A Russian take on ruble’s decline and yuan’s rise

December 12, 2015 08:04
Evgeny Gavrilenkov (inset), chief economist of Sberbank CIB, believes a weak ruble could make the Russian market more compelling to both domestic and foreign investors. Photo: Brian Yeung

The Russian ruble, dubbed “the worst performing currency” last year, almost lost half of its value against US dollar in the past 12 months. As of Dec. 7, the ruble had fallen to 69 against US$1 for the first time since September.

As a commodity currency that highly depends on the export of raw materials such as crude oil, the ruble is highly vulnerable to oil-price volatility.

The oil price has fallen to its lowest level since 2009, with Brent Crude below US$40 as of Dec. 8.

The key question for Russia's regulators and financial industry is how to cope with such market realities.

“Russia was once seen as an expensive economy to invest in, but not anymore,” Sberbank CIB chief economist Evgeny Gavrilenkov said at the recent Metals & Mining and Fertilizer conference, a global commodities market event in Moscow.

He believes a weak ruble could make the Russian market more compelling to both domestic and foreign investors.

He explained: “Weak currency is a very important factor attracting investment. Local production in Russia including labor costs has become much cheaper for investors and our economic situation has been more stabilized than last year.”

Amidst Russia’s strained relations with the West, and now Turkey as well, Chinese investment has become more important to the Russian economy.

According to an investment research by Sberbank CIB, the corporate and investment banking business of Russia’s largest bank Sberbank, China's share of foreign direct investment in Russia increased from 1 percent in 2013 to 5.6 percent in 2014.

But analysts of that research also acknowledged that Chinese investment is “not rising fast enough at present to make up for the fall in Western investments”.

Even though the Chinese economy continues to show signs of a slowdown and the yuan is depreciating further, Gavrilenkov remains upbeat about Russia’s partnership with China.

As of Dec. 9, the yuan further weakened to 6.4140 against the US dollar, the lowest since August 2011, according to Reuters.

The Financial Times cited Fitch’s estimation that China's economic growth will slow from 6.8 percent this year to 6.3 percent in 2016 and 6 percent in 2017, mainly because of a drastic fall in residential property investment after the construction boom from 2010 to 2014.

But Gavrilenkov thinks “the scale of depreciation of the ruble is much more significant than that of the yuan, so the impact of the yuan depreciation on the Russian economy is minimal”.

“Over the past years, many analysts focused too much on the percentage, losing sight of the reality. China’s economic growth is slowing in terms of percentage but the economy still appears very promising in absolute terms,” he said.

Meanwhile, Russia's regulators and financial industry eye opportunities brought by the country's strengthening partnership with China and the internationalization of the yuan, which is now included in the International Monetary Fund’s basket of reserve currencies.

Last month the Central Bank of Russia also announced it will add the yuan to its reserve currency basket.

“We are experiencing client demand for operations using ‘new’ currencies, as well as growing interest in cooperation from Asian banks,” Oleg Ganeev, deputy chairman of the executive board of Sberbank and head of Sberbank CIB, said in an interview.

He cited trade finance as a growing area with new opportunities; Sberbank’s trade finance yuan portfolio increased 17 times from May to October this year.

Sberbank has signed a number of agreements with Chinese financial institutions, with limits equivalent to over 12 billion yuan (US$1.87 billion), and its current partnership with Chinese banks covers the entire line of Sberbank’s trade finance products, Ganeev said.

Sberbank also introduced post-financing of letters of credit in yuan, a document from a bank guaranteeing that a seller will receive a certain sum as long as the seller provides documents that correspond with the terms of the letter of credit, as well as trade-related loans in yuan since 2014 and early 2015, he added.

Ganeev said Sberbank has recorded growing interest in financing yuan-denominated contracts, illustrated by the more than 150 letters of credit it issued in yuan over the past year.

Eddie Astanin, chairman of the executive board of National Settlement Depository (NSD), Russia’s central securities depository, believes that settlements in the national currencies of Russia and China will continue to grow, but a direct link between the financial infrastructures of both countries is key.

Currently NSD is working with the China Central Depository and Clearing Co. to create a link that “would open direct and convenient access for Russian and Chinese investors to the respective governmental debt markets”.

Astanin also cited an announcement from Russia’s Ministry of Finance, which said that the country is considering issuing renminbi-denominated government bonds, also known as Federal Loan Obligations (OFZ) [in Russian: Облигации Федерального Займа].

“Chinese investors are already in the Russian market, but they enter Russia through other jurisdictions, using US dollars, euros or other currencies for settlements,” he said.

“I believe that opening this link and the renminbi-denominated OFZ issuance will encourage Chinese investors to use the direct channel, thereby increasing the volume of settlements in the national currencies of both countries.”

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