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Fears of sanctions stymie Russian panda bond sales in China

Sources said that Russian companies' plans for low-cost financing through China's massive bond market are not working because Chinese investors and banks avoid them due to concerns over Western sanctions.

The conundrum shows how difficult it is for Russian companies to raise capital in a country which has been an ally since Moscow's invasion of Ukraine over three years ago.

Beijing, which is seeking a deal with Washington while also forging a partnership with Russia - a relationship that is said to have no limits - is being put to the test.

Last month, sources at top Russian companies including the state-owned nuclear corporation Rosatom, and the giant gas concern Gazprom reported that they were exploring the sale of "panda bonds" denominated in yuan.

The announcement came shortly after Russian President Vladimir Putin's visit to China in early September. Since the Ukraine invasion, Russian companies are no longer able to access the capital markets of the West.

Chinese investors and bankers, however, dismissed the prospect of a panda bond issue by Russian companies in the near future. A person with knowledge of the situation said that banks and regulators were concerned about secondary sanctions.

The person said, "Preparation is always underway, but it's just impossible to push the project ahead," citing the lack of progress in the panda bonds issuance by Rosatom and Russian aluminum producer Rusal over the last year.

Rusal declined comment. Rosatom declined to comment, despite the fact that its top management was sanctioned by the U.S.

Gazprom did not reply to a comment request. The company cannot raise finance in the U.S., Europe, or Canada, but it has not been subjected to U.S. blockade sanctions, known as SDN List.

The official of a Chinese securities exchange said that he did not know of any concrete plans for issuance by Russian companies. Several Chinese bond investors also said they were wary about buying such debt because of the geopolitical risk.

The five sources that were interviewed for this article declined to be identified due to the sensitive nature of the subject.

First source: China's state owned brokerages, such as Galaxy Securities, have stopped doing deals with Russia after 2022. The "Big Four" banks of the state are also unwilling to do such deals due to geopolitical issues.

Galaxy has not responded to a request for comment sent via email.

Zhan Kai of Yuanda China Law Offices in Shanghai said that there was no legal barrier to Russian companies issuing panda bond as long as they were not listed on the U.S. sanction list.

Zhan, a Chinese company advisor who helps Chinese firms avoid sanctions and manage risks, said: "It is clear that local traders and bankers are concerned about acting as underwriters and buyers."

He said that the market will ultimately determine whether or not a Russian bond is sold. "I don't anticipate a lot appetite in China" to buy Russian bonds, he added.

Requests for comments were not responded to by the China Securities Regulatory Commission or the People's Bank of China.

YUAN BORROWINGS ARE CHEAPER

S&P Global reported that 35 offshore companies raised 116 billion Yuan ($16.3 billion), after raising 194.8 billion yuan last year. This was the highest volume since the data began to be available in 2015.

Since the conflict in Ukraine 2022, no Russian companies have issued debt on China's panda bond markets of 342 billion yuan. Rusal was the only Russian company to sell panda bond in China before Russia's troops invaded Ukraine in 2016.

The Chinese rating agency CSCI Pengyuan assigned to Gazprom a "triple A" rating in early September, indicating a very low default risk and paving its way for its yuan bonds issuance.

According to a Moscow fund manager who declined his name, the Russian rouble's borrowing rates are high. They range from 15%-16% per year. So issuing Yuan bonds would be a good way to obtain cheap capital.

Comparatively, in July a Chinese BMW unit sold a panda-bond with a coupon of 1.73%.

According to a Russian official, there's nothing stopping Russian companies issuing panda bonds as long as demand exists.

"Large corporations work with their own placements." "We only assist them with infrastructure and solutions," said the official. He added that the question is now who will purchase them in China where banks fear secondary sanctions.

A manager at a Chinese state owned company, who declined to give his name, revealed that some Russian companies are desperate to find low-cost financing and are willing to restructure their loans through a commodities deal.

Kirill Lysenko of the Russian rating agency Expert RA said that issuing panda bond by Russian companies could take many years.

Geopolitical risks exist even within the framework of a "friendly nation". He said that if sanctions were to impact China's financial infrastructure, debt servicing would become more complicated. $1 = 7.1979 Chinese Yuan Renminbi (Reporting from Shanghai and Hong Kong Newsrooms, Anastasia Lyrchikova in Moscow, Oksana Kobieva in Singapore and Rae Wee at Rae Wee; Editing done by Sumeet Chatterjee & Muralikumar Aantharaman).

(source: Reuters)