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Country Commercial Guides for FY 2000: Russia Report prepared by U.S. Embassy Moscow, Released July, 1999 Note*

VIII: TRADE AND PROJECT FINANCING

Brief Description of the Banking System

Since private banks were fist allowed in the late 1980s, their number in Russia peaked at over 2,500 in 1995. Although there are over 1,500 licensed banks, the sector has been in a period of consolidation since mid-1995, accelerated by the 1998 financial crunch. In June 1999, the Central Bank revoked the licenses of eleven large and medium-sized banks, and in early July, CBR Chairman Gerashchenko indicated that about 130 banks would have their licenses revoked in 1999

Russian banks' commercial lending has been limited for years, due to weak credit analysis and lack of international accounting practices (and until August 1998, by the certainty of higher returns on Russian government bonds, or GKOs). A silver lining of the 1998 devaluation was that it weeded out some (though by no means all) poorly-managed banks, and has encouraged banks to seek business through commercial lending, commissions on payment transactions and other normal banking operations instead of speculative investment in government securities with unsustainably high yields.

Russian banks remain small by world standards (Sberbank, the largest, had assets worth approximately $9 billion in November 1998 after the ruble's sharp depreciation; no other Russian bank had assets worth more than $1.8 billion). State-owned Sberbank aside, size is not necessarily a good indicator of reliability: In 1998 Russia's largest commercial banks were those most exposed in terms of their portfolios of GKOs and forward foreign exchange contracts; whereas smaller banks that focused on commercial loans, payment transactions and other banking services often fared better. However, commercial lending remains a small share of Russian banks' business. Long-term lending (over 1 year) comprises under 10 percent of credits; and many Russian banks remain in precarious shape.

Currency Control and Regulation

Since 1994, businesses in Russia have been barred from accepting cash payments in dollars or other hard currency. Non-cash transactions (e.g. credit/debit cards and checks) are not affected by the new regulations, so establishments that previously accepted payment via credit cards continue to do so. Stores that sell imported goods are still allowed to mark prices in dollar equivalents. Since January 1999, Russian entities are required to convert 75 percent of their foreign-currency revenues from exports into rubles.

In an effort to limit outflow of capital, the CBR introduced a computerized export control system to monitor the flow of goods out of the country and the flow of hard currency back in. The system, which unites for the first time banking and export controls, requires exporters to obtain a special "passport" from a commercial bank, which enters the trade in a computer database. Customs agents register the actual export of the goods in the database and the commercial bank completes the cycle by entering receipt of the payment. Strategic exports, including energy and several types of metals, were subject to the new regime as of January 1, 1994. The system took effect for all other types of goods on March 1, 1994.

In 1996, the CBR, to combat bogus import contracts concealing offshore capital flight, imposed an "import passport" system, which requires issuance of a "passport" by the importer's bank for payment against a specific import contract. The importer has 180 days either to document entry of the goods with Russian Customs or return the hard currency issued in payment. Failure to comply with this regulation may make the importer liable for a hard currency penalty equal to the payment.

General Financing Availability

High domestic interest rates, weak local banks and Western banks' reluctance to accept Russian bank letters-of-credit continue to limit Russian enterprises' access to working capital. While the Russian banking system as a whole is inexperienced in project financing, a number of Western investment banks and venture funds are operating locally, although most have scaled back their Russia operations since autumn 1998. In addition, a number of bilateral and multilateral financing programs provide more opportunities for traders and investors. The use of limited recourse project financing remains hampered by the immaturity of commercial legislation, including contract enforcement, asset title, the rights of debt and equity holders, performance responsibility of contractors and dispute settlement, among others.

How to Finance Exports; Methods of Payment

Companies new to exporting to Russia should insist on payment in advance for goods and services. This is, in fact, the normal procedure in Russia for most transactions. Letters of credit are issued by Russian banks only in those cases where the Russian customer can deposit the requisite funds in its account ahead of time. Prior to the 1998 financial crisis, Western banks generally would only confirm letters of credit on that basis as well, and today, very few Western banks accept Russian LCs under any circumstance. Once a firm has established a strong relationship with a Russian trading partner, the U.S. firm may consider extending short-term credit as a way to bolster sales volume. This should be done with caution, and after careful evaluation and establishment of a track record of succcessful payments.

For some large transactions, where up-front payment from Russian buyers may be impractical, financing may be provided by a bank, export credit agency or venture fund. In cases where lease transactions are appropriate, exporters should insist on three to four months' lease payment upon delivery.

Perhaps as many as twenty private Russian banks now offer forfaiting and factoring services. However, the volume and value of transactions using these techniques have yet to attain levels at which they are either profitable or self-sustaining. Given the endemic illiquidity in the Russian economy, cross-border leasing may become an important alternative to export sales. At present, less than five percent of imported equipment is leased. Equipment for the aviation, energy, transportation, pharmaceutical, forestry and fishing industries, which may be too expensive for Russian customers to purchase outright, is often leased.

Countertrade and Promissory Notes

Because of low liquidity throughout the Russian economy, many U.S. and other foreign companies which pursue business here are surprised to find that, in some industries and regions, more than 70 or 80 percent of economic activity is conducted on a non-cash basis. In many transactions, goods or services are sold for other goods which can be used directly -- or more typically, sold -- by the original seller, who may have better access to cash-paying third-party customers than the original customer which made the payment-in-goods. While such barter deals can be more complex than cash transactions, U.S. firms should not dismiss them out-of-hand, for they can be just as profitable, and can help a company win a market foothold which it might not otherwise obtain. As in cash transactions, however, companies are advised to stay engaged in all aspects of the deal, to ensure that the payer meets commitments on schedule and that contracts are drawn up in accordance with Russian law, so that tax and other problems can be avoided. Promissory notes (in Russian, "veksels"), denominated in rubles, are often offerred by Russian companies or government entities in lieu of cash. While many veksels are issued by reliable companies, others are issued by firms with no credit records, or worse. U.S. companies are advised not to accept promissory notes as direct payment, but may find it worthwhile to rely on Russian banks or "veksel brokers" as intermediaries who will accept the final risk of the promissory notes and ensure that the U.S. exporter is paid in cash.

The U.S. Export-Import Bank

The U.S. Eximbank initially began lending to support U.S. exports to Russia in 1992, offering loans based on sovereign guarantees from the Russian Government. With Russia's tightening budget constraints undermining the Russian Government's willingness and ability to credibly offer sovereign guarantees, Eximbank has sought more creative ways to finance transactions, focusing on project-based finance. Eximbank's Oil and Gas Framework Agreement relies on pledges of exported oil to guarantee loans, and Exim has supported eight transactions for the oil sector, worth more than $1 billion. Russia's Gazprom withdrew from a similar arrangement in 1997, citing concerns over possible U.S. sanctions. Companies which wish to investigate whether Eximbank financing may be available for particular transactions should contact Eximbank directly (see Chapter XI for contact information).