russia’s first sovereign issue, and the first in Moscow.

Russia is not the first to issue renminbi-denominated sovereign debt. Last year, the United Kingdom became the first western country to do so.

“In London the renminbi is seen as an opportunity, but in New York it is seen as a threat,” Jon Vollemaere, chief executive of R5FX, a currency trading company specializing in emerging markets, told the FT. “The best thing to happen recently for the Chinese money market is Washington deciding not to do business with Russia for a while.”

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