2004 Survey: Financing Deals in Eurasia


October 2004 

by Philip H. de Leon

 Weak banking systems and underdeveloped financing environments in Eurasia create problems for U.S. companies trying to conduct trade transactions and conclude investments deals. In 2003, BISNIS representatives in Eurasia conducted a unique survey on how deals are financed in Eurasia and found that the lack of available financing is a major hurdle to the development of trade with Eurasian companies. The goal of the 2003 survey was to help U.S. exporters gain an understanding of from where financing could come and to whom it could go. In 2004, BISNIS conducted a new Eurasia Finance Survey to check on progress, look at new trends, address the issues of consumer credit and credit history, and widen the survey by including Tajikistan and Uzbekistan. Overall, the 2004 Survey shows that improvements have taken place in financing deals in Eurasia, but the speed of change is uneven across the region and many obstacles to financing deals remain.

 
The Survey

The 2004 BISNIS Finance Survey was conducted in eight countries (Armenia, Azerbaijan, Georgia, Moldova, Kazakhstan, Kyrgyzstan, Tajikistan, Ukraine, and Uzbekistan) and in nine major Russian cities (St. Petersburg, Nizhny Novgorod, Samara, Yekaterinburg, Novosibirsk, Tomsk, Khabarovsk, Vladivostok, and Yuzhno-Sakhalinsk). It featured a comprehensive list of questions on how Eurasian companies finance purchases of U.S. goods and services. The survey included such questions as: How is business financing obtained? Is leasing a significant vehicle for business finance? Is consumer credit available in your country/region? The survey also sought to capture information about the banking systems in Russia and Eurasia.


Positive Changes Are Noticeable

Compared with the 2003 BISNIS Finance Survey, the recent study found some positive changes taking place in the financing and banking situation in Eurasia. Some of these key developments are:

 
-    Higher minimum capital requirements for banks are leading to a consolidation of the industry through mergers and acquisitions.

-    Leasing is becoming more popular and, as a result of growing competition, procedures are being simplified and margins cut.

-    Access to funds from international financial institutions, such as the European Bank for Reconstruction and Development (EBRD) and the World Bank’s International Finance Corporation (IFC), and channeled through local banks has been increasing.

-    Greater competition is broadening the range of available banking services, such as investment and retail banking, mortgages, and consumer loans.

-    Measures are being taken to increase the role of banks in assisting small and medium-sized enterprises (SMEs) development as a means to foster economic growth.

-    Banks are opening branches outside large cities, increasing access to financial services.

 

But Striking Disparities Exist

These positive trends should not mask major disparities between countries and very often between cities of the same country. The reality remains that, in most Eurasian countries, the banking system is underdeveloped. Difficulties that are faced include:

 

-      For most countries, a shortage of medium and long-term capital is a major constraint to finance private businesses. The existing credit supply is far too small to provide a suitable environment for the development of SMEs.

-      The lack of trust in banks and the absence of guarantees given to depositors have resulted in large amounts of hard currency that are unaccounted for and untapped by the financial markets.

-      The absence of credit bureaus and the inability of banks to assess the creditworthiness of “new” clients lead banks to be very conservative, demanding unattainable collateral requirements and using dissuasive interest rates for short-term lending only. As a result, self-financing by internally generated cash is, for many companies, the only option available.

-      Restrictions imposed on foreign banks eager to enter the market prevent competition from being a motor for change.

 
Expected Developments


Little by little, each country is making positive changes, often initiated and/or aided by foreign development agencies and multilateral development institutions. Examples of important efforts to improve the banking and financing situation in Eurasia include:

 

-      The EBRD’s Trade Facilitation Program, whereby the EBRD provides guarantees to international confirming banks and, thus, takes on the political and commercial payment risk of transactions undertaken by issuing banks. This program has been instrumental in making small deals come through, including enabling a local bank in Tajikistan to finance the import of foreign equipment.

-      Azerbaijan is working on the development of payment systems, such as a national card-processing center for the payment of wages and pensions. This will increase non-cash payments and indirectly strengthen the banking system.

-      Leasing is seen as having great potential in some countries, particularly if it focuses on some of the strong industries of the country, such as agribusiness and food processing in Moldova and Tajikistan. The IFC, through its Private Investment Partnership technical assistance program, works on building local leasing expertise and has already trained thousands of leasing professionals, bankers, entrepreneurs, and government officials across 35 of the 89 regions of Russia and has a web site for leasing issues in Russia at www.ifc.org/russianleasing. The program also worked with public and private partners in Armenia, Georgia, Kyrgyzstan, Tajikistan, Ukraine, and Uzbekistan to draft new leasing laws and amendments and advocated for their passage.

-      Russia, with a growing middle class, is seeing an increased demand for consumer credit to purchase cars, electric household appliances, and medical services, or to renovate an apartment. New areas for consumer credit are to finance vacations and annual fees for health clubs.

 

The consolidation of the banking system and the adoption of adequate and enforceable legislation are expected to continue to be a top priority for 2005. The trend in many Eurasian countries and regions of Russia is toward SME development, as well as toward greater affordability of and accessibility to financial solutions. Staying informed about what financial options are available to potential importers in Eurasia could be the key to concluding a successful export transaction. U.S. companies should consider the financing situation of potential Eurasian customers instead of simply focusing on solutions generated in the United States and Western Europe.

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