While few corners of the world have proved immune to the global financial crisis, some regions appear to have suffered the brunt. With currencies crashing and commodities markets – the very backbone of some countries’ foreign trade – collapsing, it’s not surprising that the trade finance flow in Central and Eastern Europe (CEE) has dried to a meagre trickle, writes Helen Castell.
Local banks in Central and Eastern Europe have collapsed, been nationalised or simply stopped lending out of choice. Corporates have been left saddled with huge foreign currency debts and shrinking demand for their produce. Foreign commercial banks have exited en masse, leaving export credit agencies (ECA) and development banks like the European Bank for Reconstruction and Development (EBRD) to try and plug a now gigantic liquidity gap.
“There is a huge liquidity gap for corporates who need financing, and cannot get financing from local banks,” says Rudolf Putz, head of the trade facilitation programme at the EBRD in London.
Weak commodity prices and demand have made it harder for countries in Central and Eastern Europe to sell their produce, while shrinking demand within the region – especially since many local economies have suffered big currency depreciations – means that imports of foreign consumer goods and machinery has also dived.
Local banks in the region have meanwhile seen their own liquidity dry up as foreign commercial banks pull back their participation. They have also become very wary of lending to local corporates, whose risk profile is now very high.
“Foreign commercial banks are now unable to lend as much liquidity to our countries of operation as they have been in the past,” says Putz. Such countries “are strongly dependent on funding from foreign commercial banks. And since foreign commercial banks need now their own liquidity for their own clients in their own countries, they don’t have sufficient liquidity left for financing of trade in the CEE”.
The EBRD is helping close the liquidity gap through lending to the local banking sector. Together with the World Bank and EIB, the bank pledged in February to provide up to €24.5bn in extra liquidity to the CEE, mainly through supporting local banks.
According to Putz, the biggest share of the funds will go to Russia, Kazakhstan and Ukraine, but also smaller countries such as Georgia and Belarus will benefit.
A wider range of countries are now calling on EBRD support though. “We may see some new demand in the next weeks and months from the Baltics, from Southeast Europe and perhaps even from Central European countries,” Putz notes. “For example, we are just looking at a new facility for a bank in Croatia that in the past had sufficient own liquidity.”
Assistance for the EBRD is much appreciated by local banks. “Special programmes like EBRD’s trade finance programme are very useful,” says Sergei Sisoshvili, vice-president – international business at Transcapitalbank in Moscow.
Praising its “flexible, advanced and sensitive approach to local banks’ requirements”, Sisoshvili says that not only does the EBRD help plug the liquidity gap left by international commercial banks, but it helps boost a local bank’s image as a trust-worthy institution, which can play a role in attracting foreign commercial banks to work with them again.
“The EBRD is quite flexible – they’re not bureaucratic,” says Arthur Iliyav, deputy chairman at Raffeisen Bank Aval in Kiev. “We’d like to work more and more actively with them – if we can find the right deals.”
ECA involvement is very important in the region, says Andrew England, head of global transaction banking CEE at UniCredit Group. “Because to a certain extent some of the infrastructure projects have to go ahead. And if an ECA can help cover a big percentage of the risk, then that really helps banks.”
In countries like Ukraine, “credit has pretty much dried up”, England notes. The blame for this, however, rests as much with how their economies were structured as with the global financial crisis, he argues.
“Economies which have not been built in more fundamental businesses have really been clobbered,” he says. “They’ve been very dependent on easy credit and to a certain extent on projects related to construction,” both of which have collapsed in current market conditions, England observes.
As well as struggling to compete with China for its export markets, Ukraine relied on steel, which in turn relied on construction activity. This is also seen, to a lesser extent, in economies like Romania.
Massive foreign currency borrowing has also hit the region hard, especially in Ukraine, where the local currency has depreciated by some 50% over the past year. The country is facing the acute problem of how they can pay back their foreign borrowings, with Hungary, Romania and the Ukraine all tapping IMF support to meet their currency obligations.
Central banks meanwhile have taken over the biggest banks in Kazakhstan and Ukraine.
Observing developments in the region, Geoffrey Wynne, partner – head of international trade and export finance at Denton Wilde Sapte, comments, “Much of the chaos was caused by over-lending, inflated prices and careless deals. And if the banking systems in some of the CIS countries have problems, there will be more hurt before you turn it around again.”
However, Wynne argues, if you compare the region’s troubles with Russia’s 1998 crisis, when 4,000 banks collapsed, it puts today’s crisis in some perspective.
Almost all corners of Ukraine’s economy have been affected by the global financial crisis, says Tatyana Slipachuk, partner – international trade and international arbitration practices, at Vasil & Kisil Partners in Kiev.
Across industries including steel, chemicals and agriculture, Ukrainian businesses have suffered significant losses as domestic and foreign demand for their products have dropped sharply, export markets have effectively closed, and credit has become harder and more expensive to access.
The country’s banking system has been hit hard, with a number of banks taken under the temporary administration of the National Bank of Ukraine. Others have reduced their lending, and raised both the price of and conditions required to obtain what credit is still available.
