eliminating obstacles to efficient trade finance in

UNITED NATIONSECONOMIC COMMISSION FOR EUROPE

COMMITTEE FOR TRADE, INDUSTRY AND ENTERPRISE DEVELOPMENT

ELIMINATING OBSTACLES TO EFFICIENT TRADE FINANCE IN TRANSITION

ECONOMIES: PRACTICAL ASPECTS

PROCEEDINGSOF THE SEMINAR

held on 4 and 5 May 2000 in Riga (Latvia)

Geneva/New York 2000

The views expressed and the designations employed in this publicationare those of the authors and do not necessarily reflect the views of the UnitedNations Secretariat nor do they express any opinion whatsoever on the part ofthe Secretariat concerning the legal status of any country, territory, city or areaor of its authorities, or concerning the delimitation of its frontiers or boundaries.

All material may be freely quoted or reprinted, but acknowledgement isrequested, together with a copy of the publication containing the quotation orreprint (to be sent to the following address: Trade and Investment PromotionSection, Trade Division, United Nations Economic Commission for Europe,Palais des Nations, Geneva 10, CH-1211 Switzerland).

UNITED NATIONS PUBLICATIONS

Sales No. E.01-II-E-4

ISBN 92-1-116772-8ISSN 1020-7384

ECE/TRADE/267

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CONTENTS

Page

Preface .............................................................................................................. v

Introductory Remarks by Ms. Danuta HübnerExecutive Secretary, United Nations Economic Commission for Europe ........ vii

Welcoming address by Mr. Bernhard GerdhardState Secretary, Ministry of Economy, Latvia .................................................. xi

Welcoming address by Mr. Zenon OlbrysPresident and Chairman of the Board, Baltic Transit Bank, Latvia ................ xiv

Chapter

III. Important Features of Trade Finance in Transition Economies:Second Half of the 1990s. Note by the UNECE secretariat .................. 1

III. Short-term Payment and Credit Arrangements as Instruments ofTrade Finance: Some Practical Experiences in Different Groups ofCountries................................................................................................. 37

1. Mr. Beat Haenni,Retired Head of International Trade Finance and Credit Mana-gement, Novartis Pharma Services Inc (Switzerland)Trade Finance Consultant ................................................................... 37

2. Mr. Dmitry Latishev,Director, International Department, Baltic Transit Bank (Latvia) ..... 39

3. Discussion ........................................................................................... 43

III. Medium and Long-term Trade Finance: Available Schemes andProblems ................................................................................................. 51

1. Mr. Kenneth Owen,Head of Trade Finance Department, Hansabanka (Latvia) ............... 51

2. Mr. Tomas Dvorak,Deputy Financial Director, SKODA Export Co. Ltd (Czech Republic) 55

3. Discussion ........................................................................................... 58

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Page

IV Banks as Partners in Export Finance: the Experience of TransitionEconomies ............................................................................................... 59

1. Ms. Veronika Shemyakina,Head of Project Finance, International Business Department,Promsvyazbank (Russian Federation) ........................................ 59

2. Mr. Meirambek Karazhigitov,Expert on International Financial Institutions, Kazkommertsbank(Kazakhstan) ................................................................................... 60

3. Discussion ....................................................................................... 63

IIV. Government Support to Trade Finance: Direct Financing andExport Promotion Schemes1. Mr. Alexandru Vrabie,

Director, Bucharest Branch, Eximbank (Romania) ................... 672. Mr. Martin Drabek,

Senior Director, Banking Section, Eximbank (Slovakia)................. 69

3. Discussion ....................................................................................... 77

IVI. Government Support to Trade Finance: Risk Insurance andGuarantees ....................................................................................... 81

1. Mr. Jonast PlaciakisDirector General, Lithuanian Export and Import Insurance(Lithuania) ................................................................................. 81

2. Mr. Michael SpiveyDirector of Business Development, Eximbank (United States) ....... 83

2. Mr. Louis Habib-Deloncle,Chairman/CEO, Assurance, Finance et Développement (AFD)(France) ....................................................................................... 87

4. Discussion ...................................................................................... 92

VII. Summary of General Discussion........................................................ 99

v

Preface

The purpose of this series of trade and investment guides is to assist econo-mies in transition, as well as economic actors in other countries, in becoming famil-iar with best practices in the areas of trade and investment and related legal andcommercial practices. The guides are developed under the aegis of the United Na-tions Economic Commission for Europe's Committee for Trade, Industry and En-terprise Development and its subsidiary bodies.

The present guide was prepared by the UNECE secretariat, with substantialcontribution from Mr. Vassili Serebriakov, an intern with the secretariat.

This is the fifth guide. The preceding titles in this series are:

1. Trade Finance in Transition Economies: Practical Ways to SupportExports and Imports

2. Standards and Regulations in International Trade

3. Investment Promotion in Central and Eastern Europe and the CIS

4. The Polish Experience of Transition: Accomplishments and Problems.

These can be obtained from the UN Publications Service:

Geneva:Tel. +41-22-917 2613 – Fax. +41-22-917 0027 – e-mail: [email protected]

New York:Tel. +1-212-963 8302 – Fax. +1-212-963 3489 – e-mail: [email protected]

INTRODUCTORY REMARKS

Ms. Danuta Hübner,Executive Secretary, United Nations Economic Commission for Europe

It is my pleasure to introduce to you the proceedingsof the Seminar on “Eliminating Obstacles to EfficientTrade Finance in Transition Economies: PracticalAspects”. This Seminar took place in Riga (Latvia) on 4-5 May 2000. It was jointly organized by the UNECEsecretariat and the Baltic Transit Bank (Riga). The BalticTransit Bank as well as the Moscow-based Alfa Bankprovided financial support to this event.

Two features of today’s world have become particular-ly prominent in recent years. The first one is the speedwith which modern technologies develop. Moderntelecommunications and the Internet are rapidly trans-forming all aspects related to the international movementof commodities, labour and capital. Therefore, and this isthe second remarkable feature of today’s world, theeconomy is experiencing rapidly growing internatio-nalisation and globalisation of production and exchange,which have already now attained levels unthinkable adecade ago.

Both of these trends create tremendous opportunitiesfor individual companies, on the one hand, and for coun-tries liberating themselves from excessive governmentcontrols and autarkic trends, on the other.

In the context of rapid globalization, the issue of tradepromotion, in general, and of trade finance, in particular,has become highly relevant for the transition economiesof central and eastern Europe and the Commonwealth ofIndependent States. Over the past decade of market trans-formation in these countries, foreign trade has proved tobe a potent means of facilitating reforms and smoo-thening the hardships of transition. In particular, growingexports in several countries of the region have been aresult of successful structural reforms. At the same time,the increase in revenue and growth resulting from theseexports have, in turn, influenced favourably internaltransformations. The growing inflow of convertible

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currency due to export promotion generates additionalincome and enables enhanced imports of both consumerand investment goods, facilitating structural adjustmentand the modernization of national economies. From thisstandpoint, an unobstructed and adequate flow of funds tofinance exports and imports can contribute importantly toa successful transition.

Another relevant aspect is the critical nature of financ-ing for small and medium-sized enterprises in the contextof their establishment, growth and expansion into exportactivities. Information provided to nascent private sectorcompanies on how to build constructive relationshipsamong themselves, with commercial banks and insurancecompanies, as well as with government trade-supportinginstitutions, is often a key element of their success. Weattach a great deal of importance to this issue because thedevelopment of productive networks between privateenterprises, banks and other financial institutions is one ofthe factors rendering the transition to the market economysustainable.

It is appropriate to emphasize that the Riga seminarwas organized as a public-private partnership projectwhere a regional commission of the United Nationscollaborated with interested banks from the region. For usin the UNECE secretariat, this is another sign of theproductivity of public-private cooperation in areas ofpractical significance for the transition process. We areconvinced that the joint public-private organization ofseminars, workshops and similar events in economies ofthe European region is a cost-effective and efficientmeans to build a platform for the exchange of opinionsbetween various stakeholders and the development of rec-ommendations for Governments.

These Proceedings provide an account of the vastspectrum of opinions on ways and means to remove ob-stacles to financing trade in transition economies comingfrom trading companies, bankers, insurers and represent-atives of Government trade-financing agencies. Thevariety of views presented at the seminar not only helpsidentify problems obstructing access to trade finance; it isalso instrumental for finding solutions to these problemsand, in fact, might inspire government bodies to adjust

viii

their stance on certain issues of relevance to foreign tradepromotion.

I hope that the readers in both developed and transitioneconomies will appreciate the wealth of relevant infor-mation that these Proceedings contain. I also hope thatthis publication will stimulate further the discussion oftheoretical and practical issues related to market economytransformations in central and eastern European countriesand the CIS.

ix

WELCOMING ADDRESS BY:

Mr. Bernhard Gerdhard,State Secretary, Ministry of Economy, Latvia

It is my great pleasure to open this seminar, devoted toissues that are highly relevant to the development of theLatvian economy.

There is no doubt that the unobstructed funding offoreign trade is essential for business people entering newmarkets and extending existing ones. It is also importantfor exporters wishing to reduce commercial or politicalrisk-induced losses.

Unfortunately, trade finance instruments are notsufficiently developed in transition economies, includingLatvia. The legal basis for crediting, guaranteeing andinsuring exports is still being developed.

That is why I consider the theme of our seminar todayvery important and I hope that through an open exchangeof opinions we shall be able to better understand problemsrelated to the funding of foreign trade and, possibly,identify some solutions.

