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Q&A: Bridging the financial divide between Russia and China

By Alison Tudor-Ackroyd

Russian bank VTB plans to knit together the financial infrastructure to support booming trade between the two nations.

Russia started to pump natural gas along a 3,000 km pipeline to northeast China on December 2, drawing the two countries closer together even as the US-China trade war rumbles on.

Russian President Vladimir Putin and China’s counterpart Xi Jinping were on hand to celebrate the launch of the $55 billion pipeline dubbed Power of Siberia. Trade is booming between the two countries, spurred by encouragement from the heights of political power.

China is Russia’s top export market and trade between Russia and China hit a record $107 billion in 2018, up from $84 billion in 2017, according to China’s General Administration of Customs.

Financial infrastructure binding the two countries together, however, is still under construction.

Putin said that the number of transactions settled in renminbi and roubles between Russia and China has so far been “somewhat low” during the Russia Calling! conference in November.

Both Russia and China have been pushing for the wider international use of their national currencies partly to reduce their reliance on the US dollar.

“Some factors are accelerating the strengthening of the relationship, such as the US-China trade war,” said Riccardo Orcel, a senior vice president at VTB Bank.

VTB Bank for one is working to bridge the financial divide. The nitty-gritty details of paying salaries, letters of credit, trade finance or foreign exchange transactions are as unglamorous as they are indispensable.

VTB says that it is the only Russian financial institution with a general banking license in onshore China and serves more than 300 corporate customers.

The bank’s headcount in Shanghai has risen by 50% over the past 12 to 15 months. As a result, the bank is moving into larger offices in Shanghai Tower and expects to open for business in its new location in 2020.

VTB collaborates on developing trade finance between Russia and China with China Development Bank and EXIM Bank of China as well as Sinosure to ensure export insurance coverage for joint Russian-Chinese projects.

The push is timely as clients are looking for solutions. VTB acted as a financial advisor for China National Gold Group, one of the largest global gold producers, on its acquisition of an interest in Klyuchevskoe gold deposit in the Chita region of Russia.

More, however, needs to be done. “The trade between China and Russia is deepening but financial cooperation is lagging,” said Yanzhi Wang, president of China’s Silk Road Fund, during the same Russia Calling! conference. Settlement of trade in renminbi would reduce foreign exchange risk and lower transaction costs for the fund, Wang remarked.

The fund aims to boost the value of renminbi circulating in Russia via equity and loans. It sees Russian companies in Russia receiving investment in renminbi then spending the Chinese currency on buying goods and services from China or exchanging it into roubles at local banks. Those banks could either invest it in renminbi-denominated financial products, lend it to companies or exchange it for roubles with the central bank.

“If it works, more RMB capital could flow into Russia,” said Wang.

The following extracts of FinanceAsia’s interview with VTB Capital’s Riccardo Orcel have been edited for brevity, accuracy, clarity and to fit our house style. Some of the questions and answers have also been reordered

Q As Sino-Russian bilateral trade swells over time how will VTB participate?

A We are making sure that we can offer support to Russian companies that want to do business in China and vice versa, to help to expand trade between the two countries. In the last 12 months, we have focused on growing our local platform in mainland China with a large investment in the infrastructure of the VTB branch in Shanghai and increasing local staff.

Q Do you expect to see Russia-China trade and financial links deepen as the US-China trade war rumbles on?

A The aspiration is definitely, on both sides, to grow the business flows between the two countries. Some factors are accelerating the strengthening of the relationship, such as the US-China trade war, but there are natural synergies between the two economies and a geographic fit with the two countries sharing around 4,000 km of borders. Chinese companies that are seeking opportunities to grow internationally such as Chinese EPCs [Engineering, procurement, construction companies] see a clear opportunity as Russia embarks on a programme of large infrastructure investments.

Q How will you balance resources between Hong Kong and mainland China?

A Most of our Chinese clients are in mainland China and therefore we are building our local presence to develop closer ties. If we look forward 20 years, the banking business will be primarily conducted onshore as China continues to develop the country’s financial architecture, from efficient share and commodities exchanges to liquid capital markets. We have increased our headcount in Shanghai and during the hiring process, we also noticed that there is now a wide talent pool that a few years ago only Hong Kong was offering.

Q How are Russian and Chinese plans to de-dollarise trade progressing?

A There is a strong desire to make the renminbi and rouble currencies more international, starting by using national currencies in bilateral trades. A few years ago, Russia’s exports were approximately 95% denominated in dollars. Now only 45% are, with the euro becoming the main currency for trading. The use of RUB or CNY is still limited to a few special situations.

Q What is the focus of Chinese companies in terms of M&A deals along the Belt & Road?

A We have a good pipeline of projects that we are called to support with M&A advice, financing and commercial banking needs once the project is developed in Russia, and with our network of local contacts to help Chinese companies to integrate more easily in Russia. Not enough deals, however, have actually closed. Russian valuations are slowly rising based on strong fundamentals and a discount to other EM and BRICS countries. There are great opportunities in several sectors of the economy with interest from China spreading beyond oil & gas to include steel, coal, agriculture, real estate and leasing for example.

With assistance from Elizabeth Utley