Methodology of Export Finance structuring in Russian Federation

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Is it really so beneficial to use export financing instruments in Russian Federation?

“The interest of the exporter is to obtain an advance payment for the goods, and the importer’s risk is the possible failure of the exporter supply and appropriation of the money. Similarly, if the exporter provide a trade credit to the importer, importer may refuse to pay or unreasonably detain payment. Therefore, there is a need to attract intermediaries, in the export-import operations, who usually performs financial institution – bank and/or insurance company of the exporter. Broadly speaking, export financing can be defined as a set of insurance, financial or guarantee arrangements which allow to make the delivery, minimizing export-import risks on both sides. Increasing interest in this type of funding is due to the fact that other forms of fundraising, such as IPO, Eurobond issue or syndicated loans became less available and more expensive in post-crisis period. At the same time, export financing may also attract companies with average turnovers that do not have enough capital to use expensive types of fundraising” (Kuznetsov, 2014).
“The main advantage for the importer is a cost of the financing, because it is much lower than the cost of direct loan. Moreover, export financing contributes to the long-term development of the enterprise and to an increase of its competitiveness. As for a bank, export financing instruments allow the bank to earn 1,5% as a margin and revenue from the organizing of the transactions, the positive moment is that a Russian bank is secured from the risk” (Kuznetsov, 2014).
Can you give a forecast of the development of the trade finance and documentary transactions of Russian market for the next few years?
“In general, I can see a variety of evidence that proves that export financing market is developing and it is aimed at avoiding the usual-established schemes, seeking to expand the boundaries of international business. New exporters/importers markets, such as Russia, are developing, as well as traditional markets for export financing. Many projects already exist or are only in the development stage. I am sure that trade finance market will be actively developed during next few years; funding levels will recover to pre-crisis level and surpass it. Companies will be actively use different financial instruments, including pre-export, however, the post-import financing under the coverage of export credit agencies will prevail. I think before the end of 2014 the market significantly surpass pre-crisis period, 5-10%” (Kuznetsov, 2014).

Interview with a financial consultant Alexander Ageev.

The interview was conducted with Alexander Ageev, who is a high-level professional in finance consultancy. He has been working as Director of the trade department in one of the banks in Saint-Petersburg and as a Financial Consultant of the CEO of biggest electricity equipment producer in Russian Federation. The goal of the interview was to get an objective view on the whole Export Financing sphere in Russian Federation, the development of Export Financing in Russia, main instruments that ate used and theirs efficiency, as well as the perspective and trends of Trade Finance in Russia in the upcoming year.
Can you briefly characterize the export in Russian Federation, is level of export is falling? And how do you think Russia has to support our business in that case?
“Main trading partner of Russia for many years now is Europe. However, if you ask ordinary Europeans what sells our country, the answer is likely to be the same: oil, gas and other natural resources, someone might remember a Kalashnikov rifle. However, if we are talking about export performance as a whole, we cannot say that it falls. Moreover, if we are talking about engineering exports or exports associated with high technology, it even has a tendency to increase. If we are talking about such industries as metallurgy, coal exports, these sectors are experiencing hard times nowadays. I would not say that Russian exports reduced somehow globally. Such a phase characterized the 90s, when the Russian raw exports decreased significantly. Right now, we can rather say that it does not grow rapidly enough” (Ageev, 2014).
“Within the framework of export financing, Russia can support our exporters with a range of financial products. The main financial product is financing the buyer of Russian industrial products abroad. For example, take some of the Russian manufacturer of vehicles, machinery or equipment, which sells its product in a foreign country. Therefore, our lender in this situation will be a foreign company, in other words – the buyer. Moreover, I can say that documentary operations also play significant role, because sometimes exporters do not even need a pure form in lending – buyers can fully pay for their own contracts. However, there are several types of guarantees that are often needed to Russian exporters abroad. For example, such types of guarantees, as a guarantee of contractual obligations, the guarantee refund” (Ageev, 2014).

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What can you say about the emergence of Russian Credit Agency?

“With the emergence of Russia’s own export insurance agency created by analogy with the world’s leading ECA, for the first time exporters get a marketing tool to promote their sales abroad and strengthening active position in core markets. At the same time, the emergence of EXIAR formed a need to develop a new infrastructure that ensure the generation of export-oriented projects and linking the commercial and financial aspects of the export transactions. I personally believe that the emergence of Russian Credit Agency will help our national banks, such as SBERBANK, not only to consolidate the leadership in the area of export financing in Russia, but also to compete with major western banks. Additionally, I can say that nowadays Russian banks finance only 10% of the Russian export, while the remaining 90% are financed by western competitors” (Ageev, 2014).

1 Introduction .
1.1 Background
1.2 Problem discussion .
1.3 Purpose
1.4 Delimitation .
1.5 Perspective .
1.6 Definitions
1.7 Disposition
2 Frame of reference
2.1 Theoretical fundamentals of Export Financing
2.1.1 Trends and challenges of financing foreign trade in Russia
2.1.2 History of ECA and the modern international system of export credit
2.1.4 ECA risks
2.1.5 Theoretical basis of Export Financing .
2.2 Methodology of Export Finance structuring in Russian Federation
2.2.1 Participants of Export Finance
2.2.2 Main characteristics of long-term financing covered by ECA
2.2.3 Typical models and structures of Export Financing
2.3.4 Benefits of Export Financing
2.3.5 Due Diligence of Export Finance transactions
3 The Methodology .
3.1 Methodological considerations .
3.2 Data collection analysis .
3.2.1 Primary data
3.2.2 Secondary data
3.2.3 Sampling and selection of respondents
3.3 Conducting the interviews
3.5 Quality of investigation
4 Empirical findings
4.1 Evaluation of the cost-effectiveness of export-finance tools in a Russian commercial bank
5 Analysis .
5.1 Evaluation of the cost-effectiveness of export-finance tools
5.2 Interview analysis
6 Conclusions
7 Bibliography