I am very pleased to see in this room representativesfrom public institutions, organizations involved in exportand import promotion and from the private sector.Hopefully, the seminar will provide an opportunity for anextensive exchange of ideas among the various interestedparties.

Opening the seminar today, I would like to make abrief overview of the current economic situation andpolicies implemented in Latvia.

It has to be admitted that the general business environ-ment in the country is improving and conditions fordevelopment of the national economy are getting better.The consistent reforms in Latvia are starting to bear fruit.GDP and investments are growing, and living standardsare also slowly improving. In the period from 1996 tomid-1998 average annual GDP growth was 6 per cent.

xi

Unfortunately, the financial crisis in Russia has badlyinfluenced the growth rates of the Latvian economy. In1998, GDP grew by 3.9 per cent and in 1999 by only0.1 per cent. This being said, since mid-1999 the situationhas been improving and during the first months of 2000the economic results were quite encouraging.

During the first quarter of this year, exports andindustrial production experienced a rapid increase, andLatvian ports shipped a high volume of cargo. Thefinancial ratios are also good, and the budget has receivedmore taxes than was planned. The activity of the stockexchange has also gained momentum.

This makes us feel optimistic about the future. Weenvisage a 4 per cent GDP growth for 2000, and I thinkwe shall be able to increase growth rates to 6 per centsubsequently.

During the years of independent development, ourcountry has managed to reorganize its economy. Latviahas implemented a liberal trade policy, thus enablingcompetitive sectors to benefit from their advantages in theinternational market. Currently, Latvia's imports andexports with EU countries constitute more than half of itstotal volume of exports and imports. This is despite thefact that during the years preceding the restoration of itsindependence, Latvia did not conduct any foreign tradeoutside of the former socialist countries area.

Integration into the European Union is one of Latvia’spriorities, as Latvia considers itself as a Europeancountry. In December 1999, with the invitation of theEuropean Commission to start the accession negotiations,Latvian-EU relations entered a new phase.

On 10 February 1999, Latvia was the first among theBaltic States to become a full-fledged member of theWorld Trade Organization (WTO). Upon accession to theWTO, Latvia has invested a lot of effort into harmonizingand improving its foreign trade legislation. Latvia nowhas broader opportunities to participate in world tradebased on unified principles.

We are very well aware of the fact that economicreforms in Latvia have not been completed. The restruc-turing of the national economy should continue; we

xii

should introduce more up-to date management methodsand further train business persons to work in the marketeconomy. This is the major reason why we need seminarslike yours. We also hope that such events might help us toconsolidate and improve the institutions responsible forthe promotion of Latvian exports.

I would like to express my gratitude to the organizersof this seminar, and to the participants, and express hopethat it will not only constitute a platform for the exchangeof opinions, but will also promote mutual contacts andcooperation.

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Welcoming address by:

Mr. Zenon Olbrys,President and Chairman of the Board, Baltic Transit Bank, Latvia

On behalf of Baltic Transit Bank let me welcome you,the participants of the seminar “Eliminating Obstacles toEfficient Trade Finance in Transition Economies” toRiga, the capital of the Latvian Republic.

We, the Baltic Transit Bank, are proud that the UnitedNations Economic Commission for Europe has chosenour charming city as a venue for this conference and ourbank as the coorganizer of the conference.

I hope that during the next two days you will be able todiscuss the problems and obstacles which prevent the de-velopment of business relations and trade between transi-tion economies and will find solutions as to how toovercome the identified problems and obstacles.

I would like to thank the Moscow bank “Alfa Bank”which has agreed to be a co-sponsor of the conference incooperation with the Baltic Transit Bank.

Many thanks to the UNECE for their hard work duringthe preparations for this conference.

I am familiar with the list of moderators and I am sureit will be a great pleasure for us to hear to their talks.

We, the Baltic Transit Bank, are at your disposal and ifyou have any questions or need assistance please do nothesitate to contact us, and we shall do our best to help you.

I hope you will be satisfied by the results of the confer-ence and enjoy your visit to Latvia.

I wish you all fruitful and interesting work.

CHAPTER IIMPORTANT FEATURES OF TRADE FINANCE INTRANSITION ECONOMIES: SECOND HALF OF THE 1990s

Note by the UNECE secretariat

INTRODUCTION

The development of transition economies’1 foreigntrade has proved to be a very effective means of facilitat-ing reforms and smoothening the hardships of transition.In particular, growing exports in several countries of theregion have been a result of successful structural transfor-mations and the revenue and growth resulting from theseexports have, in turn, favourably influenced internalreforms. The increased inflow of convertible currencydue to export growth generates additional income and en-ables enhanced imports of both consumer and investmentgoods, facilitating structural adjustment and the modern-ization of national economies.

The present note summarizes the most recent develop-ments in transition economies’ trade; traces the evolutionof trade finance risks and instruments used in short- andlong-term export and import transactions; and examinesthe changing role of Eximbanks, export credit agenciesand other government agencies engaged in trade finance

1 The European transition economies refer to the formerly centrallyplanned economies of eastern Europe and the former Soviet Union.Central and Eastern Europe (CEE) refers to the economies of Albania,Bulgaria, Hungary, Poland, Romania and the Czech Republic, Slova-kia, and the successor States of the former Socialist Federal Republicof Yugoslavia. Among the newly independent republics of the formerSoviet Union, a distinction is made between the Baltic States, Estonia,Latvia and Lithuania, and the remaining republics which cooperatewithin the institutional framework of the Commonwealth of Independ-ent States (CIS): Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan,Kyrgyzstan, Russian Federation, Republic of Moldova, Tajikistan,Turkmenistan, Ukraine and Uzbekistan.

1

2 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects

and promotion in transition economies. It is hoped that,on the basis of this paper and discussions at the seminar,participants might develop some practical recommen-dations to government agencies dealing with tradefinance and promotion, and provide some guidance tointernational organizations active in this area.

EXECUTIVE SUMMARY:MAJOR FINDINGS

In the second half of the 1990s, the growth of trade inthe European transition economies was unstable andtended to slacken. At the end of the decade, the value ofboth exports and imports showed negative growth rates,and this fall was particularly pronounced in the CIScountries. At the same time, developed market economiesincreased their role as the principal trading partners ofEuropean transition economies, and a growing demandfrom western markets has helped maintain the volume ofexports in most of the central and eastern Europeancountries and the Baltic States.

The CEEC and Baltic countries have increased theshare of high value-added goods (consumer goods,machinery and equipment) in their exports to developedmarket economies, while food products and intermediategoods (including chemicals) have become major compo-nents of their exports to other transition countries, inparticular, members of the CIS. In contrast, primarycommodities (crude oil, natural gas, oil products, metalsand cotton) have continued to dominate the compositionof exports from the CIS countries, making their exportrevenues particularly sensitive to changes in commodityprices.

Recently trade payment conditions have tended to im-prove for those CEEC and Baltic States which are moreadvanced in the transition process and have stagnated ordeteriorated for the other transition economies (CIS, inthe first place). Imports to the CIS are conducted almostentirely on a prepayment basis, since very few westernpartners accept letters of credit issued by local banks. Amajor obstacle to the financing of CIS countries’ exports,and, in particular, the development of L/C transactionshas been the weakness of the CIS banking system.

Important features of Trade Finance in Transition Economies: Second half of the 1990s 3

Advance payments and cash collaterals, on the one hand,and countertrade on the other, remain essential features oftransition economies’ foreign trade, while the lack ofworking capital and pre-shipment finance continues toimpede exports from countries at the earlier stages oftransition.

Access to long-term trade financing is still limited incentral and eastern European countries and practically un-available in the CIS. Even with assistance from govern-ment-sponsored schemes, commercial banks are unableto provide long-term credits to exporters and importersbecause of the narrow capital base on the one hand, andhigh risk of those operations, on the other. In this context,forfeiting and leasing can be potentially attractive solu-tions to companies’ financial needs.

During the second half of the 1990s, barter and coun-tertrade continued to play an important role in the domes-tic trade of CIS countries, as well as in their trade withdeveloped market economies and among themselves.However, the available data show that from 1995-1997,the value of barter in CIS countries’ trade declined both inabsolute terms and as a proportion of exports and imports.The development of more flexible trade financing, as op-posed to barter, should be seen as an important instrumentfor assisting the transition process.

The general paucity of efficient sources of tradefinancing is a major impediment. Access to private finan-cial sources is frustrated by companies’ lack of workingcapital and track record, (i.e. the lack of credit ratings),the undercapitalization of commercial banks and the highshare of non-performing loans in their portfolios, as wellas banks’ insufficient expertise with risk management andtrade finance instruments. In addition, excessive securityand collateral requirements have been identified as signif-icant obstacles to pre-export finance.

The Russian financial crisis of 1998 has had a detri-mental effect on the availability of trade finance. Bothdomestic banking sectors and local security markets havebeen affected adversely, while the access of local finan-ciers to international financial markets has been handi-capped. Spillover effects have been most pronounced inthe countries that maintained extensive trade links with


Russia prior to the crisis, namely the Baltic States and theother countries of the CIS. Although some countries (theBaltic States, in particular) have been more successful indealing with the negative effects of the crisis, manyproblems, notably bank sector restructuring and reca-pitalization, have still to be addressed effectively.

Since the beginning of the 1990s, a number of coun-tries in eastern Europe, the Baltic and the CIS haveinitiated Export Credit Insurance and Guarantee Schemes(ECGSs), and established export credit agencies (ECAs)and State-sponsored export and import credit banks(Eximbanks). Despite the limited scope of official exportcredit insurance programmes in most transition econo-mies, they are generally thought to have a positive impacton export development. The highest export growth rateshave been shown recently by eastern European countries,where ECAs are relatively efficient and well managed. Inthe Baltic countries, which have enjoyed export growthrates comparable to that of central and eastern Europeaneconomies, export credit agencies have been successfullyexpanding their operations. In contrast, in most countriesof the CIS, the scale of export credit insurance remainsmodest.

