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NEW IFC TRADE FINANCING
by Paul J. Norton

Documentary credit will be more readily available to Russian importers because of
a new  "Trade Enhancement Facility" developed by the International Finance
Corporation  (IFC). The facility, a $20 million five-year agency guarantee, provides
partial guarantees for the credit risk of selected Russian banks engaged in import
finance.  This trade finance facility is expected to generate up to $2 billion of
Russian imports.

Currently, Russian importers generally pay for goods in advance through wire
transfer or, more commonly, under the terms of a letter of credit. Because of the
lack of access to Western banks, most Russian importers ask their Russian bank to
issue a letter of credit to be confirmed by a Western bank.  Western banks will
only provide a direct payment guarantee if the Russian bank has established a
confirmation line of credit, backed by cash deposits, with the Western bank. 

Under the new IFC facility, eligible Russian banks provide partial cash collateral for
confirmation of letters of credit:  The remaining uncollateralized portion will be
guaranteed by the IFC and the co-guarantor, ABN- AMRO Bank, N.V., on a 50-50
risk sharing basis.  The result is a reduction in collateral requirements for Russian
banks issuing letters of credit, from a full-cash cover basis, in order to improve the
capability of Russian banks to support trade.

How It Works

The facility will enable Russian banks to use an approved confirmation line of credit
and issue letters of credit under the line to ABN-AMRO Bank (the agent bank),
which verifies the letter of credit and advises/confirms the letter of credit to the
exporter.  Subsequently, the exporter ships the goods, obtaining the shipping
documents required under the letter of credit, and submitting these to the agent
bank.  Upon receipt, the agent bank check the correctness and validity of the
documents.  When the documents are in order, the agent bank pays the amounts
due to the exporter, and reimburses itself via the Russian bank.   
The maximum duration for a letter of credit will be around 90 days.  Risk will be
managed on a per bank, per transaction basis, on pre-established terms, subject to
close monitoring by the agent bank.  Fifteen Russian banks, to be jointly selected
by the IFC and ABN-AMRO, are expected to be part of this program.  The selection
criteria involves detailed credit analyses and an assessment of the operational
capacity of these banks with respect to issuing letters of credit.  After the review,
each Russian bank will be assigned a credit rating.  Based on this rating, the
facility will guarantee between 30 and 70 percent of the liabilities arising from the
letters of credit issued by each bank

What It Means for Your Business

U.S. exporters can benefit from the increased ability of Russian companies and
Russian banks to finance imports with guaranteed payments. By encouraging
Russian banks to meet certain disclosure, auditing and financial strength standards,
American companies can also be more confident about the financial integrity and
soundness of one of these select Russian banks. 

The IFC is in the process of developing a similar Trade Enhancement Facility for
Kazakstan and Belarus.  For more information contact BISNIS trade specialist
Michael Guerin (202) 482-4655. 

Trade specialist Paul J. Norton recently left BISNIS for the private sector.  BISNIS
wishes him all the best.
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