|                                                                                                                                                                                     |  | Leasing Has Potential in Russia                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsCustomsCornerPublicationsSourcesof FinanceFinanceLinkLeadsand EventsExchangeRatesState ExportsOtherSources** |  | December 1998by Derek BloomOver the past seven years, little capital has been available to finance lease transactions in Russia. 
Investments in Russian government and corporate securities during the period were made at the
expense of investments in new productive assets.  In this environment, new owners of Russian
industry largely postponed long-term investments in acquired enterprises, had insufficient
capital, or lacked a real intention to undertake such investments.
As a result of the current banking crisis, those domestic Russian banks which survive will be
even less able to provide financing for leasing transactions. Similarly, foreign banks operating in
Russia are likely to focus on short-term export financing activities, rather than comparatively
long-term equipment financing transactions. Under these circumstances, Russian enterprises
desiring to acquire foreign equipment will, even more than before the 1998 collapse, need to
obtain financial assistance from foreign equipment manufacturers, foreign finance companies,
and those foreign banks still active in the Russian market.Environment for Leasing
Leasing is fundamentally a legally stronger form of financing equipment than a pledge of
equipment purchased with loan proceeds. Established laws governing lease transactions and
freedom of contract in Russia allow global lease companies to operate in Russia in much the
same manner that they operate in other developing economies.  Concerns about the legal
environment for leasing in Russia apply equally to all other types of financing. These concerns
include the enforceability of contracts in general, including the procedure and cost of enforcing
pledges, guarantees, and setoff agreements.Typically, Russian lease transactions only go forward with extensive and duplicative additional
means of financial security, such as guarantee agreements from equipment vendors, guarantees
from companies affiliated with a lessee, resale agreements, price guarantees, pledges of other
assets owned by a lessee, offshore escrow accounts, bills of exchange from offshore banks, and
other mechanisms.  A requirement for insurance against loss of the equipment and repossession
risks is becoming increasingly common in Russian lease financing.Although leasing, as compared to lending funds to purchase an asset and taking a pledge for the
purchased asset, offers the legal advantage that the lessor will have a clear contractual right to
repossess leased equipment, an impediment to the growth of leasing has been the practical and
perceived inadequacy of legal options available to lessors in the case of default.  So far, where
transactions have been constructed using Russian leasing companies as intermediaries, on the
whole, the foreign company involved has underwritten such lease transactions and retained all
the financial risks. In practice, finance lease companies express frustration with the time required
to enforce via the Russian legal system repossession rights following a breach of a lease's terms.
Additionally, even if a lessee has defaulted under the terms of its lease, a lessee facing
repossession of leased property has the right to start a legal proceeding if its rights as lessee have
been violated. Further, in the case of leased equipment installed in distant locations or
underground, such as oilfield equipment, retention of the right of ownership may be of little real
value to the lessor.1998 Leasing Law
Improvements to Russian leasing laws, including clarifying the procedures for repossessing
leased equipment, could facilitate more leasing activity in Russia. The new Russian leasing law,
signed in late October, raises significant legal problems and impediments to substantial
investments in lease transactions. The draft law does not reconcile many of its substantive
provisions with existing provisions of the Civil Code, Civil Procedural Code, Tax Law, Customs
Law, Joint Stock Company Law, and Bankruptcy Law.  These conflicting pieces of legislation
give rise to a number of new legal problems.  There will likely be a prolonged period of legal
ambiguity before the provisions of the lease law can be implemented in practice. 
The confusion created by the conflicts with other federal laws may lead Western leasing
concerns to engage solely in cross-border leasing transactions governed by foreign law rather
than domestic leasing governed by Russian law.Practical Steps
An efficiently run or wholly owned or controlled financing operation in Russia should be able to
compete successfully in facilitating sales of new equipment, while at the same time providing
protection against a number of risks.  Major global equipment vendors or financiers may want to
consider assuming the responsibility for providing necessary financing to their customers.  Few
viable partners exist among the banks and leasing companies currently in Russia, and many
existing Russian leasing companies face bleak futures due to their affiliated banks facing
insolvency and liquidation.  The use of external financial intermediaries who mark up the cost of
financing to end-users can price the lease out of the market.  Lease transactions which exceed the
cost of competing gray market transactions, or which greatly exceed the cost of loan financing on
an after-tax basis, will not be viable in the marketplace.A further practical step for strategic investors in large projects is to obtain corporate control over
lessees by forming joint ventures to serve as lessees.  Control may then be exercised over these
joint ventures through control of the preparation of charter documents and subsequent corporate
activity.  At minimum, a minority interest in a lessee company, with must be obtained to utilize
this strategy.  Options may be granted to joint venture partners to acquire control of the lessee
once its financing obligations are satisfied.  Potentially, offers of equity stakes in a lessee may
co-opt key regulatory and business partners, providing a positive incentive to facilitate the
lessee's success and fulfillment of its obligations.Thirdly, with the declining value of the ruble, lessees should be contractually obligated to pay the
foreign leasing company a ruble amount equivalent to the required amount of hard currency (at
the exchange rate of the date payment is received).Leasing should prove to be a growing, flexible, and promising means of financing the acquisition
of many types of equipment needed by Russian industry and entrepreneurs. Foreign leasing
companies should have certain compelling advantages due to their experience with such
transactions and access to relatively inexpensive sources of capital.  Many Russian leasing
companies would welcome joint lease/sublease transactions in which they would assume
responsibility for all activities in Russia and provide guarantees of lease repayments to a foreign
partner.  Alternatively, a foreign leasing company that desires to capitalize upon the opportunity
to develop a larger scale business of its own in Russia may want to consider setting up a wholly
or jointly owned  leasing company in Russia.For more information on leasing and other means of financing, visit BISNIS OnLine at
www.mac.doc.gov/bisnis/isa/isa.htm#Gisa.
Derek Bloom is an attorney with Coudert Brothers in Moscow.This report is provided courtesy of the Business Information Service for the Newly
Independent States (BISNIS)