Recent financial and economic crises, and the resultingweakened domestic economies, have rendered transitioneconomies more vulnerable to changing world marketconditions. The aggravation of risks has emphasized theimportance of export-credit insurance. Under these condi-tions, the maintenance of trade volumes among transitioneconomies largely depends on the flexibility of ECAs,their prompt reactions to partners’ failures and innovativetechniques of claim settlement. To this end, an exchangeof information and cooperation among the relevantgovernment agencies of different transition economiesmay help them to learn from each others’ experience andto develop practical tailored solutions.

MAJOR FEATURES OF TRANSITION ECONOMIES’ TRADE IN THE SECOND HALF OF THE 1990S

In the second half of the 1990s, the growth of Europe-an transition economies’ trade was unstable and tended to


slacken. Overall their annual export growth rates atcurrent prices plummeted from over 25 per cent in 1995to about 8 per cent in 1996, 4 per cent in 1997 and, finally,became negative in 1998 and 1999 (minus 3 per cent andminus 6 per cent, respectively). The import growth ratesfollowed the same pattern, decreasing from 32 per cent in1995 to less than half a per cent in 1998 and finallyturning into a decline of 14 per cent in 1999.

The export growth rates of central and eastern Europe-an countries fluctuated with a general decreasing trend,and in 1999 showed a negative growth (minus 2 per cent).Over the same period, exports of the CIS countriesshowed an even steeper downward trend: the exportgrowth rate went down from 23 per cent in 1995, 10 percent in 1996, less than one per cent in 1997 and minus15 per cent in 1998 (the data for the first nine months of1999 show a 9 per cent decrease).

On the import side, growth rates showed a similartrend. Both in central and eastern European countries andthe Baltic States, import value growth peaked in 1995(36 and 53 per cent, respectively) slackened in the subse-quent years of the decade and finally reached negativesigns in 1999 (a fall of about 4 per cent for central andeastern European countries and 17 per cent for the BalticStates). Here again, the performance of the CIS memberStates was worse than average: import growth ratesdropped from 26 per cent in 1995 to 8-9 per cent in 1996and 1997, and plummeted to a negative 14 per cent in1998. Preliminary data for 1999 show an almost one thirddecline in USD value of CIS imports.2

In the 1990s, developed market economies, and thoseof western Europe in particular, increased their role as themajor aggregated trading partner of transition economies.By the end of the decade their weight in total exports andimports of central and eastern European countries exceed-ed 70 per cent; the same re-orientation of trade toward thedeveloped part of the world was characteristic during thepast decade also for the CIS countries.

The growing demand from western markets has helpedmaintain the exports of the central and eastern European

2 UNECE Economic Survey of Europe, 2000, No. 1, p. 3 - 11.


countries and the Baltic States. In contrast, in 1998 and1999 it was adversely affected by Russia’s economic cri-sis. Declines in exports from Russia and several other CISState during 1998 and 1999 was largely a result of fallingcommodity prices and, to a lesser extent, the currency in-stability and banking system disruptions related to theabove-mentioned crisis. In 1999, though, the rising pricesof oil and metals partially offset the adverse effects of thecrisis and contributed to maintaining the export levels andrevenues of the CIS producer-countries.

In the second half of the 1990s, the commodity struc-ture of the central and eastern European countries and theBaltic States’ exports was influenced by import demandin developed market economies and the CIS. Their ex-ports to the first destination consist mainly of consumermanufactures and machinery and equipment (central andeastern European countries). In contrast, by 1999 foodproducts and intermediate goods (including chemicals)were major components of their exports to other transi-tion economies and CIS States in particular. This patternis, to a large extent, the reverse of trade structures thatwere characteristic for those countries in the years imme-diately following the desegregation of the Soviet Union.

Primary commodities have continued to dominate thecomposition of exports from the CIS countries. Russia,Azerbaijan and Kazakhstan depend significantly on for-eign sales of crude oil, natural gas and oil products.Exports of metals are important to the Russian Federa-tion, Kazakhstan, Tajikistan and Ukraine, while cottonand gold sales largely determine the export structure ofcentral Asian countries. The dependence of CIS exportrevenues on primary commodities makes them highlysensitive to changes in commodity prices. On the importside, the CIS countries purchase predominantly machin-ery and transport equipment, agricultural products andfood, fuels and chemicals.

The commodity structure of the CEEC and CIS exportssuggests particular forms of financing. The developmentof high value-added exports to developed market econo-mies from countries of central and eastern Europeincreasingly requires medium- and long-term exportcredits and developed export insurance schemes. On theother hand, food and intermediate goods exports from


Box I

Financial sector support to international trade

The financial sector supports international trade in four main ways:

First, it provides working capital to the exporter, thus bridging the gap betweenthe time when the exporter needs funds for production and transportation, and the timewhen the importer pays for the products or services and reimburses the exporter’s in-vestment. Financial institutions directly influence the competitive positions of export-ers, as the ability of the latter to win contracts depends on their capacity to offerattractive payment terms to foreign buyers. The role of payment terms as a marketingtool is very relevant in countries of central and eastern Europe and the CIS where buy-ers often encounter serious financial difficulties and cannot purchase without credit.

Second, it renders services, which help the exporter to receive payment in the leastcostly and risky way (from simple intra-bank money transfers to relatively complex in-struments such as leasing, letters of credit, and foreign exchange-related services).

Third, it provides insurance against risks encountered in the process of trade. In-surance instruments include freight and export credit insurance but also forward con-tracts.

Fourth, it makes valuable information available to corporate financiers, informingtheir clients on present and future money and capital market conditions.

Source: WTO Special Studies 3, “Trade, Finance and Financial Crises”, 1999, pp 4-5.

those countries as well as exports of primary commoditiesfrom the CIS economies may not need elaborate long-term financial arrangements but may demand considera-ble investment in export production (i.e. pre-shipmentfinancing and working capital).

RECENT TRENDS IN TRADE FINANCE IN TRANSITION ECONOMIES

Adequate and timely access of exporting and import-ing companies to trade finance depends on the effective-ness of their interaction with the financial sector. Thelatter influences the competitive positions of domesticproducers in several ways (see box I). In varioustransition economies, the peculiarities of exporters’ andimporters’ cooperation with financial institutions depend


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Risks 2000

both on the level of that economy’s development and thelevel of market reforms that have been implemented.

SHORT-TERM INSTRUMENTS ANDFACILITIES

The transition to a market economy in countries ofeastern and central Europe and the CIS has opened upnew profit opportunities for entrepreneurs from devel-oped market and transition economies. At the same time,


it has revealed considerable limitations and inefficienciesin the existing trade financing infrastructure.

The experience of the last decade has shown that thepast decade’s drastic systemic transformations, accompa-nied by an unstable and often contradictory institutionaland regulatory environment, as well as the emergence ofthousands of new actors has significantly enhancedforeign trade risks within the CEEC, Baltic and CIScountries. These high risks, in their turn, have stronglyaffected the availability and cost of trade finance incentral and eastern Europe and the CIS region.

The assessment of country risks by various credit-rating institutions during the last 5 or 6 years has shownthat most economies of central and eastern Europe haveimproved their positions. Alternatively, the situation hasnot changed or has even worsened for the majority of CISand south eastern European countries.

Earlier this year, the French Export Credit AgencyCOFACE issued short and medium-term country riskratings as they stood at the end of 1999. Diagram 1 showsthat in terms of short-term country risks, most east andcentral European and Baltic countries, and especiallythose which have applied for membership in the Europe-an Union, were considered as low risk (Poland, Hungary,Slovenia and the Baltic States) or moderate risk (CzechRepublic, Slovakia, Croatia and Bulgaria). The diagramalso reveals that perceived short-term risks were consid-erably higher for the CIS States and countries of southeastEurope. Of the former, only the Republic of Moldova andthe Russian Federation were rated by the Agency asmoderate country risks (see Diagram 2), while all theother CIS member States were considered as highly riskypartners.

Hence, COFACE advises western exporters to the CIScountries to negotiate pre-payment terms where possible:prepayment remains “an irreplaceable norm” for dealingwith Russian companies, for example. As a matter ofcomparison, for Hungary, Poland and the Czech Repub-lic, open account and documentary credit terms are mostcommonly advised. In the same way, for the Baltic States,deferred payment (letters of credit, supplier credit


between 30 and 60 days) is considered acceptable for“well-known and serious exporters”.3

Consequently, in the CIS States’ trade both with devel-oped market economies and among themselves accordingto the least costly payment modes (open account, sightdraft) are used rarely, if ever. For example, a recentsurvey of over 1,000 representative offices of Germancompanies operating in Russia indicated that in tradetransactions with Russian firms, 46 per cent of Germancompanies asked for prepayment, only 29 per centaccepted deferred payment, and less than 12 per cent wereprepared to trade on letter of credit (L/C) terms.4

In most CIS countries, letters of credit are issued bylocal private banks only in those cases where the custom-er can deposit the requisite funds in its account wellbefore the transaction takes place. Prior to the 1998 finan-cial crisis, western banks were in some cases ready toconfirm letters of credit from CIS banks.

