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The CIS region has been rocked by a number of financial crises. But in Kiev, Ukrainian exporters and trade finance professionals are starting to see the light at the end of the tunnel, writes Michael Turner.

Ukrainian exporters, banks and international institutions converged on Kiev in November 2010 to attend the Trade Finance: Anatomy of a Deal conference hosted by law firm Integrites. The conference was geared towards raising awareness amongst Ukrainian exporters about the trade-related products available to them from banks, law firms and insurance agencies.

One of the keynote speakers, Dominique Menu, head of BNP Paribas’ representative office in Ukraine, highlighted the main challenges that the country faces. One of the biggest is the lack of investment in infrastructure: according to the country’s export-import bank, steel exports have grown by over 30% year-on-year, and yet investment into steel factories remains low.

This, Menu argued, is a critical factor that needs addressing for Ukraine to continue in its upward GDP growth of 5% a year. This is particularly important as China, one of Ukraine’s largest export markets for steel, is expected to produce 50% more steel in 2014 than in 2009.

Ukrainian risk

Another significant challenge for international organisations raised by all speakers was the direct negative effects of the large-scale defaults during the financial crisis and the indirect effects of bank defaults elsewhere in the CIS, such as Kazakhstan.

“Only one in ten companies make the decision to restructure their debts and settle them very quickly.”

“[Ukrainian] businesses prefer Ukrainian banks and suppliers rather than foreign ones when choosing who to pay to first. Only one in ten companies make the decision to restructure their debts and settle them very quickly; the others start playing games,” says Viacheslav Korchev, managing partner of Integrites.

Speakers from the export credit agencies of Germany, Italy and Finland were unified in the opinion that while they are open for the possibility of Ukrainian corporate risk, company transparency must reach the benchmarks of international standards.

The company information that ECAs require to perform proper due diligence is so far removed from what Ukrainian businesses currently offer that the ECAs won’t be guaranteeing corporate risk any time soon.

But the problem doesn’t just lie with the country’s corporates; in October 2010 Ukraine’s sovereign debt was the world’s riskiest, according to debt insurance costs. This was reflected in external organisations’ risk appetite towards Ukraine at the conference.

Furthermore, the ECAs were in agreement that there are very few banks in Ukraine with which they would definitely be willing to do business with. However, the state-run Export-Import Bank of Ukraine (Ukrexim) was consistently cited as a bank that the ECAs were comfortable dealing with.

“We collaborate with around 35 main export credit agencies,” Sviatoslav Kuzmych, deputy head of financial institutions and trade finance at Ukrexim, confirmed to GTR.

Anja Pakkala, senior adviser at Finnvera, noted to the conference’s audience that the agency would like to work with more Ukrainian banks, as this would inevitably lead to more deals being signed.

But in order to do so, the banks would need to show that they are well capitalised, transparent in their operations and unlikely to default on payments.

However, due to a number of factors including corporate defaults through a range of sectors, banks are finding their loan books are shrinking – which in turn increases the ratio of non-performing loans.

“We still see an increase in the volumes of loan loss reserves in the banking system as a reflection of the weakening of the loan book quality; however, this is with a slowing speed,” says Ukrexim’s Kuzmych.

“There are a limited set of sources for the banks for quick loan-workouts and, despite the comfortable level of liquidity, an appreciable growth of financing can be expected after the improvement of the banks’ portfolios.”

Kuzmych explains that a factor compounding the problem is the clear divide in customers in Ukraine: “You can find different types of customers now. One is companies with well-known names, and in many cases they don’t need a lot of financing; they can finance their projects themselves. Definitely, they are attractive for the banks, which struggle to get such customers.

“Then there’s the other group of good firms, which can’t easily come through the internal procedures of evaluation of credit risks, which have become much tougher as a result of the crisis. For the time being many banks cannot afford to finance these customers on a full scale.”

Multilateral help

However, the outlook in the country isn’t entirely bleak. Ukraine has had consistent and necessary aid from multilateral organisations; the European Bank for Reconstruction and Development (EBRD) is the country’s biggest investor with an approximate US$4.6bn portfolio in the country to date. Due to the nature of EBRD lending, the money has generally gone towards the type of much-needed infrastructure that BNP Paribas’s Menu highlighted as being so necessary for the country’s prosperity.

“Over the years, the EBRD has become Ukraine’s largest financial investor, a long-time partner helping to facilitate economic growth and increasing investor confidence in the country,” the EBRD says in a statement, before reiterating its plans to continue supporting the Ukraine. “As the financial crisis unfolded in 2008 and 2009, it was important for Ukrainians to know that this commitment and confidence was not only for the good times.”

Kuzmych at Ukrexim continues: “It’s like a discreet optimism. We have up to 5% GDP growth, but we’re estimating higher than that next year. The level of cooperation with multilaterals such as EBRD and the IMF is significant and quite positive for Ukraine.”

The IFC also sees the potential that Ukraine, and Ukrexim in particular, has. At the end of November 2010, the World Bank member doubled Ukrexim’s limit for its guarantee facility under its global trade finance programme to US$80mn.

The IFC has three distinct areas that its strategy in Ukraine focuses on; helping to maximise agribusiness potential, promoting energy and cleaner finance and increasing access to finance in the country.

“IFC’s trade guarantee has helped us support Ukrainian exporters during times of uncertainty following the global financial crisis,” notes Olena Kozoriz, head of financial institutions and trade finance at Ukrexim.

Furthermore, it is rumoured that the Ukrainian government is looking to create an export credit agency for the country, which conference delegates made clear that they would gladly welcome – although at the time of writing this had yet to be officially confirmed by any state-run organisations. GTR