By Yelena Orekhova and Andrey Ostroukh
MOSCOW (Reuters) - Russia may borrow Chinese yuan for the first time ever by the end of 2016, a Russian finance ministry official said, a step towards Moscow's ambition of using Asian credit markets to compensate for its limited access to Western funding.
Russia needs new sources of cash as low crude oil prices lead to widening shortfalls in the budget. Its access to Western capital markets is restricted by Western sanctions imposed on it over the conflict in Ukraine.
One option the finance ministry may choose is selling treasury bonds, known as OFZs, denominated in the Chinese currency, later this year, Konstantin Vyshkovsky, head of the state debt department at the finance ministry, told Reuters.
Moscow may raise the equivalent of $1 billion in yuan through the OFZs, money that the finance ministry would convert into rubles, Vyshkovsky said.
Russia has drawn closer to China, painting it as its close partner, after Moscow's relations with the West were soured by its annexation of Crimea from Ukraine in 2014 and its support of the conflict in Eastern Ukraine.
But Moscow's pivot towards Asia has not gone smoothly, in part because Asian credit markets are much shallower than the Western debt markets that Russia has turned to in the past when it needed to borrow.
Russia raised $3 billion through a dollar-denominated Eurobond this year, but the issue was complicated by the fact that many major financial institutions were wary of taking part because of sanctions risk.
Under a plan set by the finance ministry, Russia will not raise any more foreign debt this year, so the yuan-denominated OFZs, which are considered domestic borrowing, would be a timely supplement for the budget.
The money raised may help avoid a greater budget deficit, which this year will exceed the ceiling of three percent of gross domestic product that had been initially set by President Vladimir Putin.
Russia's Reserve Fund is running out and low prices for crude oil, its key export, are putting pressure on the budget. The finance ministry had said it will respond by increasing borrowing and will also try to proceed with selling state stakes in major Russia companies.
The OFZ bonds would be issued as part of additional borrowing worth 200 billion rubles ($3.21 billion), Vyshkovsky said.
The extra borrowing program for the fourth quarter was approved in September after Russia had nearly reached its full-year borrowing limit of 300 billion rubles in the domestic market in the first three quarters.
Sovereign rouble bonds enjoyed strong demand this year thanks to high yields linked to the central bank interest rates . The central bank has been reluctant to cut rates quickly, given risks that inflation won't slow to its ambitious target an all-time low of 4 percent in 2017.
($1 = 62.2255 rubles)
(Reporting by Yelena Orekhova, writing by Andrey Ostroukh, editing by Christian Lowe, Larry King)