Moscow seeks to unlock Chinese financing for Russian companies

Financial Times, 07.05.2015

Moscow is trying to attract more Chinese loans for Russian companies by shouldering some of the credit risk through a financing arrangement that seeks to ease Beijing’s wariness of further exposure to cash-starved businesses.

Under an agreement to be signed at a summit between Xi Jinping, Chinese president, and Vladimir Putin, his Russian counterpart, in Moscow on Friday, the state-backed Russian Direct Investment Fund and state-owned China Construction Bank will establish a debt mechanism to help unlock Chinese financing for Russian borrowers.

RDIF and the $2bn Russia-China Investment Fund — which RDIF launched with the China Investment Corporation in 2012 — plan to lower the risk for Chinese lenders by either taking equity positions in prospective borrowers or extending subordinated debt to them.

The effect of such financing structures is that the Russian funds would suffer the first losses if loans soured, potentially sparing their Chinese co-lenders.

“For example, in a $1.5bn loan, we would take on a $200m mezzanine tranche with a higher interest rate, and overall the loan would have a blended interest rate attractive to the Russian company,” Kirill Dmitriev, RDIF’s chief executive, told the FT. “Thus we are derisking these loans for the Chinese banks.”

Western funding has dried up for Russian borrowers since the US and the EU almost completely barred several Russian state banks and energy companies from raising capital in western markets last year in response to Moscow’s involvement in the war in eastern Ukraine.

While some of Russia’s largest state-owned enterprises are receiving government support to cushion the effect of the sanctions, private companies have been left to fend for themselves.

Moscow has been courting China as an alternative source of funding. But Chinese financial institutions have so far been slow to fill the gap. “They are very conservative, and they don’t really know how to approach this market,” Mr Dmitriev said. “We are solving this problem now.”

The new mechanism is aimed exclusively at providing funds to non-sanctioned Russian companies, particularly exporters. It could be applied to both US dollar loans and financing in other currencies, such as renminbi, if there was demand, RDIF said.

Mr Dmitriev said five prospective borrowers had already been identified, and he expected up to 10 loan deals to be closed this year, beginning in September.

Moscow aims to establish similar schemes with other Chinese banks. “The target is to provide up to $20bn in the next two to three years,” said Mr Dmitriev. The ambitious target compares with Rmb2.36tn ($381bn) of overseas loans that Chinese banks had outstanding at the end of March — $347bn of which were in foreign currency, according to the Central Bank of China.

If successful, Mr Dmitriev added, the mechanism could help Chinese banks push aside long-established European competitors that have reduced corporate lending in Russia in the wake of the sanctions.

“European banks are the most profitable in Russia, especially certain Italian banks, if you know what I mean,” he said, with an apparent reference to UniCredit, one of the largest foreign lenders in Russia. “We are going to take that market share away.”

The debt mechanism will be joined by an agreement for a joint-venture investment bank RDIF has agreed to set up with Citic Merchant. RDIF said the new institution would focus on helping Russian corporates raise money in Asia, including through the sale of equity stakes to Chinese financial investors, IPOs and bond placements.

Other deals expected to be signed during the summit include an agreement for a leasing programme aimed at promoting sales in China of the Sukhoi Super Jet, Russia’s biggest civilian aircraft, a $2bn joint fund for agriculture investments and a joint venture between aluminium company Rusal and Chinese partners.