**COUNTRY COMMERCIAL GUIDE--RUSSIANFEDERATION**

**FISCAL YEAR  2000**

 

****

**VIII:  TRADE AND PROJECT FINANCING**

 

**Brief Description of the Banking System**

 

Since privatebanks were fist allowed in the late 1980s, their number in Russia peaked atover 2,500 in 1995.  Although thereare over 1,500 licensed banks, the sector has been in a period of consolidationsince mid-1995, accelerated by the 1998 financial crunch.  In June 1999, the Central Bank revokedthe licenses of eleven large and medium-sized banks, and in early July, CBRChairman Gerashchenko indicated that about 130 banks would have their licensesrevoked in 1999  

 

Russianbanks’ commercial lending has been limited for years, due to weak creditanalysis 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 devaluationwas that it weeded out some (though by no means all) poorly-managed banks, andhas encouraged banks to seek business through commercial lending, commissionson payment transactions and other normal banking operations instead ofspeculative investment in government securities with unsustainably highyields.  

 

Russian banksremain small by world standards (Sberbank, the largest, had assets worthapproximately $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 notnecessarily a good indicator of reliability:  In 1998 Russia’s largest commercial banks were those mostexposed in terms of their portfolios of GKOs and forward foreign exchangecontracts; whereas smaller banks that focused on commercial loans, paymenttransactions and other banking services often fared better.  However, commercial lending remains asmall 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 dollarsor other hard currency.  Non-cashtransactions (e.g. credit/debit cards and checks) are not affected by the newregulations, so establishments that previously accepted payment via creditcards continue to do so.  Storesthat sell imported goods are still allowed to mark prices in dollarequivalents. Since January 1999, Russian entities are required to convert 75percent of their foreign-currency revenues from exports into rubles.

 

In an effortto limit outflow of capital, the CBR introduced a computerized export controlsystem to monitor the flow of goods out of the country and the flow of hardcurrency back in.  The system,which unites for the first time banking and export controls, requires exportersto obtain a special "passport" from a commercial bank, which entersthe trade in a computer database. Customs agents register the actual export of the goods in the databaseand the commercial bank completes the cycle by entering receipt of thepayment.  Strategic exports,including energy and several types of metals, were subject to the new regime asof January 1, 1994.  The systemtook effect for all other types of goods on March 1, 1994.

 

In 1996, theCBR, 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 importcontract.  The importer has 180days either to document entry of the goods with Russian Customs or return thehard currency issued in payment. Failure to comply with this regulation may make the importer liable fora hard currency penalty equal to the payment.

 

**General Financing Availability**

 

High domesticinterest rates, weak local banks and Western banks’ reluctance to acceptRussian bank letters-of-credit continue to limit Russian enterprises’ access toworking capital.  While the Russianbanking system as a whole is inexperienced in project financing, a number ofWestern investment banks and venture funds are operating locally, although mosthave scaled back their Russia operations since autumn 1998.  In addition, a number of bilateral andmultilateral financing programs provide more opportunities for traders andinvestors.  The use of limitedrecourse project financing remains hampered by the immaturity of commerciallegislation, including contract enforcement, asset title, the rights of debtand equity holders, performance responsibility of contractors and disputesettlement, among others.   

 

**How to Finance Exports; Methods ofPayment**

 

Companies newto exporting to Russia should insist on payment in advance for goods andservices.  This is, in fact, thenormal procedure in Russia for most transactions.  Letters of credit are issued by Russian banks only in thosecases where the Russian customer can deposit the requisite funds in its accountahead of time.  Prior to the 1998financial crisis, Western banks generally would only confirm letters of crediton that basis as well, and today, very few Western banks accept Russian LCsunder any circumstance.  Once afirm has established a strong relationship with a Russian trading partner, theU.S. firm may consider extending short-term credit as a way to bolster salesvolume.  This should be done withcaution, and after careful evaluation and establishment of a track record ofsucccessful payments.

 

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

 

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

 

**Countertrade and Promissory Notes**

 

Because oflow liquidity throughout the Russian economy, many U.S. and other foreigncompanies which pursue business here are surprised to find that, in someindustries and regions, more than 70 or 80 percent of economic activity isconducted on a non-cash basis.  Inmany transactions, goods or services are sold for other goods which can be useddirectly -- or more typically, sold -- by the original seller, who may havebetter access to cash-paying third-party customers than the original customerwhich 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 otherwiseobtain.  As in cash transactions,however, companies are advised to stay engaged in all aspects of the deal, toensure that the payer meets commitments on schedule and that contracts aredrawn up in accordance with Russian law, so that tax and other problems can beavoided.

 

Promissorynotes (in Russian, “veksels”), denominated in rubles, are often offerred byRussian companies or government entities in lieu of cash.  While many veksels are issued byreliable companies, others are issued by firms with no credit records, orworse.  U.S. companies are advisednot to accept promissory notes as direct payment, but may find it worthwhile torely on Russian banks or “veksel brokers” as intermediaries who will accept thefinal risk of the promissory notes and ensure that the U.S. exporter is paid incash. 

 

# 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 budgetconstraints undermining the Russian Government’s willingness and ability tocredibly offer sovereign guarantees, Eximbank has sought more creative ways tofinance transactions, focusing on project-based finance.  Eximbank’s Oil and Gas FrameworkAgreement relies on pledges of exported oil to guarantee loans, and Exim hassupported eight transactions for the oil sector, worth more than $1 billion.  Russia’s Gazprom withdrew from asimilar arrangement in 1997, citing concerns over possible U.S. sanctions.  Companies which wish to investigatewhether Eximbank financing may be available for particular transactions shouldcontact Eximbank directly (see Chapter XI for contact information).

** **

    

**OPIC and Other Investment InsurancePrograms**

** **

In 1992, theU.S. Overseas Private Investment Corporation (OPIC) was authorized to provideloans, loan guarantees and insurance against political risk to U.S. investmentsin Russia.  OPIC normally insuresagainst expropriation, political violence and currency inconvertibility.  In 1994, to meet the demands of largerprojects in Russia (and worldwide), OPIC doubled the amount of insurance andquadrupled the amount of finance support - to $200 million in each case - itcan commit to an individual project. Through the end of FY 1998, OPIC had committed $3.37 billion ininsurance, finance and OPIC-backed investment funds to over 125 projects inRussia.  Russia is a member of theMultilateral Investment Guarantee Agency (MIGA).  Following the ruble devaluation of 1998, OPIC, along withmost other insurers, ceased offering currency inconvertibility insurance forinvestments in Russia, although it remains on cover for its other services.

 

 

** **