Transactions have also been delayed as Ukrainian banks take longer to verify the creditworthiness of potential borrowers. The additional security requirements many also require has made transactions more expensive.
“It goes without saying that the number of trade finance transactions has decreased tremendously,” Slipachuk adds.
“Ukrainian banks are in a very bad shape,” says Vyacheslav Korchev, managing partner at Integrites, a law firm in Kiev that works largely with ECAs to help them assess the risks associated with supporting deals in Ukraine and to structure transactions accordingly. “ECAs want to know if Ukrainian banks have enough ability still to provide some sort of role in trade finance at all.”
“The risk has rapidly increased since last summer,” and while some deals are still going ahead, pricing is much higher, Korchev notes.
As an Austrian-owned bank, Raffeisen Bank Aval’s problem does not lie with liquidity, but with finding quality deals to back, says Iliyav. “We have limits – big ones, deep ones … but we don’t utilise them, to be honest.”
The introduction of heavy customs duties and strict restrictions on foreign-currency letters of credit for entities without receivables in foreign currency has seen imports to Ukraine plunge. In April, the Ukraine government banned FX forwards until next year and has also forbidden Ukrainian banks to finance foreign currency loans to non-resident legal entities.
“Together these changes make it almost impossible to do classical trade finance on a larger scale,” remarks Iliyav.
And although the government’s fight to boost foreign currency reserves and tackle capital flight from the country are understandable, the resulting slump in imports of machinery, are counterproductive, Iliyav argues.
However, Ukraine’s trade finance flow has not totally dried up. Most financings are now small-scale and focused on exporters.
Iliyav also explains that current deals don’t get advertised, noting that the first banks to get nationalised had been the heaviest advertisers of deals, creating a current distrust of publicity.
The key difference between this crisis and the Russian crisis of the late 1990s is the massive proportion of foreign currency debt involved, plus the fact that trade finance loans now touch on a much wider variety of countries, Iliyav observes.
“This is not just Ukraine’s crisis – it’s a world crisis,” he argues. “In the past, if an export market broke down, you could find another market to sell to. Now it’s very difficult because everyone’s in the same situation.”
Mariam Megvinetukhutsesi, director, investment banking, at Georgia’s TBC Bank, adds, “The worldwide financial crisis has substantially influenced the ability of Georgian banks to borrow on international financial markets.
“There has been a significant impact on our clients, especially those in need of long-term funding. Even working capital financing availability has become scarce.”
She explains that the bank is continuing to work actively with development finance institutions to obtain long-term liquidity and trade finance lines.
As in other regions, Georgia has a mounting level of commercial debt that will need to be refinanced or repaid this year. Megvinetukhutsesi comments, “Some 40% of the region’s pre-crisis financing activities were trade-related, and only 50% may be refinanced this year.”
It’s not all grim in CEE however, and it’s important to differentiate clearly between the different economies of the region, notes UniCredit’s England. Those of Czech Republic, Slovakia, Lavinia and Poland are, “much better placed, some of them more so than Western Europe”, he argues.
He adds that although Russia’s economy has contracted, it has a comparatively strong balance of payments.
The higher cost of funding in Russia has affected local companies’ ability to attract working capital. However, weak demand and subsequent cuts in production also mean that such companies often want to borrow less anyway.
Transcapitalbank’s Sisoshvili argues that Russian companies have adapted quickly to changing market conditions.
“The Russian risk of default is considerably low.
“On the micro-level, everything depends on the professionalism of the companies’ management, and their willingness to restructure their own business,” he says.
Restoring faith in the market
Whatever local firms do to get their own houses in order, and what ECAs and development banks do to support trade finance flow, the biggest challenge facing Ukrainian trade finance is bringing western banks back, argues Raffeisen Bank Aval’s Iliyav.
“Most of the western banks have cancelled their trade limits for exporters,” leaving them unable to finance the transport of goods. “And there’s nothing we can do to help them as a local bank.”
The pull-back of western banks is unjustified, he argues. “It’s almost a risk-free business,” he says. Financing the transportation of goods by ship “is insured. It’s not Ukrainian risk. It’s the risk of the counterparty – this can be hedged.”
“We have an important role to keep organisations going,” says UniCredit’s England. “We’re not looking for new lending, obviously. But we’re very conscious of the need to support clients at a difficult time. If we just pulled funding the situation could get a lot worse – and not just for them but for the bank.”
“I wouldn’t say there’s no new lending. But our activity is very much restructuring lending around clients that we feel are going to make it through the blip.”
And although conditions are still severe, and no one is talking of a real return for new trade lending soon, there are early signs that the worst may be over for CEE.
In mid-to-late April, “there’s been a slight easing in the view on country risk” in many of the region’s economies, says England. “The situation’s become slightly better.”
The fortunes of CEE partly hinge on the health of western economies. Countries like the Czech Republic, Slovakia, Poland and Slovenia have become “extensions of Western Europe in terms of production capabilities”, particularly in the automotive industry, England explains.
An overhaul at home is desperately needed, and there is evidence that this is happening. But only once deficits, foreign currency borrowings and inflation are all hacked back will the region really start its recovery.