Looking east

by Elliot Wilson

Vitaly Bouzoveria, VTB Capital

Relations between Russia and China are entering what many believe to be a golden age. For decades, the two superpowers faced in different directions. But in recent years, they have sought to forge a future together, driven and supported by mutual respect and economic benefit.

Vitaly Bouzoveria, global head of fixed income at VTB Capital, and head of investment business at VTB Bank, says it is “no exaggeration” to say that financial cooperation between the two nations is currently “more active” than at any other stage in his long career.

Bilateral trade between the two nations is booming, while political, financial and economic relations are closer, on both a sovereign and a corporate level, than they have been for decades.

Gazprom’s $400 billion deal to deliver natural gas to China’s CNPC over the next 30 years is merely the most prominent strategic deal signed in recent years between Moscow and Beijing.

Currency swap agreement

In October 2014, the Central Bank of Russia and the People’s Bank of China (PBoC) also signed a currency swap agreement worth R1.5 trillion ($23.6 billion), the latest sign of the increasing alignment between the rouble and renminbi.

“The last five years have seen a series of moves to harmonise currency trading systems,” notes Bouzoveria. He points to the China Foreign Exchange Trade System (the interbank trading and foreign exchange division of the PBoC), which was launched in 2010; and a landmark agreement aimed at enabling the two central banks to settle infrastructure and trade finance deals in each other’s tenders, which was finalised in 2011.

'Beijing has committed itself to opening its domestic capital markets to greater inward investment'

“The numbers speak for themselves,” says Bouzoveria. “In 2014, there was an eight-fold increase in rouble-renminbi transactions, with volumes rising to R305 billion. Over time, we expect to see the two currencies being used far more frequently in bilateral trade settlements. This in turn will further boost interest in the currency swap.”

It will of course take time for that bilateral facility to develop. Most of Russia’s exports to China are commodities, largely energy and metals, the prices of which are still typically set in US dollars.

“But over time,” adds Bouzoveria, “we expect to see Russian exports to China become more diversified, injecting more impetus and interest in the swap line.”

He points to the fact that 12% of all bilateral trade was settled in one or other of the nations’ currencies in 2014, a four-fold rise in just two years.

“These numbers will only continue to rise as Chinese banks step into the space vacated by other foreign institutions, and expand their business with Russia,” says Bouzoveria. “The only limiting factor here is the lack of financial instruments such as bonds, which are denominated in local currencies.”

Deals are also being signed at a corporate level, with leading firms from both countries benefiting as barriers to bilateral business are torn down. Signs of rising trade are everywhere. Russian agricultural exports to China jumped 80% year-on-year in volume terms in the second quarter of 2015.

VTB Bank has also been busy, inking an R120 billion (US$1.9 billion) trade finance agreement with China Development Bank to help clients of both lenders fund their import-export operations.

“I believe these efforts have laid the groundwork for the steady development of trade relations between Russia and China,” notes Bouzoveria. “VTB is working with major national and regional banks in China to provide trade and export finance solutions in local currencies.”

China’s determination to open its capital account should also prove a major boon to Russia’s large and open economy, and to the country’s well-run and export-focused corporates.

With economic growth slowing in China, albeit from a very high level, officials in Beijing are looking to liberalise their capital markets, and open their capital account. This will create a new capital revolution, as mainland money flows out across the world, benefiting Russia’s economy greatly.

“I see significant potential for enhanced cooperation in the foreign exchange and derivatives markets,” notes Bouzoveria. “I would like to see the opening of trade lines, as well as a raising of the allocation of limits to Russian banks on the OTC markets. And when it comes to the fixed income space, all eyes are on the opening up of the mainland’s bond markets, which will lead to a huge uptick of Russian investments in Chinese assets.”

We are already heading in that direction. Beijing has committed itself to opening its domestic capital markets to greater inward investment. And China’s onshore bond markets – now one of the world’s largest credit markets – have expanded rapidly in recent years, as the government seeks to shift debts off the balance sheets of commercial lenders, and broaden the country’s investor base.

Free-trade zones

The opening of the Shanghai free-trade zone in 2013 was an important step toward greater capital account liberalisation, but more needs to be done.

“We would like to see a further loosening of curbs on offshore borrowing, to promote outbound investment by individuals,” says Bouzoveria. This process is already under way: take the northerly Chinese city of Harbin, which lies less than 500km from the Russian border, and which recently applied to host the first official Russo-Chinese free-trade zone.

“This would attract investment through preferential rates and partial exemption from customs duties.”

And of course VTB Bank, with its deep pockets, and VTB Capital, an investment bank that has achieved so much in its short history, advising on many of today’s largest and most complex cross-border transactions, is in the perfect position to benefit from increasingly rosy relations between the two nations.

“Our global presence has enhanced our ability to deploy VTB Capital’s expertise in investment banking on behalf of customers all over the world,” says Bouzoveria.

“Aided by our offices in Shanghai and Hong Kong, we have executed a number of major trade finance deals, including a multi-billion-dollar three-way agreement between Export-Import Bank of China, China Development Bank and Harbin Bank, aimed at providing trade and export financing for VTB customers who deal with their Chinese counterparts.

“VTB Group’s strategy for Asia will ensure we take full advantage of the space that has opened up for Russian investors in China and elsewhere.”