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Russia Set to Revive Local Bond Sales After Six-Month Freeze

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Russia will resurrect local bond sales as soon as next month and it wants yuan-denominated debt to eventually play a role as it retools its sanctions-hit markets with a view to its ally, China.

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(Bloomberg) — Russia will resurrect local bond sales as soon as next month and it wants yuan-denominated debt to eventually play a role as it retools its sanctions-hit markets with a view to its ally, China. 

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Sales of ruble bonds, known as OFZs, could resume with small offerings in the second half of September after a six-month hiatus, according to a person familiar with the matter. The government froze weekly auctions in early February, just two weeks before Russia’s invasion of Ukraine, fulfilling less than a fifth of its first-quarter borrowing plan.

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At the same time, a long-mulled plan to debut Chinese currency notes locally is being dusted off with fresh urgency as yuan trading volumes surge after sanctions shut Russia out of its traditional markets in the US and Europe, the person said. It won’t be a quick process and won’t start this year, said the person, who requested anonymity because they’re not authorized to speak publicly.  

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As Russia’s war grinds on, imports from China are picking up and yuan trading has risen more than 40-fold on the Moscow Exchange since the start of the year according to Citigroup. Russia’s biggest gold miner, Polyus PJSC, and aluminum giant United Co. Rusal International PJSC, have debuted yuan debt locally. 

Yuan’s ‘Meteoric Rise’ in Russia Trading Enables Wider Use: Citi

Formal Chinese government backing for a Russian yuan issue would be Moscow’s preferred option, and there may be opportunities for talks in the next few months, the person said. The more likely outcome, however, is for the Finance Ministry to pursue smaller sales aimed exclusively at local players looking for a place to park their growing piles of yuan, the person said.  

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With hundreds of millions of dollars coming into government coffers from energy revenue each day, the government has no need to borrow now, and sales of yuan debt would serve solely as a benchmark for companies looking to tap the market, the person said.

After an initial ruble-bond sale in September, the government will announce its borrowing plan for upcoming auctions, the person said. Earlier, the ministry had said it may restart with initial sales of 10 billion to 30 billion rubles.

What Bloomberg Economics Says…

“Issuing debt in yuan would solve two problems at once for the Finance Ministry: it would slow the drawdown of the wealth fund and if the yuan are raised on the domestic market, it would absorb some of the excess FX supply and weaken the ruble. The recent Rusal issue shows demand for yuan instruments inside Russia is strong.” – Alexander Isakov, Russia economist

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The share of the OFZ market owned by foreigners has held steady after dropping in the wake of the invasion. It 17.6%, or 2.8 trillion rubles ($47 billion) as of July 1, according to Russian central bank data. At the same time, the debt changes hands at deeply distressed levels overseas, and some foreign investors who have been unable to offload their positions due to local restrictions blocking sales have written them down to zero. 

The move away from the dollar and euro — currency Russian authorities labeled “toxic” — toward the yuan is another sign of how the world’s biggest energy exporter is acclimatizing under sanctions.

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The ruble quickly returned to a level against the greenback that’s stronger than before the war as oil revenue continued to flow in and exports shrank. Yields on ruble debt are also back to pre-invasion rates. Yuan trading volumes have surged in Russia and there’s a clear surplus of liquidity in the currency, creating good opportunities for local companies to issue bonds, Sberbank said in a note Wednesday.

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The idea of selling local government debt in yuan dates from 2015, the year after Putin’s annexation of Crimea saw some of the country’s biggest companies slapped with sanctions, locking them out of international debt markets. 

At the time, the aim was to go big and secure approval from Beijing for Chinese investors to participate, the person familiar said. That proved easier said than done and the project was left on the back burner. 

Why Increasing Russia-China Ties Worry Democracies: QuickTake

Russian newspaper Vedomosti first reported Russia had returned to the idea of issuing sovereign debt on Tuesday, citing people it didn’t identify. The Finance Ministry didn’t respond to a request for comment from Bloomberg. 

Separately, gold miner Polyus set final coupon guidance on its 3.5 billion yuan ($511 million) of five-year bonds at 3.8% on Tuesday, lowering it from the original target of 4.2%, according to people familiar with the matter who asked not to be identified because the details aren’t public. 

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