As European banks continue to struggle with rising funding costs and pull back on trade finance, banks in the CIS region will find new ways to diversify their funding strategies.
- Marko Gucijan, director, head of project and export finance, global banking, HSBC
- Sviatoslav Kuzmych, deputy head of financial institutions and trade finance, Ukreximbank
- Julia Petrova, head of global transaction banking, UniCredit Russia
- Rudolf Putz, trade facilitation programme head, EBRD
- Olga Strekalova, director, trade finance and forfaiting, VTB Bank
GTR: How have the eurozone problems affected Russian and CIS trade finance? Has it reduced appetite for Russian/CIS risk among international lenders?
Kuzmych: The decreasing volumes of trade in the EU will have a negative effect on CIS trade. Taking into account that many EU-based banks are active participants in trade finance deals in the Ukraine, now they have their own internal issues, some of them can potentially reduce their portfolios.
For the local market, the number of local banks accepted as counterparties by foreign trade finance players are limited to the top-tier banks of the country. In any case, the banks from the EU which are focused on the long-term perspective will continue to do trade finance business in the Ukraine.
Strekalova: The number of FIs that used to support our trade finance business worldwide has decreased, and global players have minimised their trade finance activities outside of their domestic markets. Tenors have shortened, foreign FIs’ lending capacities have been reduced by their own liquidity and capital constraint. Prices, especially for funded deals, noticeably increased.
Putz: Funding costs in the eurozone have increased and many foreign commercial banks have reduced their trade finance facilities for borrowers in Russia and the CIS region. However, the reduced availability of trade finance provided by foreign lenders is also the result of increased capital requirements of foreign commercial banks in their home countries, which also limits their ability to lend to Russia and the CIS region.
Petrova: The eurozone crisis has affected trade finance more in regards to Russian borrowers having to pay more, rather than the appetite itself.
GTR: How have these issues affected top-tier Russian corporates and are they finding it more difficult to raise money?
Putz: Top-tier Russian corporates are always good customers for local and international banks, but because banks have had to increase their funding costs, these corporates now have to get used to the increased cost of financing. So top-tier corporates will have no problem raising money but they might have to pay a higher premium for it. However, second or third-tier private borrowers with a lower credit standing are already finding it more difficult to cover their trade finance requirements.
Strekalova: I fully agree with Rudolf, given the ongoing liquidity concerns within the eurozone and the high cost of US dollar funding. Many European lenders cannot afford to lend below 200 basis points (bps) to the top-rated names in Russia. It means that Russian borrowers now have to pay up if they wish to tap the market or look for other solutions, such as the bond market, which can offer some liquidity at the moment. In light of the current market conditions, a number of big Russian players decided to hold off their borrowing activities.
Petrova: I don’t think we can say that risk appetite towards top-tier Russian corporates has diminished but there is a clear upward trend in financing costs.
GTR: Are borrowing costs rising? Are corporates rethinking their funding strategies?
Gucijan: Borrowing costs for Russian corporates have definitely been rising in line with higher capital costs for European banks, which were historically most active in the Russian Federation. Russian corporates started to diversify their funding ever since the first wave of the crisis. ECA financing has become a cornerstone for Russian corporates’ long-term financing strategies. We have seen names which in the past would have rather considered capital markets issues now heavily utilising ECA-covered financing.
Kuzmych: In accordance with the information from the foreign banks, some of them are in the process of reconsidering their pricing due to their capital requirements. We’ve also seen a 15-20% rise in the cost of funding for trade financing in particular.
Ukrainian corporations traditionally finance their needs from different sources, but for the present moment due to the fact that bond and syndicated loan markets are too expensive or not even active, they are focused on bilateral deals with parent or partner companies to the local market (financing in foreign currencies and Ukrainian hryvnias).
Lending in other currencies (Rmb in particular) is probably different in the Ukraine compared to Russia because we are just at the beginning of the road.
Petrova: Yes, borrowing costs have been rising in the last six months. However I don’t think we have been observing massive changes in corporates’ behaviour towards their funding strategies.
Strekalova: The internal funding costs of the biggest European and US players has increased from 20 to 100 bps liquidity premium over Libor for 12 or more months. Trade finance deals and even banks in the eurozone quote an extra 15-70 bps for euro-denominated transactions. As in 2008-09, the trend of switching to the cost of funds rate as a base, while quoting trade finance deals, has reappeared.
We are witnessing Russian corporates switching to making settlements in national currencies with their counterparties. There is also growing interest in rouble financing, or even Rmb-supported loans.
Putz: Russian corporates will also have to diversify their funding strategies; in the past some of the larger top-tier Russian corporates strongly relied on syndicated loans, but this market is currently shrinking.
