So Much for Putin's China Pivot as Sberbank Sours on Yuan

(Bloomberg) -- The Russian word for “debt” also means “duty.” The nation’s finance giants could say they were doing a little of both when they borrowed in yuan with their country under sanctions over the conflict in Ukraine. 

Almost two years after opening a 6 billion-yuan ($870 million) credit line with China Development Bank Corp. in a pomp-filled ceremony in front of Presidents Vladimir Putin and Xi Jinping, Russia’s biggest lender Sberbank PJSC says the bottom line doesn’t add up.

“We only use our yuan credit lines sparingly, because we have excess liquidity and these funds are more expensive than money from alternative sources,” Igor Bulantsev, head of the bank’s investment arm, Sberbank CIB, said in an interview. 

When it comes to China, Russia is finding its geopolitical ambitions and economic interests can be difficult to reconcile. Building a counterweight to the U.S., the neighbors often side with one another in the United Nations and their militaries train or march together at parades. Xi has told Putin that he wants China and Russia to be “friends forever.”

Developing economic ties is a whole different story. While China is Russia’s biggest single trade partner, the overall turnover of goods edged up only slightly last year to $66 billion, far off the countries’ joint target of $100 billion. It’s also a relationship marked by imbalances, with Russia accounting for a share of China’s trade comparable to Vietnam’s.

Mixed Picture

The world’s largest country by territory has made some inroads into the most populous one, taking the top spot among China’s oil suppliers last year for the first time ever. But its market remains closed to Russian meat producers because of a ban imposed as a result of disease outbreaks.

Fault lines have also emerged in finance. Banks from VTB Group to Gazprombank OJSC that issued dim sum bonds were hailed as part of Russia’s pivot to Asia after tensions with the west flared over the Ukraine crisis. Less advertised was that all of the yuan issues were repaid at maturity rather than being rolled over, signaling that the lenders don’t find the Chinese securities market worthwhile.

Plans by Russia’s government to issue yuan-denominated bonds have stalled. To date, Russian banks have only tapped China’s offshore market, with sales from VTB as well as Gazprombank and Russian Agricultural Bank OJSC since 2010.

“Practice has shown that it’s not cheap money,” Bulantsev said.

Closer Links

The countries are making some headway. Russia’s central bank, which has signed agreements on currency-swap lines with its Chinese counterpart and bought yuan bonds in 2015, is opening an office in Beijing. Aluminum giant United Co. Rusal, which has a listing on the Hong Kong stock exchange, last month announced plans to sell up to $1.5 billion in the first-ever panda bonds issued by a Russian company, with the proceeds to be used for the purchase of raw materials in China.

Chinese money also makes sense to companies with nowhere else to turn. Russia’s sanctioned development lender Vnesheconombank -- which has dodged insolvency by dumping bad debt, tapping government assistance and opting for a fire sale of its liquid assets -- signed agreements to borrow at least 16 billion yuan last year.

Most Russian lenders, however, concluded there isn’t sufficient demand for yuan loans at home, while the relatively shallow swap market made the conversion into dollars economically unfeasible.

Although that’s taken the luster off Asian capital markets for Sberbank, it’s striking out in new directions, according to Bulantsev, who’s also a former head of Nordea Bank AB’s Russian unit.

Chechnya, Iran

One area it’s exploring is Islamic finance, following a pilot deal in 2016 with a leasing firm in Tatarstan. Others are in the works this year, possibly with companies from predominantly Muslim regions such as Bashkortostan, Chechnya and Tatarstan, Bulantsev said.

It’s also discussing Shariah-compliant deals with its Turkish unit Denizbank and looking at co-financing opportunities with Arab lenders, he said.

Iran is also on its radar.

“We are carefully monitoring the process of loosening the sanctions regime in Iran,” Bulantsev said. “Despite the progress that’s been declared, there are numerous restrictions in place. As soon as an opportunity arises, we’ll go to work.”

Back home in Russia, the stabilizing economy is “very positive” for bank asset quality, according to Bulantsev. The subdued expectations among business mean demand for loans isn’t improving much from last year, he said.

As lenders face tighter margins, Sberbank plans may replace lost revenue by expanding its services with “non-credit products,” which could include offering protection against cyber-risk, Bulantsev said.

“Current monetary policy isn’t stimulating banks to build up credit portfolios more actively,” he said. “Companies will use all means available to explain to banks and the regulator that real rates are truly high.”

--With assistance from Vladimir Kuznetsov

To contact the reporters on this story: Anna Baraulina in Moscow at abaraulina@bloomberg.net, Jake Rudnitsky in Moscow at jrudnitsky@bloomberg.net.

To contact the editors responsible for this story: Torrey Clark at tclark8@bloomberg.net, Paul Abelsky