Russia’s China pivot gains bond cheerleaders

By BLOOMBERG

MOSCOW • President Vladimir Putin’s (picture) hometown of St Petersburg is probing Chinese debt markets as it prepares to sell bonds to foot a bill it ran up partly thanks to World Cup construction.

A “decent” chunk of the city’s first bond sale in half a decade was bought last year by Industrial & Commercial Bank of China Ltd, the world’s largest lender by assets, according to St Petersburg’s debt chief, Alexei Korabelnikov.

Officials have discussed ruble-denominated bond sales with counterparts from the Shanghai exchange and a placement in yuan is possible in theory, the chairman of the Finance Committee said.

But until he gets the green light from Russia’s Finance Ministry, Korabelnikov will continue selling debt at home.

“There are complications that need to be resolved at the state level,” Korabelnikov said. “You can’t steal a march on the Finance Ministry, and we don’t plan to — after all, they’re the ones that set the policy in this area.”

Putin and other officials have called for doing more business with Asia ever since the US and its allies slapped Russia with sanctions in 2014 for its role in the Ukraine crisis — shutting a handful of the nation’s biggest corporations out of foreign financial markets.

While some companies have sold so-called panda bonds, the Finance Ministry’s plans for direct debt placements in China are languishing, and a ban on foreign sales by Russia’s regions and municipalities means places like St Petersburg can’t go it alone.

“We could potentially think about issuing in yuan, but the Finance Ministry is getting in the way,” Korabelnikov said. “A decision needs to be taken at the level of the ministry before something like this could be done by the regions.”

According to Konstantin Vyshkovsky, head of the Russian Finance Ministry’s debt department, “the stars still aren’t aligned” for the government’s debut yuan-bond sale.

Efforts continue to create a market for yuan securities in Russia and attract Chinese investors, but more bilateral work is needed, he said in April.

So, St Petersburg will be aiming to place 35 billion rubles (RM2.16 billion) to 40 billion rubles at home this year, according to Korabelnikov. He prefers traditional instruments given the political tensions and turmoil in emerging markets, but is also considering floating-rate securities and inflation-linked debt.

“We need to wait until the macroeconomic situation is more stable and the geopolitical pressures decline,” he said. “So far, they are only increasing and the risks are considerable.”

St Petersburg posted its largest budget deficit in five years in 2017 as it splurged on construction before the 2018 soccer World Cup, according to Fitch Ratings.

Spending will continue as the city expands its underground rail network and builds a new belt line, requiring about 100 billion rubles of investment this year and next, the ratings company said.

Still, the city’s overall debt burden will stay low through 2020 at less than 15% of current revenue, according to Fitch.

The yield on the 30 billion rubles of 2025 bonds sold by St Petersburg last year has climbed 136 basis points since July to 9.03%.

“Of course it will be more expensive to sell than last year,” Korabelnikov said. “It depends if there will be additional sanctions against Russia. There are lots of parameters that we don’t know yet.”