However, after the crisis, only a few western bankshave accepted L/Cs issued by CIS commercial banks. InDecember 1999, the head of the Russian State-controlledBank for Foreign Trade (Vneshtorgbank) indicated that“western banks have practically stopped normal credittransactions with the Russian banking system [Russianbanks] as letters of credit are not accepted in importtransactions”.5

For this reason, export trade with the CIS by compa-nies of developed market economies is conducted almostentirely on a pre-payment basis. This situation particular-ly distorts the trade of those countries where commercialbanks are not authorized by the National Banks to servicedeals involving prepayment (e.g. Turkmenistan), con-firmed letters of credit then being the safest instrumentfor western exporters.6

3 MOCI “Risque pays 2000”, 27 January-2 February 2000, pp. 37,59.

4 “Moskovskiye Novosti”, o 11, 1999, p.8.5 “Vremia MN”, 27 December 1999.6 US Department of State “FY 2000 Country commercial guide:

Turkmenistan”, July 1999.


In the context of CIS exports to the west, the majorobstacle to the development of letter of credit transactionshas been the weakness of the CIS banking system. west-ern bankers often indicate that only a few Russian bankshave sufficient know-how to act as an advising bank in aletter of credit transaction where a western bank acts as anopening bank. This is probably the major reason for thepredominant use of various types of prepayment not onlyin the import but also export transactions from the CISmember States.

Importers from developed economies, as well as theirbanks, thoroughly investigate only the performance riskfor exporters. Here, a lack of coherent ownership struc-ture or continuous infighting among shareholder groups,for example, may endanger pursuit in case of non-performance. In the same way, western importers’ bankslook very closely at the financial position of exporters,notably tax arrears and utility bill payment records.Indebted companies are unlikely to win the contractbecause, in the case of competing claims on theexportable product, importers from developed marketeconomies and their banks do not expect to win a courtcase against local creditors.

The difficulty of obtaining sufficient pre-shipmentworking capital remains one of the most importantobstacles for exporters in European transition economies(CIS in particular). More specifically, the problem liesnot so much in the lack of short-term funds, but rather inthe reluctance of commercial banks to extend creditwithout burdensome collateral requirements. As a resultof this prudent approach to risk-taking, companies arerequired to pledge various types of security (asset-basedcollateral, cash deposits, contract-based cash flowcommitments) often creating too heavy a burden on theexporter’s resources. According to a recent study by theInternational Trade Centre (ITC), excessive collateralrequirements by banks significantly affect not only smallfirms trying to expand their export operations, but alsolarger firms, seeking to upgrade production equipmentand technology.7

7 ITC “Improving The Financing of Exports From eastern Europe”,Division of Trade Support Services Technical Paper, 1997.


To summarize, as was already mentioned in the 1996UNECE study on Trade Finance in the Transition Econ-omies on the same subject, wider use of modern paymentterms in trade by all CIS countries is hampered by majorweaknesses of the financial sector in these countries (seebelow).

Topics requiring further discussion:

1. What are the most relevant trade finance risks indifferent groups of transition economies?

2. What are the conditions that must be met for atransition from prepayment to less expensivepayment terms (L/C, documentary collection)?

3. What are the factors favouring the reduction ofcollateral requirements by local banks?

Long-term instruments and facilities

(a) Risk perceptions

To be competitive, exports of capital goods must bebacked by favourable credit terms, extended for a periodof up to seven years, depending on the size of the transac-tion. Imports of capital equipment, essential for the mod-ernization and upgrading of production in transitioneconomies, also require cohesive support from the finan-cial sector.8 For this reason, macroeconomic instabilityand the overall weakness of the banking systems in manycountries of the region considerably inhibit medium andlong-term financing of foreign trade.

It should be mentioned that, until 1998, at least well es-tablished companies from eastern European countries andthe CIS enjoyed relatively easy access to foreign funds forexpansion and restructuring, and banks were eager to lendto the fast-growing countries. However, the 1998 Russianfinancial collapse has considerably reduced the possibili-ties for bank financing both at home and abroad. Thiscircumstance has left many exporters and importers in

8 Ibid.


transition economies searching for alternative sources offinancing.

Here again, the opportunities of foreign traders havebeen different in countries at different stages of transition,depending on the perceived medium and long-term risks.Diagram 2, compiled from COFACE data, shows that atthe end of 1999 the medium-term country risk ratingswere closely correlated with the progress of marketreforms and the success of economic stabilization. TheCzech Republic, Estonia, Hungary, Poland and Slovenia,being the most immediate candidates for joining theEuropean Union, represented relatively low risks forbanks and exporters, while Croatia, Latvia, Lithuania andSlovakia were classified as moderately high risk. Thediverging perceptions of risks associated with trade andinvestment have influenced the access to foreign financ-ing by companies from different countries.

(b) Forfeiting9

The “Country Risk Rankings” published by Euro-money magazine use the discount on forfeiting availablein different countries as a component of the countries’overall risk rating. The forfeiting scores reveal that, at theend of 1999, in eastern and central Europe, Slovenia en-joyed the highest ranking, followed closely by Poland,Hungary and the Czech Republic. Of all former SovietUnion countries, ratings were attributed only to the BalticStates and Kazakhstan. All other CIS member States,including Russia and Ukraine, were qualified as “offeringno sustainable access to forfeiting markets”.10

While traditionally the use of forfeiting is driven by anexporter’s need to reduce risks and get a quick reward,recently interest in forfeiting services has also come fromeastern European importers seeking alternative financing

9 Forfeiting is a financial instrument aimed at reducing the risk ofthe exporter. It involves the issue of promissory notes by the importer(or bills of exchange by the exporter) on which a bank in the buyer’scountry guarantees payment. Once the goods have been delivered andthe contract fulfilled, the exporter sells the paper (i.e., the bills ornotes) to a forfeiter without recourse and at a price determined by theforfeiter itself. Thus, the exporter receives payment instantly andtransfers the risk of non-payment to the forfeiting company.

10 “Euromoney”, September 1999, pp. 250-255.


methods after their habitual sources of financing disap-peared following the 1998 crisis.11

Importers from such countries as the Czech Republicand Croatia whose preferential access to the bond marketswas lost as a result of the crisis have been successful in at-tracting the big forfeiting companies such as LondonWest LB, London Forfeiting and DOG Trade Finance forimport financing. For instance, recently LondonForfeiting (with Zagrebacka Banka guaranteeing thedeal) has put together the financing for John Deere to sellUSD 15 million worth of tractors to a number of buyersin Croatia. The financing has been extended for sevenyears (with a two-year grace period) as opposed to theusual 1 to 3 years.12

The volume of individual forfeiting transactions withcompanies from CIS countries has yet to attain the levelsof those undertaken with firms from central and easternEurope. As a comparison, while in Hungary or Poland asingle forfeiting deal can be worth up to USD 50 million,the value of individual forfeiting transactions in centralAsia recently has not exceeded USD 5 million.13 In thecontext of intra-CIS trade, forfeiting is still uncommonbecause of the high risks inherent in long-term transac-tions, the relative weakness of local commercial banks aswell as the lack of companies specializing in this type offinancing.

(c) Leasing

Another potentially attractive financial solution forcompanies seeking to sell and purchase capital equipmentis transborder leasing. Leasing services have enjoyedbuoyant growth in countries of central and easternEurope. The total volume of new lease financing inHungary, Poland, the Czech Republic, Slovakia, andSlovenia rose from USD 1.3 billion in 1993 to more thanUSD 4 billion in 1996. In 1997, European transitioneconomies experienced a slowdown in leasing growth,while in 1998 a major downturn in the region’s develop-ment lead to a significant divergence in growth rates of

11 “Central European”, February 1999, pp 30-31.12 Ibid.13 Ibid.


leasing operations in different countries of the region. Ifthe markets in the Czech Republic, Poland and Sloveniagrew by 8, 28 and 12 per cent respectively, volumes oftransactions declined by 19 per cent in Slovakia and asmuch as 35 per cent in Estonia..14 According to experts ofLeaseurope Association, the expansion of the EU toselected eastern European countries will stimulate invest-ment, creating an important potential for lease financing.

The importance of leasing has increased in varioussectors and industries. It has been growing the fastest inservices, followed by manufacturing and construction,and agriculture, forestry and fishing.

In countries which have suffered the most from theconsequences of the 1998 financial crisis, the share ofshort-term leasing (up to 2 years) has increased, reflectingthe instability of the economic situation and the conse-quent rise in investors’ risks. At the same time, anincrease in the amount of long-term leasing deals (with aduration of 5 to 10 years) has occurred due to a wave ofrestructuring of lease payments for those lessees whohave run into payment difficulties.

Over the last decade, leasing in general, and trans-border leasing in particular, has become an importantinstrument of long-term trade and investment finance. In1998 about 80 per cent of leasing transactions in easternand central European and Baltic countries and the CISfinanced the acquisition of equipment and only 20 percent the acquisition of real estate.

The use of leasing makes it easier for the lender (lessorin this case) to preserve the security behind financing bykeeping ownership rights on the leased title; in certaincases, both lessor and lessee may also acquire some taxgains15.

