BISNIS Bulletin, December 2002/January 2003

 

BISNIS Director’s Message:

Russian Banking and Trade Finance Advance

 

by Trevor Gunn, Director, BISNIS

 

The Russian banking industry continues on a path of positive, albeit slow, change toward acting like traditional western style financial institutions. In the post-1998-crisis environment, private banks in Russia are looking to alter two distinct elements of past behavior. First, financial institutions in Russia have traditionally loaned money only to a very small, preferred customer base. Often this client base represented state run enterprises or companies in which the banks had some ownership stake. Second, and somewhat as a result of this loan pattern, Russian private banks have suffered from being undercapitalized. Now, in an effort to increase their competitiveness, Russian banks are looking at ways to bridge the gap in services, offering credit to more customers and to improve capitalization. 

 

One way that Russian banks are seeking to expand their client base is to attract new foreign commercial clients for trade finance transactions. Since the fall off in 1998, exports to Russia, particularly from the United States, have been on a steady rise. Each year, the number of U.S. firms entering the potentially lucrative Russian market climbs. Leading Russian financial institutions such as AlfaBank, MDM Financial Group and AvtoBank, to name a few, are eager to attract these U.S. companies as potential long-term customers. 

 

Through trade financing, the banking sector looks to diversify its business in two important ways. Direct lending with U.S. companies for trade finance will continue to grow. More U.S. firms have developed a long-term interest with substantial investments in Russia. As a result, it becomes increasingly important to localize banking services. In the past two years, there has been a significant increase in bank loans for large equipment purchases for industries related to oil and gas, heavy manufacturing, and agribusiness. For the U.S. company that has developed long-term partnerships in Russia, having the ability to finance trade transactions beyond the traditional Letter of Credit can now be effectively accomplished. 

 

Another important development is that relationships between certain private Russian banks and U.S. government supported lending agencies, such as U.S. Export-Import Bank and Overseas Private Investment Corporation, have improved and expanded. Both of these U.S. institutions have spent significant time identifying private sector banks in Russia that they are willing to work with on trade finance loans and guarantees. U.S. firms can access trade financing in conjunction with their Russian counterparts, utilizing Russian bank financing, guaranteed through one of these U.S. agencies. In addition, some U.S. banks have begun to look at direct trade finance opportunities in Russia. BISNIS has recognized an increasing interest by some local and regional U.S. banks during recent outreach programs around the United States that would work directly with U.S. companies or perhaps with their Russian banking partners. It has become apparent to many U.S. banks that more U.S. firms are involved in long-term relationships in Russia and require a host of banking services to support their operations. 

 

Where does this leave U.S. companies doing business or considering entry to the Russian market? The continued changes in Russian private sector banking mean more options for U.S. firms. It would only be natural for those with continuing relationships in Russia, working closely with Russian partners, to seek local banking resources to help finance transactions and develop new investment initiatives. At a time when the U.S. economy has seen some retrenchment, trade finance makes sense in order for U.S. firms to not lose out on the lucrative opportunities in Russia today. Institutions like EximBank and OPIC would like to see more U.S. companies take advantage of their lending and guarantee programs to increase U.S. exports to Russia. Clearly, there is a level of risk tolerance in the Russian banking system now that allows more options in developing trade finance strategies.  

 

The developments occurring in the Russian banking system will help to make the market more attractive to U.S. companies. The Russian government continues to push for further reforms in the banking industry. A major initiative by the Russian government is to support the development of SMEs in the country. Russian banks, seeing the significant role U.S. firms will play in this sector’s development, are developing trade finance programs to support this initiative. In addition, this year should see further progress on issues such as deposit insurance, which will help increase the public trust in the overall system. Competition among Russian banks will continue to strengthen; competition that is healthy and will bring banks more in line to western standards and offer U.S. firms in Russia more options and services to support continued success in this important emerging market.