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Originally Posted by Wikipedia
It was previously a subject of debate amongst fans as to whether or not Bugenhagen is Red XIII's biological grandfather. Actually, this is not the case. The word for "grandfather" used by Red XIII in reference to Bugenhagen is "'jii-chan", a title of familiarity and respect, often used even when there is no biological relation between the speaker and who they are referencing.
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Sounds like a good reason. ^^
But why he's called Red XIII, well: (Star Wars)
Nanaki,
his real name, is Anakin, spelled different.
Red XIII, his
nickname, is a
codename used by the Rebel Alliance.
So, either, Red XIII doesn't mean anything except that both names for Nanaki were supposed to be just a reference to Star Wars, or it could be that Red XIII was just the thirteenth project Hojo was working on.
(EDIT: Tiny Bronco was quicker than me.
)