Challenges for Russian Businesses as Yuan Financing Costs Rise

Financing through China's yuan is becoming more expensive for Russian companies, posing significant challenges for their operations. Short-term borrowing costs for the yuan surged to 15.7% at the beginning of March, indicating a notable increase in the cost of borrowing in this currency. This rise in yuan debt expenses could have detrimental effects on Russian firms, especially when they are already grappling with high domestic borrowing costs.

Rising Costs of Yuan Debt

The cost of yuan-denominated debt has been steadily increasing throughout 2023, with the average yield on yuan-based securities inching close to 6% last year, as per data from Russia's central bank. This upward trend in costs is concerning for Russian businesses that have issued significant amounts of yuan debt to fulfill their foreign currency requirements.

Volatility in Short-Term Borrowing Costs

Short-term borrowing costs for yuan bonds have exhibited high volatility, with rates spiking to 15.7% on March 1 and later stabilizing around 4%, according to Bloomberg Economics. This fluctuation adds a layer of uncertainty for companies relying on short-term yuan financing.

Impact of High Domestic Borrowing Costs

Russian businesses are already facing pressure from elevated domestic borrowing costs, as the central bank maintained interest rates at 16% in February to combat inflation. This decision has resulted in corporate borrowers incurring an additional 1.2 trillion rubles (approximately $13 billion) in debt costs due to the interest rate hike last year, based on data from Russian consulting firm Yakov & Partners cited by Bloomberg.

Increasing Demand for Yuan

Importers in Russia are showing a growing preference for yuan transactions, given the reliance on China's currency following Western sanctions. The yuan constituted 75% of Russia's trade with China and 25% of trade settlements with other countries in the previous year, highlighting the currency's significance in the country's trade activities.

Risk of Overdependence on China

Economists have cautioned that Russia's increasing reliance on China, particularly amidst the challenges posed by the war in Ukraine, could lead to the country becoming excessively dependent on its eastern neighbor. The prospect of Russia becoming an "economic vassal" to China has been raised, emphasizing the need for diversification in economic partnerships to mitigate risks.

—————————————————————————————————————————————
By: jsor@businessinsider.com (Jennifer Sor)
Title: Challenges for Russian Businesses as Yuan Financing Costs Rise
Sourced From: markets.businessinsider.com/news/bonds/russia-economy-yuan-bonds-debt-financing-ukraine-moscow-war-sanctions-2024-3
Published Date: Tue, 05 Mar 2024 16:45:17 +0000