|                                                                                                                                                             |  | LEASING GROWS IN RUSSIA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsPublicationsSourcesof FinanceLeadsand EventsExchangeRatesState ExportsOtherSources** |  | by Marina KamayevaAugust 1997Leasing is growing rapidly as a finance technique for U.S. firms exporting capital goods to Russia
(see BISNIS Bulletin, April 1996, Page 3).  A number of U.S. and other foreign leasing
companies are now operating in Russia, where they are well positioned to provide competitive
services because of the high cost of domestic credit.  Despite leasing's advantages, successful
transactions in Russia require careful planning.Leasing experts predict very rapid development of leasing in Russia's major cities over the next
three years. The acute need to upgrade obsolete equipment combined with an underdeveloped
banking system encourages flexibility and innovation in financing.  Banks find it difficult to
evaluate or secure credit risk, which can result in collateral values considerably exceeding the loan
value.  Non-bank financing is also difficult to obtain and carries a substantial risk premium. 
Leasing offers U.S. equipment manufacturers and sellers and Russian end-users easier access to
economical medium-term financing.Hewlett Packard and IBM already have considerable experience leasing computer equipment in
Russia and are considering establishing leasing subsidiaries in Russia.  AT&T Capital has
organized a wholly owned Russian leasing company to engage in a broad range of small and
medium-sized leasing transactions.  Lease Holding, B.V., backed by American International
Group and Cargill Enterprises, is forming joint-venture leasing companies with a major bank to
operate in Russia's three largest cities.  General Electric, backed by  the Export-Import Bank
of the United States, leased gas-fired turbines to the Chelyabinsk Electro-Metallurgical
Plant.Opportunities
Given the very difficult domestic credit market, very few Russian companies are able to borrow
money to purchase modern equipment (see the article on Page 1).  Not surprisingly, financial
leasing--for terms of five years or more, usually with the end-user purchasing the leased
equipment when the term is up--is likely to be the most common form of leasing in Russia over
the next several years.  Forecasting from leasing transactions registered with the Central Bank of
Russia (CBR) in 1996, leasing is most promising in the following sectors:
- oil and gas: exploration, petroleum extraction, and refinery equipment;
- aviation: aircraft;
- transportation: road building equipment; trucks; other transportation vehicles;
- power generation equipment: for the reconstruction of co-generation and power plants,
including nuclear;
- computers and telecommunications;
- pharmaceutical factories;
- logging and wood-processing plants;
- small production facilities: bakeries, dairies, meat-processing factories, canning equipment; dry
cleaning and laundry equipment; solid waste processing facilities, etc.Leasing is also a possibility for financing sales to municipalities and companies with municipal
participation.  Public transport, municipal roads, and waste processing are issues facing every
Russian city, which usually cannot be financed directly from municipal budgets alone. 
TDV-Auto, an official Ford Motor Company dealer in St. Petersburg, recently used a lease
transaction to finance the sale of 100 Ford vans to RUST, a St. Petersburg leasing company
owned by Sberbank.  RUST leased the vans to the St. Petersburg Municipal Administration for
operating commercial shuttles in the central areas of St. Petersburg.  City officials expect all their
expenses to be fully recovered within three years.Obstacles
A variety of obstacles impede leasing in Russia.  The  value-added tax (VAT) is usually applied to
both the value of the equipment being imported into Russia and to the value of leasing services,
imposing an extra non-recoverable 20 percent expense on many types of equipment.  Additionally,
Russian lessees must withhold income tax at the rate of 20 percent on lease payments made to a
foreign lessor, unless the lessor is from a country with a tax treaty with Russia allowing an
exception from required tax withholding.Leasing transactions involving foreign lessors must be licensed by the Russian Ministry of
Economics, which adds to their expense. The ministry's license is issued for a period up to five
years.  The ministry is currently considering granting exceptions for one-time cross-border lease
transactions.  A Russian lessee must also obtain a license from the CBR to make hard currency
payments to a foreign lessor.Lessors may have trouble recovering their equipment in the event of default. Although current
regulations state that leased assets remain the lessor's property, effective enforcement is often
lacking.  Russian leasing companies are lobbying for new legislation that would strengthen 
lessors' rights and allow for easier repossession of property.In structuring a leasing transaction in Russia, U.S. companies should remember certain key points. 
Lease financing should cost less than domestic credit available in Russia.  Leasing should be part
of a long-term strategy for developing your company's business in Russia.  Where appropriate,
develop partnerships with local leasing companies that may have ties to potential clients.  For a
more detailed analysis of leasing in Russia by the author, including legal issues, visit BISNIS
Online at www.mac.doc.gov/bisnis/isa/isalease.htm.Marina Kamayeva is with the U.S. Commercial Service in St. Petersburg, Russia.This report is provided courtesy of the Business Information Service for the Newly
Independent States (BISNIS)