GTR: Russia’s domestic market grew stronger throughout last year, is this set to continue into 2012?
Putz: EBRD forecasts an economic growth of 4.2% in 2012, and it is similar over the medium term. The growth expectations in Russia are good, and growth will be higher than in the eurozone − a good sign of stability in the Russian economy.
Petrova: We have indeed seen a stronger growth of domestic trade finance business due to its greater penetration into medium and small-sized businesses, which then become more frequent users of trade
Strekalova: 2012 will definitely bring up both challenges and positive changes to the Russian trade market, due to Russia’s WTO entry in November 2011 and the official start-up of the United Economic area of Russia, Belarus and Khazakhstan. The official economic growth figure for 2012 is set at the level of 3.7%.
GTR: Do you see new international banks entering the Russian/CIS market?
Putz: Currently there are hardly any new international banks entering the Russian and CIS markets, except for Chinese banks. China has already become the largest exporter to Russia, so Chinese banks are establishing branches in Russia and they’re becoming more interested.
Petrova: Asian banks with cheaper and longer US dollar liquidity have been particularly active in the deals with top Russian borrowers (both from FI and corporate sectors).
However, it does not entail full-scale banking operations set-up; it’s more of a book-building pattern of those banks pertaining Russian assets.
Kuzmych: I wouldn’t say that 2012 will be the biggest year for new international banks entering the Ukrainian market. On the other hand, if we speak about the new names that are now entering the market, if some banks decided to exit we will definitely be interested to see how the new names will work with local partners in the trade finance segment to fill their places.
GTR: Since Russia’s first export credit agency Exiar opened at the end of last year, which sectors are benefitting most from ECA investment?
Strekalova: The producers of goods and services that require medium and long-term financing will definitely benefit from Exiar’s start-up, such as exporters of complex and agricultural machinery.
Different financing schemes were always available for main Russian export market players, primary resources and commodity sellers both in the domestic and international markets, while all other producers were limited to classic loans and Roseximbank’s support.
Petrova: Given that Exiar has stated that support will be extended to non-commodities-related industries, it should benefit most those export-oriented industries where Russia is competitive in the international markets.
Putz: Exiar’s support will be required not only for financing the exports of large Russian companies, but also for small and medium-sized private Russian producers.
GTR: Will the ECA change the way trade finance has operated in Russia?
Putz: Exiar’s support will be useful for Russian exports that cannot be financed by Russian commercial banks, either because the risk is too high, the tenors are too long or the amounts are too high. Exports will not just focus on commodities, they will also include value-added goods, such as machinery and equipment.
Strekalova: I think it will change the picture of Russian trade finance since it will not only influence the tenors of export deals but also, hopefully, it will bring more local banks onto the trade finance stage. The banks will be ready for more active support of their export-oriented customers once an insurance mechanism, aligned with international practices, is in place.
However, the creation of Exiar obviously does not solve the liquidity problems that have squeezed the Russian markets these days – that’s why we should not expect drastic alterations and big export finance figures straight away.
Petrova: We expect that Exiar will help obtain longer tenors and larger amounts when financing international trade of Russian exporters.
GTR: Since the high-profile restructurings in Kazakhstan and the Ukraine, are international lenders returning to the market? Or are they still wary?
Kuzmych: I think the global financial crisis of 2008-09 and the restructurings seen in this region has made all of the banks more wary and conservative in evaluating their risks.
We are obviously looking to increase the presence of international lenders in Ukraine. I think there has been a lot of negativity surrounding these restructurings, especially at the middle of the crisis but it’s time to look forward and past this negativity.
Now main international lenders − the IFIs and commercial banks − are here and I do hope that bearing in mind the size of the economy and the perspectives of the market, the number of the banks who want to reap the benefits of being here will eventually increase.
Petrova: There is now a clear trend that where international lenders are supporting transactions in this region, the structures and goods flows are transparent, the risk is understandable and synthetic structures are not used.
Putz: We are trying to motivate international lenders to lend to Kazakhstan and the Ukraine again as they still need foreign lenders, but from my experience the international lenders are still very cautious. Banks are returning to the market, however they only accept borrowers with good credit standing and only offer limited amounts of trade finance with tenors of up to 6 to 12 months.
Additionally, many of them offer trade finance only for exports from their countries and will not finance intra-regional trade transactions, such as trade between Kazakhstan and the Ukraine.
Strekalova: In most CIS countries, Russia excluded, only two or three top names have access to international trade finance, while other players get adequate risk coverage from multilaterals like EBRD, IFC or large Russian banks.
The amount of intra-regional trade supported by the biggest European and US banks and Russian players has decreased. GTR