The importance of leasing in transition economies maygrow in the future. In Russia, for example, according tothe Ministry of Economy’s forecast, the proportion ofleasing may grow from being equivalent to about 2 per

14 Leaseurope Association “Annual Report 1999”.15 “Multinational Business Review”, Fall 1999, pp. 89-96.


cent of total investment in 1997 to about 20 per cent in theyear 2000.16

Non-conventional trade

During the second half of the 1990s, barter andcountertrade continued to play an important role in thedomestic trade of CIS countries17, their trade with devel-oped market economies and among themselves. At thebeginning of the past decade, about 50 per cent of intra-CIS trade was estimated to have been effected via barter.Subsequently its importance has tended to decline.18

The available data show that in 1995-1997, the valueof barter in CIS countries’ trade declined both in absoluteterms and as a proportion of exports and imports. In mostof the countries for which data are available, the share ofbarter dropped from about 20-25 per cent of exports in1995 to 10-15 per cent in 1997. However, these transac-tions remained important for many countries, for exampleBelarus (28-30 per cent in 1997), Republic of Moldovaand Azerbaijan (10-14 per cent) and Ukraine (9-10 percent). In the trade of the Russian Federation, the share ofbarter in 1997 was about 6 per cent for exports and 8 percent for imports. However, in absolute terms, thesepercentages still represented important values (aboutUSD 4.5-5 billion in each case).19

Anecdotal evidence attests to a continued use ofcountertrade between traditional Soviet-era partners.Recent examples include a three-way deal to supply gasfrom Turkmenistan through Russia to Ukraine. The dealis based on an agreement between Turkmenistan and

16 “Zakon”, July 1999, pp. 46-49.17 According to different estimates, the volume of barter transac-

tions in the Russian Federation accounts for up to 80 per cent of inter-enterprise turnover. Guriev, S., Ickes, B. “Barter in Russian Enter-prises: Myths vs. Empirical Evidence”, The European Commission1999, p. 6.

18 Trade Finance in the Transition Economies: a Further Examina-tion. Note by the Secretariat (UNECE doc. TRADE/R.641), Part I,p. 10.

19 Sodrouzhestvo Nezavisimych Gosudarstv. Statisticheskii Byul-leten’, August 1998, No. 15, p.75-76.


Ukraine to deliver 20 billion cubic metres of gas from1999 to 2005. As much as 10 billion cubic metres Ukrainewill have to pay in kind to Gazprom for gas transit, therest will be covered by payments in cash (40 per cent) anddeliveries in kind (food and other goods). Anotherexample of a big barter deal involves Ukraine handingover to Russia eight Soviet-made Tu-160 strategicbombers to cover USD 1.8 billion in natural gas debt.20

Payments in kind are also used outside of intra CIStrade. For example, a Latvian pharmaceuticals company”Olainpharm” has reached a deal involving the export ofmedicines in exchange for Russian coal.21 It is also esti-mated that about one third of the annual trade turnoverbetween Bulgaria and Russia (worth USD 1 billion) is ef-fected through barter transactions. In 1999 Gazpromagreed to accept, in partial payment, building materialsequivalent in value to 30 per cent of its gas deliveries tothe Bulgarian State construction company Glavbul-garstroi. In the same way, Glavbulgarstroi covers the costof importing nuclear fuel to Bulgaria’s Kozlodui atomicpower plant. For this purpose, this company has signed aUSD 15 million contract with the Russian Atomic EnergyMinistry (Minatom) to build a housing complex for theworkers of a Novosibirsk chemical plant.22 It is seen fromthe above that Minatom uses countertrade as a projectfinance instrument.

As was already indicated in the 1996 UNECE study, inthe CIS countries countertrade plays a major role in main-taining trade volumes and supply in individual regions.For example, in 1999 the Russian Government proposedto the Association of Southeast Asian Nations (ASEAN)several barter agreements involving food deliveries fromthe member States of the Association to the Russian FarEast in exchange for Russian machinery and equipment.23

The empirical evidence suggests a sustainability ofpayments in kind that cannot be explained only byenterprise liquidity shortages. The enhanced access to

20 “Countertrade and Offset”, February 22, 1999, p. 7 and Septem-ber 13, 1999, p. 6.

21 BIKI, 22 February 2000, p.3.22 “International Trade Finance” December 18, 1998, p.4.23 “Countertrade and Offset”, September 13 1999, p. 6.


Box II

Electronic countertrade and barter:A promising solution for transition economies?

The rapid development of electronic commerce via the Internet could make elec-tronic barter payments a potentially important tool of trade finance in transition econ-omies, and CIS countries in particular. The use of a commonly accepted electronic unitof accounting, for example a “trade dollar”, would offer multilateral trading possibili-ties - enabling the involvement in international trade of thousands of small companies.Such systems of “trade exchanges”, present virtually at Internet sites, offer companiesan effective way to conduct business using a trade dollar as a medium of exchange.Already now, there are over 700 trade exchanges worldwide, used by 600,000 compa-nies in 23 countries.

The year 1999 also marked the use of Internet for barter trade. The ubiquity of theInternet and its infrastructure could enable the development of powerful online elec-tronic barter centres to complement and expand existing, specialized barter companies,including those in transition economies.

Sources: “Bank Systems & Technology”, December 1999; “World Trade”, January 2000.

global markets substitutes for barter only to a limited ex-tent. A recent study of this issue prepared for the Europe-an Commission has shown that, in the CIS, an increase ofexports by one rouble leads to a decrease in barter sales ofas little as 17 kopecks. Moreover, this proportion appliesto exports directed to both cash-constrained CIS Statesand non-CIS countries. The same study has provided ev-idence that barter is used by all industries despite theirtechnological differences and varying number of suppli-ers. The authors suggest that, to a certain extent, trade-re-lated monetary transactions within the CIS may be morecostly than barter due to high taxes, insecure propertyrights, imperfect credit markets, as well as rent-seekingby banks and other intermediaries.24

It is also important to emphasize that exchanges inkind among enterprises often seek to maintain inter-in-dustrial cooperation inherited from Soviet times and con-serve trade links among enterprises of the CIS region. Inaddition, recent years have borne witness to the emer-gence of specialized intermediaries (similar to those

24 Guriev, Ickes, op.cit., p. 9.


flourishing in east-west countertrade in the 1970s) whichfocus on developing multi-party barter schemes, reducingtheir cost for the players. All those factors add up to alock-in effect contributing to the perpetuation of barter.25

One also cannot discount, at least for some CIS countries,the emergence of electronic commerce via Internet andthe new opportunities which it creates for on-line counter-trade (see box II).

In summary, the medium-term future of countertradeand barter is unclear. The opening of markets and a grow-ing exposure to outside competition will tend to reducethe number of inefficient enterprises and the network oftheir traditional links within the CIS. This factor will de-crease the potential for countertrade. At the same time,the lack of convertible currency, pressures to preservenon-viable enterprises and the requirements for stabilityof supply in particular regions and for particular productswill contribute to maintaining countertrade transactions.

Topics for further discussion:

1. What are the factors determining long-term risksin trade finance?

2. Is country risk the most important risk in the long-term perspective?

3. What are the benefits of forfeiting to importersfrom the central and eastern European countries,the Baltics and the CIS?

4. Can forfeiting and leasing substitute for the lack ofbank financing in transition economies?

5. Do countertrade and barter, in particular, substi-tute for conventional trade or, rather, supplementit? What are the major factors perpetuating barter?What are the perspectives of countertrade in themedium- to long-term future?

25 Ibid.


SOURCES OF FINANCE

1. Company’s own funds

In the second half of the 1990s and the beginning of the2000s, the use of trading companies’ own working capitalfor export production and imports has been largelyfrustrated by undercapitalization and insufficient operat-ing profitability. For example, in Russia in the first half of1998 (that is before the financial crisis broke out), morethan 51 per cent of medium-sized and large enterprisesoperated at a loss. In September 1998, the share ofenterprises having overdue receivables amounted to72 per cent of their total number and those having over-due payables to 71 per cent. At that time, the value ofoverdue payables was estimated at over 40 per cent ofGDP.26

New private companies, including those havingpotentially competitive products, often have to rely onborrowed funds both in their domestic operations and inexports. In the absence of such funds, important non-banksources of financing have been tax arrears and the non-payment of utility bills.27

2. Commercial bank credit

The availability of commercial bank credit cruciallydepends on the state of the banking system. The financialsector in the countries of central and eastern Europe, theBaltics and the CIS is known to have undergone radicalchanges during the transition. The original monobank hasbeen replaced by a two-tier banking systems across allcountries in the region and a considerable number ofcommercial banks have emerged.

During the last decade, many of them, particularly incentral and eastern Europe, dedicated considerable effortsto the development of new products and services,particularly for larger and more sophisticated clients.Recently, authorities in most countries have initiated

26 Goskomstat, “Statistical Bulletin”, December 1998.27 EBRD “Transition Report 1999”, p.138.


banking sector reforms, tightened market entry requi-rements, forced inefficient banks to exit, and recapitalizedor merged weak but viable banks.

Despite undeniable progress, the financial systems intransition economies remain underdeveloped, commer-cial banks being largely under-capitalized and small bywestern standards. Even in countries of central and east-ern Europe and the Baltics which are relatively advancedin institutional reforms, financial sector weakness isapparent. As an example, in the 11 European Unioncountries that have signed up to the Euro, bank assets(worth USD 17,000 billion), represent an equivalent of260 per cent of their GDP. A similar indicator for thecentral European countries (Poland, the Czech Republic,Slovenia, Slovakia and Hungary), shows combined bankassets worth USD 257 billion, which does not exceed92 per cent of their GDP. In the European Union coun-tries, there is one bank branch per 1,700 inhabitants,while in the countries of central Europe there is one per11,000 inhabitants. 28

The underdevelopment of the banking sector is evenmore apparent in countries of the CIS. In many memberStates of this grouping, the bulk of financial services isstill rendered by only a few banks. In Azerbaijan, forexample, four State-owned banks account for 80 per centof total bank assets. At the same time, only one of them(International Bank of Azerbaijan, IBA) is sufficientlycapitalized and fully operational, while the other three aretechnically insolvent.29

Non-performing assets and bad debts continue toweigh heavily on the balance sheets of banking insti-tutions in the region. For example, in 1999 the banksCeska Sporitelna and CSOB, accounting for about half ofthe total turnover of banking services in the CzechRepublic, had bad loans amounting to 44 per cent and30 per cent, respectively, of their total loan portfolios.30

28 Central European, February 2000, p. 8.29 US Department of State “FY 2000 Country commercial guide:

Azerbaijan”, July 1999 and EBRD “Transition Report 1999”.30 The Euromoney, November 1999, pp. 31-39.


