SHANGHAI (Reuters) – Russia’s central bank and sovereign wealth fund may account for nearly a quarter of foreign holdings of Chinese bonds, analysts at ANZ Research calculated, potentially offering shelter from Western sanctions imposed over Moscow’s invasion of Ukraine.
Russia’s financial markets have been thrown into turmoil by sanctions imposed over the invasion, the biggest attack on a European state since World War Two.
In the face of those sanctions, Russian companies have been exploring workarounds with emerging market allies, especially China, with settlement of transactions in yuan seen rising at the expense of the dollar.
In a note this week, ANZ economists and strategists said they estimate yuan bond holdings of Russia’s central bank and the Russian National Wealth Fund at $80 billion and $60 billion, respectively.
Foreign holdings of bonds on China’s interbank bond market totalled 4.07 trillion yuan ($644.13 billion) at the end of January, the latest month for which data is available.
“We are watching if Russia will liquidate the assets if (yuan) cash is needed to meet other payment obligations,” ANZ said.
Yuan accounted for 13.1% of the Russian central bank’s foreign currency reserves in June 2021, compared with just 0.1% in June 2017. Dollar holdings dropped to 16.4%, from 46.3%.
But while Russia could potentially make use of yuan assets and China’s Cross Border Interbank Payment System (CIPS) to counter the impact of Western sanctions, including bans on some Russian banks from the SWIFT global financial messaging system, the crisis is unlikely to significantly boost use of the yuan, they said.
“CIPS is a mainly a RMB clearing system and more than 80% of transactions on CIPS rely on SWIFT telegram. It is not an immediate replacement for SWIFT.”
Underscoring the impact of sanctions over the invasion, rating agencies Fitch and Moody’s (NYSE:MCO) slashed Russia’s sovereign credit rating to “junk” status, following a similar move from S&P Global (NYSE:SPGI) last week.
Russia calls its action in Ukraine a “special operation”.
($1 = 6.3186 Chinese yuan)
NEW YORK (Reuters) -The rouble touched a record low of 110 to the dollar in Moscow on Wednesday and crawled back near 100 in other trading platforms, though it continued under pressure as Russia’s financial system teetered under the weight of Western sanctions imposed over the invasion of Ukraine.
The Russian stock market remained closed and trading on bonds showed wide bid-ask spreads and little-to-no volume.
The rouble fell 4.5% to 106.02 against the dollar in Moscow trade, earlier hitting 110.0, a record low. It has lost 30% of its value against the dollar since the start of the year. Against the euro, it shed 2.5% on Wednesday to finish the day at 115.40.
But trading outside of Russia saw the currency rebound to end the day up 6% to 100 on the EBS platform and 7.6% at 97.6 elsewhere.
The currency is still over 20% weaker than where it traded at during the first half of February.
On the EBS platform, the rouble has this week had the three widest daily ranges since 2010, with Monday the widest range on record.
“Who gosh-darn knows what’s going to happen tomorrow,” said Colin Stewart, head of Americas at Quant Insight in New York.
“It’s just too volatile.”
Russia has responded to the currency weakness by more than doubling its benchmark interest rate to 20% and telling companies to convert 80% of their foreign currency revenues on the domestic market as the central bank, which is now under Western sanctions, has stopped foreign exchange interventions.
The weak rouble will hit living standards in Russia and fan already high inflation, while Western sanctions are expected to create shortages of essential goods and services such as cars or flights.
Many international companies have announced plans to exit Russia, while the country’s credit ratings are coming under pressure as a result of the crisis.
Credit rating agency Moody’s (NYSE:MCO) said it was reviewing Russia’s rating for a downgrade, a move that “reflects the negative credit implications for Russia’s credit profile from the additional and more severe sanctions being imposed.”
JPMorgan (NYSE:JPM) said about $4.2 billion in Russian debt is at risk of being kicked out of investment-grade bond indexes.
Meanwhile, Scope Ratings said capital controls “raise significant questions surrounding the Russian state’s willingness to service its debt owed to foreign residents” a day after cutting its Russia rating to junk status.
The measures, Scope added, make Russia “more vulnerable to banking and liquidity crises.”
In a separate note, JPMorgan said there was a deep recession in the making for Russia and the bank was reassessing its regional macro forecasts.
“The most recent measures targeting the CBR have completely changed the picture,” JPMorgan said.
“Russia’s large current account surplus could have accommodated large capital outflows, but with accompanying CBR and SWIFT sanctions, on top of the existing restrictions, it is likely that Russia’s export earnings will be disrupted, and capital outflows will likely be immediate.”
Several Russian banks have been barred from the SWIFT global financial network that facilitates transfers between banks.
As households and businesses in Russia have rushed to convert the falling rouble into foreign currency, banks raised rates for foreign currency deposits to attract those flows.
Russia’s largest lender Sberbank is offering to pay 4% on deposits of up to $1,000, while the largest private lender Alfa Bank is offering 8% on three-month dollar deposits. For rouble deposits, Sberbank offers a 20% annual return.
Sberbank said on Wednesday it was quitting almost all European markets, blaming big cash outflows and threats to its staff and property, after the ECB ordered the closure of its European arm.
The bank’s London-traded shares fell to 4.5 cents from $16 at the start of the year.
A U.S.-traded ETF of Russian companies and others heavily exposed to Russia fell 13% on Wednesday, for a 72% drop since mid-February.
Moscow calls its actions in Ukraine a “special operation” that it says is not designed to occupy territory but to destroy its neighbour’s military capabilities and capture what it regards as dangerous nationalists.
Source : Reuters
