Russia’s VTB looks to China for lending expansion.
Moscow keen to sew up banking ties with Beijing as US-China relationship frays
As sanctions and tariffs fray US relations with Moscow and Beijing, Russia is looking to stitch up cross-border banking ties with China.
State-run VTB, Russia’s second-largest bank and its only lender with a full branch in China, plans to double its headcount in Shanghai over the next three to four years as demand for commercial banking, foreign exchange and trade finance increases, said Riccardo Orcel, head of VTB’s international operations.
The new banking services will be aimed at Chinese companies that are expanding their operations into Russia, Mr Orcel said, citing as an example Alibaba’s growing AliExpress ecommerce business in Russia.
“We are looking for new premises because we are totally full,” he said of the bank’s office in Shanghai, which employs about 35 people.
The expansion comes as China and the US square off over trade tariffs worth hundreds of billions of dollars a year — a dispute that has damped Chinese investment into the US this year.
Mr Orcel cited the “extremely good relationship” between China and Russia and “the not-as-good relationship that exists moving towards the west” as a reason for tighter ties between Russian and Chinese companies.
Relations between Russia and western countries have also deteriorated after the US levied new sanctions on Russian companies and officials including VTB chief executive Andrei Kostin.
VTB has been under US sanctions, restricting its ability to raise debt on western markets since 2014. It has scaled down its European business, and this month it sold its US operations to management.
Last week, Mr Kostin presented a “de-dollarisation” plan, which has tentative support from Russia’s central bank, under which Russian companies would move away from transacting in the US currency internationally in favour of roubles, euros and Chinese renminbi.
VTB says it is prepared to lend to Chinese companies to support investment within Russia — adding credit exposure in roubles that few global institutions are prepared to take on given foreign exchange risks. About 70 per cent of VTB’s transactions with China are in US dollars, a figure the bank wants to reduce.
“China has a choice: it’s not under sanctions and it doesn’t need a volatile Russian commodity currency. Russia has fewer alternatives, so it’ll have to build a [renminbi]-focused infrastructure,” said Alexander Gabuev, a China expert at the Carnegie Moscow Center think-tank.
Since 2013 China has invested $7.1bn in Russia through mergers and acquisitions, in gradually decreasing amounts over that period of time, according to data from Dealogic.
“There’s a lot of talk about Chinese investment but very little of it actually happening,” said a senior executive at a rival Russian bank.
But state-backed groups such as China Investment Corp, Sinopec and Beijing Enterprises have over the past five years taken stakes in Russian chemicals and oil producers, including in Uralkali, the world’s largest potash producer, and the Yamal natural gas project.
In 2017, VTB agreed to lend €5bn to CEFC China Energy for the Chinese conglomerate’s $9bn acquisition of a stake in Rosneft, Russia’s largest oil producer.
That deal, which was also backed by China Development Bank and would have been China’s largest investment in Russia, fell apart after CEFC chairman Ye Jianming was detained early this year.
Despite the collapse, winning the financing role was a landmark for VTB and a signal to other Chinese companies the bank was prepared to take heavy domestic risk on inbound investments, Mr Orcel said.
“It somehow rang a bell in China because we were there with over €5bn of financing — something that the likes of CDB, etc, would also say [of], ‘that’s a big ticket’,” he said.