For the reasons referred to above, the banking sector intransition economies often lacks the capacity to providemarket-based financial services to private enterprises.During 1994-1998, the sum of loans to the private sectorwas equivalent on average to 27 per cent of GDP in east-ern Europe and the Baltics, and to only 9 per cent in thecountries of the CIS. This is well below the EU countries’average of over 50 per cent.31

Constraints to efficient trade financing have also beenattributed to the general level of interest rates in the re-gion, which remain higher than those available to export-ers from the OECD countries. This factor is clearly veryimportant. At the same time, research conducted by theEuropean Bank shows that it is not necessarily the mostburdensome. Often, the lack of access to long-termbank loans, heavy collateral requirements imposed byfinancial institutions, as well as the additional costs im-plied by the paperwork and other bureaucratic proce-dures imposed by banks, impede the access to financemore than the transparent cost of high interest rates.32

Western banks and their affiliates in transition econo-mies play an important role in financing exports from theregion. However, their capacity to adequately evaluatethe creditworthiness of exporters, especially new smallcompanies, is limited, and they prefer to deal with largeand well-known clients, particularly in the commodities’export sector. For this reason, the enhanced penetration offoreign financial institutions into the local markets forbanking and insurance services can seriously amplify theavailability of trade finance, particularly for SMEs, onlyin conjunction with a strengthening of the local financialsector.

To summarize, the following major weaknesses of thebanking systems in European transition economiesshould be mentioned:

Insufficient capitalization of local commercialbanks, a lack of resources for the pre-shipment sup-port of exporters and an inability to issue adequatepayment guarantees;

31 IMF “World Economic Outlook”, October 1999, p.69.32 EBRD “Transition Report 1999”, p.153.


The unstable financial position of many commer-cial banks which has been aggravated in theaftermath of the 1998 financial crisis;The lack of credit history and trust vis à vis manytransition economies’ commercial banks (CIS inparticular) both in developed market economiesand within the group of European transition eco-nomies;A limited range of services and not always efficientloan monitoring;A lack of experience in documentary trade opera-tions and a divergence between local and interna-tional standards for such operations; as well as, insome cases, out-of-date document-processingtechnology.

The 1998 financial crisis which started in August ofthat year in Russia has inflicted heavy losses on thebanking sector in that country and in many of its neigh-bours. Both the domestic banking sector and localsecurity markets have been affected adversely, while theaccess of local financiers to international financialmarkets has been handicapped. The spillover effects havebeen most pronounced in the countries that maintainedextensive trade links with Russia prior to the crisis, name-ly the Baltic States and other countries of the CIS.Bankers’ losses on assets with exposure to Russia anddeposit withdrawals induced by a decline in confidence inmany of the CIS countries cannot be easily restored.33

After the crisis, some countries have been more suc-cessful than others in addressing the problems of bankingreorganization34 In many transition economies, however,the performance of the banking sector has remained atlow levels. As an example, while in the main countries ofwestern Europe the ratio of pre-tax profits to total bankingassets during the first 9 months of 1999 ranged between

33 “World Economic Outlook...” pp. 66-68.34 In Latvia, for example, the Central Bank has strengthened regu-

latory requirements covering consolidated reporting, loan loss provi-sioning and maximum permissible exposures to borrowers in non-OECD countries. During 1998, the total number of banks was reducedfrom 30 to 25, and further consolidation of the financial system islikely to follow the introduction of new minimal capital requirementsof USD 5 million, effective from 31 December 1999 (EBRD “Transi-tion Report 1999” p.239).


0.5 and 1 per cent; in the Russian Federation and theCzech Republic this indicator was -1.2 and -0.2 per cent,respectively, meaning that the banking systems in bothcountries were making losses.35

As a result of the financial crisis, and due to significantlosses and decreases in the banks’ capital base, the supplyof credit available to exporters and importers in transitioneconomies has shrunk. In Kyrgyzstan, for example, in themiddle of 1999 the total assets of the banking systemamounted to only USD 14 million with the value of cred-its to the private sector not exceeding the equivalent of 5per cent of GDP. In 1999, seven out of twenty banks wereplaced under conservatorship or liquidation.36 In March1999, the total capitalization of Russian banks at currentprices had plummeted by 40 per cent as compared withthe pre-crisis level. By the end of 1999, the banking sectorhad restored its capitalization to the pre-crisis level (atcurrent prices). Yet, from March to December loans tonon-bank customers fell from 43 to 35 per cent of totalbanking assets.37

The limited use of short-term trade finance instruments(particularly letters of credit), as well as a general paucityof long-term funds, is likely to persist until transitioneconomies’ bankers build up the capital base of commer-cial banks, restore their credibility and develop adequateexpertise.38

It also remains to be seen how successful the post-crisis reorganization of financial sectors across the regionwill be and how quickly tangible results will be attained.

3. Capital markets

Non-bank domestic and international capital marketsrepresent another potentially important source of tradeand investment finance. So far, though, the role of domes-tic capital markets has been limited because of their low

35 “Ekspert”, 20 March 2000.36 EBRD “Transition Report 1999” p. 235.37 “Ekspert” 20 March 2000.38 IMF “Transforming Financial Systems in the Baltics, Russia,

and Other Countries of the Former Soviet Union”, 1999.


capitalization and the small number of instruments avail-able to investors. The ratio of stock market capitalizationto GDP is uniformly low across the European transitioneconomies as compared to these indicators for developedmarket economies. A large part of transactions at stockexchanges has been of a short-term and speculativenature; so far only large enterprises have ventured to raisefunds through share issues. Most European transitioneconomies also have very limited corporate bond mar-kets.39

Since the Russian debt crisis in August 1998, the costof borrowing from international capital markets has risensharply for companies from all the transition economies.Although the interest rates on bonds and syndicated loanshave somewhat fallen back since, at the end of 1999 theyremained higher than in 199740.

It should be repeated that this form of financing isaccessible only to large enterprises capable of providingan important asset-based security, and benefiting fromexplicit or implicit government support. SMEs, however,will have to rely on their track record and a gradualbuilding of trust with their servicing banks to finance theirsales abroad.

Topics for further discussion:

1. Do exporters in transition economies rely heavilyon external financial sources?

2. What are the major obstacles to efficient creditfinancing by commercial bank of exports and im-ports (low capitalization of banks, high risks andcollateral requirements, too high interest rates)?

3. What is the role of foreign banks in trade financein transition economies?

4. What regulatory measures by Governments wouldbe desirable to increase the availability of tradefinance from commercial banks?

39 EBRD “Transition Report 1998”.40 ECE “Economic Survey of Europe”, 1999, Issue 3.


VI. GOVERNMENT SUPPORT FOR TRADE FINANCE

Since the beginning of the 1990s, a number ofcountries in eastern Europe, the Baltics and the CIS haveinitiated Export Credit Insurance and Guarantee Schemes(ECGSs), and established export credit agencies (ECAs)and State-sponsored export and import credit banks(Eximbanks) (see box III).

In general terms, official financial support to exportersand importers is provided through direct export financingand credit insurance.

Direct financing of exports is effected through loansextended to domestic exporters or foreign buyers by thegovernment-backed export bank. Respectively, the loansmay take the form of pre-production financing of thedomestic exporter of goods and services, or direct lendingto the overseas borrower/buyer (buyer credit). In additionto direct financing, the export bank may also offer toexporters re-financing of export credits extended bydomestic private lending institutions, re-financing ofexporters’ outstanding payment obligations and interestrate subsidies (where credits are extended with fixed andlower-than-commercial interest rates).

Export credit insurance is effected to cover risks as-sociated with supplier credits and buyer credits (lines ofcredit). Supplier credit insurance is a guarantee of pay-ment given to exporters against the buyer’s non-paymentrisks. These can include commercial risks (risk of non-payment because of bankruptcy, insolvency or default ofthe buyer), political risk (risk of non-payment because ofgovernment-imposed restrictions), pre-shipment or post-shipment risk (commercial and/or political risks linked tothe settlement of the export contract). Insurance ofsupplier credits is most commonly used in short-termtransactions. Buyer credit insurance guarantees thepayment of the foreign buyer to the seller or its bank.The insurance of buyer credits is provided banks incountries of exporters which extend credits to foreignbuyers of exported goods or services, and is normallyused for medium- and long-term transactions.


Box III

The Berne Union and its Members

The International Union of Credit and Investment Insurers (the Berne Union) wasset up in 1934 by four founding members from France, Italy, Spain and the UnitedKingdom. In 1999 it had a total of 44 members and 4 observers from 40 countries.

By 1999, ECAs from four eastern European States (Czech Republic, Hungary,Poland and Slovenia) had acquired observer status in this organization. The Union hasalso signed cooperation agreements with the newly-established export credit agenciesin Albania, Belarus, Bulgaria, Croatia, Latvia, Lithuania, Romania, Russia, Slovakia,Ukraine, and Uzbekistan.

The purpose of the Union is to:

Work for international acceptance of sound principles of export credit insuranceand the establishment and maintenance of discipline in terms of credit for internationaltrade;

Foster international cooperation in encouraging a favourable foreign investmentclimate, and in developing and maintaining sound principles of foreign investment in-surance;

Provide a forum for the exchange of information, experience and expertise amongmembers.

