|                                                                                                                                                             |  | CONFIRMING  A  LETTER  OF  CREDIT FROM  A  RUSSIAN  BANK                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              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|**BISNISHome PageSearchBISNISEmbassyReportsCountryReportsIndustryReportsPublicationsSourcesof FinanceLeadsand EventsExchangeRatesState ExportsOtherSources** |  | October 1997by Oleg S. PopovExpanding economic ties between the United States and Russia, together with Russia's need to
rebuild its manufacturing base, offer many business opportunities for U.S. exporters.  Financing
transactions that build on these opportunities can be problematic, however, due to the significant
economic and financial uncertainty associated with doing business in Russia.  Financial uncertainty
for most foreign exports can be substantially reduced, however, by the right choice of trade
finance instruments, such as the confirmed letter of credit.While the least risky form of payment for the exporter is cash in advance in hard currency from
the Russian importer, this is often not an option (see BISNIS Bulletin, February 1997, Page 6). 
One way for the U.S. exporter both to preserve a transaction and assure payment is to use a
confirmed letter of credit facility.  With a letter of credit, or L/C, the U.S. exporter's Russian
buyer applies to a Russian bank to open a letter of credit.  If the Russian bank ("issuing" bank)
accepts the application, it opens the L/C and sends it to a U.S. bank.  Upon receipt of the letter of
credit, the U.S. bank ("advising" or "confirming" bank) advises the U.S. exporter of the existence
of the letter of credit without necessarily adding its confirmation.What Is Confirmation?
Confirmation of the letter of credit means that the U.S. advising bank makes its own independent
commitment--or guarantee-- to pay the exporter, in addition to the commitment of the Russian
issuing bank.  In other words, by confirming the letter of credit, the U.S. bank relieves the U.S.
exporter of the risk of default on payment by both the Russian importer and by the Russian issuing
bank.  Since use of a confirmed letter of credit as a means of settlement must be negotiated with
the importer from the very start, selection of a reliable Russian bank as the issuing bank for the
letter of credit is very important.Just because a U.S. exporter asks a U.S. bank to confirm a letter of credit, there is no guarantee
that the U.S. advising bank will do so.  A U.S. bank's decision to confirm or not to confirm a
Russian L/C depends on the perceived creditworthiness of the Russian issuing bank.  If the credit
standing of the issuing bank is unacceptable, the U.S. advising bank is free to inform the Russian
bank that it is not prepared to add its confirmation.  In such a case, the U.S. bank would advise
the incoming Russian L/C "as is," without adding its confirmation.Things to Remember
Most of the problems associated with confirming a letter of credit can be avoided if tackled early
on in the process of negotiations with the Russian buyer.  In particular, it is in the U.S. exporters'
interest to:--Make sure that the Russian buyer applies for an irrevocable letter of credit;
--Make sure that the letter of credit confirmation request is stated explicitly by the Russian buyer
in the letter of credit application;
--Get the name of the prospective issuing Russian bank and details on the scope of its trade
finance operations;
--Confirm if the Russian bank possesses a special authorization (license) from the Central Bank
of Russia to conduct international operations;
--Verify that the Russian bank adheres to international banking rules and practices such as the
"Uniform Customs and Practice for Documentary Credit" (International Chamber of
Commerce Publication No. 500, 1996);
--Find out which U.S. banks have correspondent relationships with the Russian bank and what
range of trade finance arrangements are available;
--Verify that the credit standing of the prospective issuing bank is acceptable for the U.S. bank;
and
--Check how the Russian buyer will cover the letter of credit: with cash, a line of credit, or some
other type of collateral (pledge of securities, for example).Although the total number of Russian banks is still rather large (about 1,700) only a relative few
are recognized by U.S. banks as acceptable financial institutions. As a result of this situation, U.S.
salespeople often return from Russia with numerous purchase orders which never materialize,
because the follow-up letters of credit were issued by Russian banks which are not considered
acceptable to any Western financial institution and, therefore, are not bankable.On the bright side, there is a small number of Russian banks which have gained recognition in the
international banking community due to their sound financial position, professional management,
and prudent risk-taking policies.  Therefore, letter of credit confirmation would be most feasible
with these prime Russian banks, most of which are listed with international rating agencies such as
BankWatch.  Very often these banks act as intermediaries between foreign banks and smaller
Russian banks, which do not have sufficient experience and the ability to operate internationally. 
This article expresses the views of the author, and should not be construed as a statement of U.S.
Government policy.  For a list of selected banks licensed to do business in Russia, visit BISNIS
Online at www.mac.doc.gov/bisnis/country/rusbanks.htm.Oleg. S. Popov works in the Economic Research Department of International Moscow Bank.This report is provided courtesy of the Business Information Service for the Newly
Independent States (BISNIS)