UK corporates are increasingly looking to capitalise on the remarkable potential of trading with partners in Central and Eastern Europe, but heightened counterparty risk and complex local markets pose considerable challenges. The key to surmounting these, according to David Vials, Head of Corporate Coverage for UK & Ireland at UniCredit, is using digital tools such as the BPO to mitigate risks, while enlisting the support of a trusted partner to steer a course through regional idiosyncrasies.


The Central and Eastern European (CEE) region is home to some of the most high-potential markets in Europe – and corporates in the UK are ready to grasp the opportunities that lie in wait. Tapping the region’s considerable potential, however, entails a number of challenges – not least due to the accentuation of counterparty risk when transacting with new partners. What’s more, the diversity and complexity of local CEE markets remain a pressing issue in a region marked out by its fragmented regulatory and cultural landscape.

As UK corporates seek to negotiate this landscape and mitigate the risks involved, treasurers will likely turn to traditional settlement methods such as the letter of credit and letter of guarantee. Yet there is a range of new tools they would do well to consider, with the Bank Payment Obligation (BPO) and digital trade finance platforms opening up new, fast and highly efficient options for mitigating counterparty risk. Meanwhile, even as they embrace these tools, UK corporates will also need to look to their banking partners’ experience and insider knowledge as they navigate the CEE region’s tricky terrain.


Central and eastern promise

Certainly, it’s a challenge worth undertaking, as evidenced by the rapid increase in UK exports to the CEE region, with goods exports doubling to over £16bn in the last decade and service exports trebling to GBP £4bn over the same period. And it’s easy to see why. The CEE region boasts a customer base of over 100 million consumers, a combined GDP in excess of £1tn, and annual growth rates that far outpace the European average. Slovakia, for instance, averaged 3.6% annual growth in the decade to 2016, compared with a European average of 0.8%.

What’s more, CEE countries tend to have relatively little sovereign debt – typically ranking comfortably above the European average. At the same time, these countries are the beneficiaries of a considerable amount of EU funding – with a pledged £170bn between 2014 and 2020 contributing to strong prospects in terms of infrastructure, energy and innovation. No surprise at all, then, that government trade body UK Trade & Investment (UKTI) is currently seeking to double trade between the UK and CEE countries – targeting volumes of £30bn by 2020.


Barriers to business

But before the UK’s corporates can take advantage of the opportunities on offer, they must have a clear strategy for dealing with the region’s challenges. For a start, corporates must contend with the numerous cultural and regulatory differences that abound not only between the UK and the CEE region, but also among the different CEE countries themselves.

Indeed, The Economist Intelligence Unit’s recent report on business risks and opportunities in Central and Eastern Europe notes a number of bureaucratic challenges for businesses, including arbitrary legislation, sector-specific taxes, and overly-complex tax incentives. And, while broader harmonising initiatives, such as EU directives, have had a standardising effect, differences in countries’ legal frameworks often mean that these rules take on subtle nuances once they are integrated into local law. The resulting landscape is one that UK corporates must traverse with care.

At the same time, the CEE region exposes these companies to a whole new range of trading partners – requiring extra care to ensure they are not overexposed to a particular client, market or industry. The same holds true on a transaction-to-transaction basis, with counterparty risk at its highest when partners are unfamiliar.


Moving to digital risk mitigation

Faced with such challenges, many treasurers may instinctively turn to traditional risk-mitigating instruments such as letters of credit and letters of guarantee – both of which are tried and tested solutions. However, they should also consider the wider range of new, digital tools at their disposal. For instance, the BPO, which sees the importer’s bank undertake an irrevocable promise to make a payment on behalf of its client upon the matching of trade data, provides excellent cover against counterparty risk – effectively guaranteeing payment for the exporter.

Beyond this, BPOs also offer a raft of further benefits – with digital compatibility and streamlined processes making for a faster and more efficient transaction. What’s more, it also opens the door to a wide range of financing options, raising the value of receivables due to the increased security of a bank guarantee.

Certainly, initial feedback on the instrument has been overwhelmingly positive. With UniCredit having carried out the first BPO in Romania last year (and previously having worked on the first such transactions in both Italy and Germany), we have seen corporates recommend all aspects of the BPO – from its speed, simplicity and financing capabilities, through to the ease of initial implementation.

For example, one of our German clients at UniCredit used the BPO’s financing capabilities to iron out payment terms with one of its buyers. The buyer required extended payment terms to cover its production cycle, while our client’s business model depended on a 30-day net agreement. The BPO, however, enabled UniCredit to refinance the buyer – covering their costs over the disputed period. As a result, our client was not only able to agree terms, but also to increase the volume of business they did with their buyer.

We have also learnt that it is important for a bank’s BPO processes to be fully digitally enabled – ensuring payments can benefit from straight-through processing and avoiding the bottlenecks created by manual steps. UniCredit, for instance, has invested in a digital platform for exactly this purpose – facilitating the execution of BPOs entirely via digital means.

Of course, certain traditional financing techniques can also benefit from digital advances. UniCredit, for example, is developing a digital trade finance portal, encompassing all aspects of working capital finance. UK corporates can take advantage of this kind of offering in a number of ways – selling their CEE receivables, for example, to offload the associated counterparty risk.


Charting a course

With counterparty risks under control, UK corporates trading in the CEE region must still contend with the region’s byzantine cultural and regulatory landscape. An expert partner – with a comprehensive understanding of both the company’s domestic and target markets – will be invaluable here.

Banks with an on-the-ground presence in a target market are particularly useful in this respect – offering an inside track on negotiating tricky local regulations and engaging with clients whose cultural context can lead to different standards in terms of service level, terminology, and inter-personal interaction.

Certainly, this is something UniCredit clients tell us they value again and again – calling on our unrivalled footprint and expertise in CEE markets such as Bulgaria, Croatia and Bosnia-Herzegovina (where we are ranked number one in terms of market share), as well as Hungary and Serbia, where we also hold top-three positions in the same rankings.

For UK corporates looking to fuel their growth through trade with the CEE region, expertise such as this, combined with fast, efficient risk mitigation from fully digital trade finance tools, form the keystones of a solid strategy. With these in place, the path is clear for them to push forward with their plans – realising the potential of these burgeoning markets.