The Union’s members are organizations engaged in export credit and investmentinsurance and their main activities are:

Supporting exports of goods on cash or short credit terms through underwritingthe repayment risks on individual buyers and, often, their banks, as well as a wholerange of political risks.

Supporting, either by insurance or guarantees, or direct lending, the supply ofproject and capital goods on medium- and long-term credit.

Supporting outward investment in various forms (e.g. equity, loans) made in othercountries.

The Berne Union—like export credit itself—plays a role of central importance inworld trade and investment. In 1997, export credit guarantee institutions, members ofthe Union, provided guarantees amounting to USD 409 billion, representing about 10per cent of the combined exports of the respective countries. It has extensive interna-tional contacts and speaks for its members in discussions both with international finan-cial institutions and individual buying countries.

Source: M. Stephens “The Changing Role of Export Credit Agencies”, IMF, 1999


The multitude of goals pursued by export creditagencies explains the fact that there exists no uniformmodel for such organizations. In OECD countries, ECAsdiffer in terms of ownership (government department,public corporation or private company), scope of opera-tion (issuance of insurance policies and guarantees, directlending or both) and the time range (short-term, medium-and long-term or both) of instruments that are offered. Inall cases, however, the main objective of ECAs remainsthe removal and reduction of uncertainties and risks thataccompany international trade.

In transition economies, the goal of upgrading theinternational competitiveness of domestic producers isparticularly challenging because of the general under-development of the financial and informational infra-structure. As in developed market economies, the ECAsin transition economies are expected to protect exportersand importers from political and commercial risks. Inaddition, and these objectives are very important in thetransition context, they provide additional security forexporters (insurance policies), facilitating their access tobank finance; they supply exporters and importers withinformation on partner countries, individual buyers andsellers, and associated risks; and they give companiesaccess to expertise and provide training in practical issuesrelated to trade financing techniques.

Despite their growing volume of operations, the scaleof activities of ECAs from countries of eastern Europe,Baltics and the CIS remains limited. In 1998, exportcredit agencies covered commercial and political risks forabout 5 per cent of trade transactions’ value in Germany,16 per cent in Austria and 24 per cent in France. In thesame year, this same indicator did not exceed 3 per centin the Czech Republic and 2 per cent in Poland, while inother transition economies with newly established ECAsthis proportion was significantly smaller.41

Depending on the scope of existing activities, one candistinguish three types of approaches to export financeand insurance operations in European transition eco-nomies.

41 A World Export Credit Guide 1999-2000, Supplement to “TradeFinance” and “EBRD Transition Report 1999”.


In the first group of countries (e.g. Poland, Latvia,Uzbekistan), government agencies offer guarantee andinsurance schemes against non-payment by buyersabroad due to commercial and political risks. They do notprovide export credit financing.

In the second group (e.g. Czech Republic and Hun-gary), two separate institutions deal with export insuranceand export financing (they usually work in close cooper-ation). Thus, in the Czech Republic, the Export Guaranteeand Insurance Corporation (EGAP) offers short-termcommercial risk insurance, and political (medium- andlong-term) credit insurance, while the Czech Export Bank(CEB) provides export financing through direct buyer andsupplier credits. Loans received by the exporter from theCEB must be insured with EGAP42 (see box IV).

Finally, in the third group of States (Kazakhstan,Romania, Russia, Slovakia, and Slovenia) there is a singlegovernment agency providing exporters with directfinancing, State guarantees and, in most cases, insuranceagainst commercial and political risks. These types ofinstitution often extend guarantees both for exporters andimporters. For example, in Romania, Eximbank issuesguarantees related to imports of capital goods andaccompanying services, which are designed to protectforeign lenders against non-reimbursement.

In transition economies, the largest part of ECAs’operations is focused on developed economies. In 1998,the OECD countries accounted for 66 per cent of the totalvolume of the insured non-commercial risks by theSlovenian ECA.43 In 1999, the Eximbank of Slovakiaquoted the Czech Republic, Germany, India, Italy andPoland as its principle countries of operation.44 It seemsthat a better coverage of neighbouring transition econo-mies by ECAs in central and eastern European countriesand the CIS could contribute to the expansion of sub-regional foreign trade.

42 “Export Credit Financing Systems in OECD Member and Non-member countries (Supplement)”, OECD 1999.

43 Internet Web Site of Sloven Export Corporation (SEC):http://www.sid.si/slo/poslovanje.html.

44 “World Export Credit Guide 1999-2000”, p.131.


Box IVGovernment support to export finance in the Czech Republic

The system of institutional support to exports from the Czech Republic is based on three pillars.

Insurance against export risks is provided by the Export Guarantee and InsuranceCorporation (EGAP), a joint-stock company established in 1992. EGAP insures exportcredits against short-term political and commercial risks, and medium- and long-termsupplier credits (with tenures exceeding 2 years) against territorial*, commercial anda combination of political and commercial risks. It also insures credits for the financ-ing of pre-export operations and guarantees export credits of commercial banks. In1998, EGAP issued short-term guarantees worth USD 443 million, and medium- andlong-term guarantees for a value of USD 638 million.

The Czech Export Bank (CEB), export credit bank which is a joint-stock compa-ny, joined the system in 1995. It grants credits to exporters at lower than commercialrates. CEB provides predominantly medium- and long-term loans extended for 2 to 12years which, in conformity with the OECD Consensus on Export Credit Conditions,do not exceed 85 per cent of the contracted value of exports. The credits are providedeither directly to exporters or to their banks.

Finally, more general information services to exporters and importers are provid-ed by the Czech Agency for Trade Support “Czech Trade”. The information on foreignmarkets and companies is particularly valuable to SMEs, which cannot afford collect-ing it by their own means.

* Territorial risk is defined by EGAP as risk of non-payment or credit default involvingbuyers from the State sector.

Source: “Czech Business and Trade”, Issue 1, 1999

Exports of transition economies to OECD countriesare ensured against non-payment risks mostly on a short-term basis. These insurance operations are often effectedas commercial transactions, and are supported byreinsurance either from western re-insurers or partnerECAs. Losses arise mainly from customer bankruptciesor fraud, and do not occur frequently. On the other hand,insurance against medium- and long-term commercialrisks and political risks is usually provided by ECAs onbehalf of their Governments, and is more often accom-panied by losses.


Despite the limited scope of official export creditinsurance programmes in most transition economies,there is a general agreement on their positive impact onexport development. The highest export growth rateshave been shown recently by eastern European countrieswhere ECAs are relatively efficient and well-managed(e.g. Czech Republic, Hungary, Poland and Slovenia). Inthe Baltic countries, which have enjoyed export growthrates comparable to that of central and eastern Europeaneconomies, export credit agencies have been successfullyexpanding their operations.45

In contrast, in most countries of the CIS, the scale ofexport credit insurance remains modest. To a certainextent, this is explained by relatively small shares ofmachinery and equipment and a predominance of rawmaterials in exports, the sale of which often does notrequire long-term credit.

CIS Eximbanks and ECAs are significantly under-capitalized compared to similar institutions in easternEurope. For example, at the end of 1998 RussianRoseximbank’s own capital did not exceed USD 9.7 mil-lion while the capitalization of the Czech EGAP stood atUSD 230 million. Among the other CIS States, only inKazakhstan (Eximbank) and Uzbekistan (UzbekinvestNational Export-Import Insurance Company) do exportcredit and insurance schemes seem to be fully opera-tional. The Uzbek Export-Import Insurance Company isthe best capitalized (USD 136 million) and the mostactive ECA in the CIS region.

Recent financial and economic crises have renderedtransition economies more vulnerable to changing worldmarket conditions. This increase in risks has raised theimportance of export-credit insurance. Under theseconditions the maintenance of trade volumes among tran-sition economies largely depends on the flexibility ofECAs, their prompt reactions to partners’ failures andtheir development of innovative techniques for claimssettlement (see box V).

45 “Finance & Development”, IMF, Sep. 1999, p.64.


Box V

Debt repayment agreement between MEHIBand Leningrad oblast’

In July 1999, a debt repayment agreement was reached between the HungarianExport Credit Agency (MEHIB) and the Leningrad region in Russia. The original dealconsisted of the sale of 120 Ikarus buses worth USD 13.8 million to a LeningradRegion Transport Company; it was financed by a national Eximbank-led consortiumand insured by MEHIB.

At the end of 1999, as a result of the bankruptcy of its guarantor bank (RossijskijKredit), and having repaid USD 2 million worth of credit, the Leningrad region Trans-port Company declared insolvency. The consortium financing the deal terminated thecredit agreement with the debtor company and endorsed a full claim against MEHIB,making the Leningrad region Transport Company a MEHIB debtor.

To avoid debt collection losses which often reach 20 - 40 per cent of the debt,MEHIB has negotiated a debt swap with the region’s authorities, supported by pay-ment guarantees. In particular, the oblast’s Government assumed the nearly USD12 million indebtedness of the importer and confirmed the payment with a bankguarantee at its own cost. In return, the Leningrad region authorities obtained a graceperiod of three years46.

