How the Yuan works for Russia

Rossiyskaya gazeta,
Moscow, September 1, 2015
Author: Anna Romanova

Russia’s Bank for Development and China’s financing institutions cooperate

In the context of the Russian President’s forthcoming visit to the PRC expected to take place in September off 2015, Head of Staff of the Presidential Executive Office noted: “I can say without exaggeration that at present the Russian-Chinese relations are at the highest level than ever before”.

The same can be said not only about political but also about financial sector. The Russian Bank for Development – Vnesheconombank (VEB) have been working together with Chinese financing institutions for a long time and in the past several years their cooperation has expanded.

Committed to development

VEB’s main partners are the China Development Bank (CDB) and the Export-Import Bank of China (the Eximbank of China). The extent of their cooperation is seen in their stated projects. From 2005 to 2014, VEB raised 10.74 billion dollars and out of them 10.11 billion dollars were provided by the CDB. Due to such significant amounts, VEB remains to be one of the CDB’s largest borrowers among Russian financing institutions. The two banks’ cooperation is based above all on an extensive and solid legal framework. For the past ten years they entered into five agreements and memorandums on cooperation, two framework agreements as well as ten credit agreements. These are the examples of projects where Russian and Chinese financial resources were used.

In 2009, VEB and CDB entered into a funding credit agreement the funds from which were used to fund the construction of a cement plant in the city of Slantsy of the Leningrad region. Cement in this city is manufactured in a special way: they use “dry” method of manufacturing this raw material on the basis of natural raw materials and technogenic raw materials received from production wastes of slate processing industry on the territory of Slantsy district municipality. Such a method is not also economical but also eco-friendly. VEB provided funds that cover more than a half of the project’s value – 237.1million euros from the total value of 442.2 million euros. Two years after the construction started (in 2011); the plant began to manufacture trial batches of products. Now the plant’s capacity is 1.86 million tons of cement per year.

In October of 2013, in the course of the 18th regular meeting of Russia’s and China’s Heads of State and in the presence of the Russian Prime Minister Dmitry Medvedev and Premier of the PRG State Council Li Keqiang, VEB and the CDB signed a credit agreement worth 400 million dollars to fund the third unit of the Ekidastuz-2 power station in the Pavlodar region of the Republic of Kazakhstan.

This project launched in 2009 is to meet Kazakhstan’s growing needs for electric power, electric capacity and close the energy gap in the Russian regions of the South Urals, West Siberia and Altai. Now 400 specialists are working there but by a launch of the unit scheduled for 2017, 1200 specialists will work there.

In May of 2014, in the course of Russian President Vladimir Putin’s official visit to China, CDB, VEB, Gazprombank and OJSC Yamal LNG signed a Memorandum on Arranging Financing of the Yamal LNG project. The Yamal LNG project provides for the construction of a liquefied natural gas plant (LNG) with a capacity of 16.5 million tons of LNG per year on the resource base of South-Tambeisk gas field. Credit facilities are to be raised from Chinese banks to fund it. VEB is to extend a banking guarantee in the amount of 3 billion dollars.

Taking into account the fact that China is our close neighbor some construction projects are being implemented in the Far East region. For example, a timber processing complex to manufacture chipboards and sawn materials was built in the Vanino district of the Khabarovsk Territory, with Vnesheconombank’s participation share being 277 million euros. The project’s total value is 415 million euros.

Joint social programs are among VEB’s and the CDB’s projects. In autumn of 2014, VEB and the CDB agreed to jointly fund the following programs “Housing for the Russian Family” and “the Rental Housing”. On the Russian side. a Memorandum of Understanding was signed by VEB and the Housing Mortgage Lending Agency. But the new Housing Development Agency will be responsible implementing it. The Russian and the Chinese sides intend to develop an optimal mechanism for funding the programs including bilateral syndicated interbankbank loans and they also explore the possibility of issuing bonds in Russia and in mainland China. The Housing Development Agency’s need for funding amounts up to 135 billion rubles for a period of 25 years. Chinese companies also intend to participate in housing construction.

From the dollar to the yuan

Until the year 2015, the dollar and the euro played a role of main currencies in bilateral and multilateral projects. In May, an agreement was signed that would be much appreciated in the near future. On May 8, 2015, VEB and CDB signed in the presence of Russia’s and China’s Heads of State a framework credit agreement worth up to 8 billion in the dollar equivalent. This framework agreement provides funding joint projects in various currencies including in Chinese yuans. It’s already known that the money will be used to fund the abovementioned programs “Housing for the Russian Family” and “the Rental Housing” as well as infrastructure projects, agro-industrial complex projects and projects of utilization and development of communications technologies.

As opposed to a framework agreement signed by VEB and CDB, VEB took its first practical step together with the Eximbank of China by signing an agreement on a credit line for an amount of 3.9 billion yuans (an equivalent of 630 million dollars) for a period of 15 years. It was the first time when VEB raised credit facilities in the Chinese national currency to implement an investment project in Russia. It’s a really breakthrough agreement even for such a large-scale financing institution as VEB.

It should be noted that so far it’s not possible to hedge risks with regard to the ruble-yuan currency pair on a long-term basis and this hinders a process of transferring to payments in our national currencies.

One of the first steps in addressing this problem was an agreement the Russian Central Bank and the China People’s Bank signed in 2014 on a swap (a conversion transaction) in national currencies for an amount of 150 billion yuans.

This is only a part of already stated and implemented VEB’s projects with Chinese partners. As part of the already concluded agreements there will be new projects and this means that new production facilities manufacturing new products and creating new jobs will emerge.