Source: “MEHIB Newsletter, 1999”, Internet Web Site of Hungarian Export CreditInsurance Ltd.: http://www.mehib.hu/hirlevel/1999-3/leningrad-a.htm

While there are positive experiences with thealready operating export credit and guaranteeschemes in transition economies, there are also anumber of obstacles inhibiting the scope of theiractivities, including:

the under-capitalization of ECAs, especially incountries of the CIS, thus impeding the develop-ment of high value-added exports;

46 “MEHIB Newsletter, 1999”, Internet Web Site of HungarianExport Credit Insurance Ltd.: http://www.mehib.hu/hirlevel/1999-3/leningrad-a.htm.


inadequate information on the ECAs’ activities anda lack of trust in their services, preventing commer-cial banks from accepting insurance policies as asecurity;

poor legal enforcement creating difficulties incollecting “problem” loans;

lack of re-insurance facilities;

lack of reliable credit information systems whichare required to assess risks.

In the future, ECAs from countries of eastern Europe,the Baltics and the CIS are likely to face problems that aresimilar to those focused on by their counterparts in OECDcountries.

It was indicated, for example, that the short-terminsurance of commercial risks remains the principaloperating area for many ECAs in transition economies. Atthe same time, one also notes the emergence and strength-ening of private sector insurance in those countries whichpotentially could take over a part of this market. It seemsimportant, in this context, that ECAs do not “crowd out”private companies from this business sector.

Another potential problem concerns long-terminsurance. In developed market economies, private sectorinsurers are increasingly willing to underwrite politicalrisks, and many ECAs face the situation of operatingunder two conflicting objectives. On the one hand, theseagencies still remain “lenders of last resort”, expected toaccept risks and offer conditions unacceptable to theprivate sector. On the other hand, the discipline imposedby international agreements47 requires export credit agen-cies to break even over the long run, implying a morecompetitive stance versus the private sector.

To summarize, in the area of government financialsupport to exporters, an exchange of views amongrelevant government agencies from different transition

47 WTO agreement on subsidies and countervailing measures, inparticular. Also, the OECD Arrangement on Guidelines for OfficiallySupported Export Credits has been successful in phasing out interestrate subsidies and implementing tied aid disciplines in the participat-ing countries (see “The Export Credit Arrangement: Achievementsand Challenges 1978-1998”, OECD, 1998).


economies might help them to learn from each other’sexperience and to develop practical solutions tailored totheir situations.

Topics for discussion

1. Is governmental support to exporters in transitioneconomies sufficient?

2. What are the impediments to the development ofexport credit guarantee schemes in the CIScountries?

3. How can cooperation between the private sectorand government agencies in trade finance befostered?

BIBLIOGRAPHY

European Bank for Reconstruction and Development,Transition Report 1998: Financial Sector in Transition,1998

European Bank for Reconstruction and Development,Transition Report 1999: Ten Years of Transition, 1999

United Nations Economic Commission for Europe,Economic Survey of Europe, 1998, Issue 3

Guriev, S., Ickes, B. Barter in Russian Enterprises:Myths vs. Empirical

Evidence, The European Commission 1999

International Monetary Fund, World EconomicOutlook, October 1999

International Trade Centre, Improving the Financingof Exports from Eastern Europe, Division of TradeSupport Services Technical Paper, 1997.

International Trade Centre, The Financing of Exports:A Guide For Developing and Transition Economies, 1997

Knight, M. et al. (editors) Transforming FinancialSystems in the Baltics, Russia, and Other Countries of theFormer Soviet Union, IMF, 1999

Lankes, H.P., Economies in Transition: Deficienciesin Trade Finance EBRD Note for the InternationalMeeting on Developing Export Finance and Insurancein NIS, central and eastern Europe, London, 11-12March 1996

Organisation for European Co-operation and Develop-ment (OECD), Export Credit Financing Systems inOECD Member and Non-member countries (Supple-ment), 1999

Organisation for European Co-operation and Devel-opment (OECD), The Export Credit Arrangement:Achievements and Challenges 1978-1998, 1998

35


Stephens, M. The Changing Role of Export CreditAgencies, IMF, 1999.

United Nations Economic Commission for Europe,Trade Finance in the Transition Economies: a FurtherExamination. Note by the Secretariat (UNECE documentTRADE/R.641 and TRADE/R.641/Add. 1).

United Nations Economic Commission for Europe/In-ternational Trade Centre, Strengthening of ExportFinance Support in Central and Eastern Europe, back-ground paper for UNECE/ITC Consultative Meeting,1996

US Department of State, FY 2000 Country commercialguide: Azerbaijan, July 1999

US Department of State, FY 2000 Country commercialguide: Turkmenistan, July 1999

“World Export Credit Guide 1999-2000”, supplementto “Trade Finance”

World Trade Organization-, Special Studies 3: Trade,Finance and Financial Crises, 1999

CHAPTER II

SHORT-TERM PAYMENT AND CREDIT ARRANGEMENTS AS INSTRUMENTS OF TRADE FINANCE: SOME PRACTICALEXPERIENCE IN DIFFERENT GROUPS OF COUNTRIES

1. Mr. Beat Haenni, Retired Head of Inter-national Trade Finance and Credit Man-agement, Novartis Pharma Services Inc(Switzerland), Trade Finance Consultant

This first, operational section starts with a discussionon payment terms. This is quite appropriate, as theseterms are the pivotal financial element in every cross-border transaction, having a direct impact on both thefinancing conditions and the financial exposure of thecompany.

The degree of ignorance and lack of know-how onmethods and ways of settling export transactions amongthe management of exporting companies is often surpris-ing. In a sales-driven environment, the main concern isthe volume of export sales. While the exporter and hiscustomer seek to find a mutually satisfying agreement onproduct or service specifications as well as price anddelivery times, the financial conditions for assuringtimely settlement in an appropriate currency, oftenremain hazy. In other words, sales managers often do notbother about when and how the proceeds will reach theexporter's books.

Contrary to that neglect, the payment terms often turnout to be a key element of export transactions, reflectingthe exporter's expectations to be duly and timelyreimbursed for the goods shipped or services rendered.One can distinguish here the following importantparameters:

37


the timing of payment, for example, 60 days afterthe invoice date, 180 days after shipment (timedraft) or when collecting documents at the bank; the documentation required to obtain payment. Forexample, under deferred payment terms, a pro-missory note is issued by the buyer; under L/C con-ditions, the letter of credit stipulates the documentsto be presented to the bank to get paid;the relationship between seller and buyer: mutualtrust and confidence command lenient paymentterms (open account as opposed to payment inadvance);the exporter's assessment of economic and/orpolitical risks in the customer’s country;the degree of bank involvement in the export trans-action: “open account” terms require a simple banktransfer, whereas a documentary collection requiresmore active intermediation by the exporter’sbank(s); services available from the exporter’s andimporter's banks and costs of those services;the ease of shipment and customer satisfaction: e.g.“letter of credit” terms can be cumbersome anddelay shipment and payments; in particular, inaccu-rate wording on conditions in the letter of credit canlead to documentary discrepancies, delaying exportproduction and shipment.

Often, export sales contracts stipulate stringentpayment terms, for example, “payment in advance ofshipment” or “letter of credit” because of the lack ofthorough payment risk assessments. In many cases, amore accurate risk assessment can justify more compe-titive terms, thus assuring a steady flow of businesstransactions. It is hardly an exaggeration to say thataccurate financial risk evaluation is the key to “repeatbusiness”, that is a permanent or growing volume ofexport orders. Here, the various risks involved—political,commercial, currency, and in some countries even the“bank” risk—should be duly assessed.

This being said, one should mention that many bankerstend to rely too heavily on country risk evaluations at theexpense of investigating the specific circumstances of thepartners involved in a deal. This is often linked to theirlack of understanding of the client’s business and its

Short-term Payment and Credit Arrangements as Instruments of Trade Finance 39

customers, or an inability to understand the structure ofthe deal.

Exporters are naturally more concerned with thecredibility of the customer rather than with the so-calledcountry risk. The task of export risk evaluation should beassigned to a credit management function within theexporting company. This function encompasses the tasksof supporting exports with competitive payment andfinancing terms, while protecting the export receivablesaccounts against bad debts, by using the right paymentchannels or stipulating insurance measures.

2. Mr. Dmitry Latishev, Director,International Department, Baltic Transit Bank (Latvia)

I would like to share the experience of Baltic TransitBank and its customers in the financing of foreign tradeoperations, in particular with reference to the issue ofpayment and credit facilities used in short-term tradetransactions.

First of all, I would like to thank the UNECE secretar-iat for the preparation of the background note, which, inmy view provides an important basis for the discussionsof obstacles to the financing of trade with transitioneconomies. For us, as practical workers, it is particularlyimportant to find ways of overcoming these obstacles,most importantly through the reduction of risks in trade.

Since the goal of the seller in any trade transaction isto receive payment for the products shipped, in trade withtransition economies where the risk perceptions are high,the seller is often inclined to ask the buyer for prepaymentof the exported goods. On the other hand, the buyer’sprimary concern is to receive goods of the quality andquantity stipulated in the contract.

Often the interests of buyers and sellers cannot beeasily matched. In particular, prepayment terms imposeexcessive risks on the buyer.

As an example, one of our bank’s customers haspurchased leather shoes from Austria on a 100 per cent


prepayment basis. However, when the truck with thegoods arrived in Riga the customer found out that thepairs of shoes were all in small sizes only. Anothercustomer of the bank is involved in frozen fish trade. Hissupplier has demanded the following payment conditions:25 per cent of the payment to be effected before the load-ing of the vessel and the remaining 75 per cent before thevessel arrives to the port of destination. The customer hadno guarantees of the quality of the goods shipped or thetime of delivery. Moreover, the importer’s working capi-tal had to remain frozen during the transaction. Recently,this customer has received a delivery of frozen fish fromEstonia. When the truck with the goods was unloaded inthe cold store rented by the importer, it became clear thateach carton was unmarked and contained differentamounts of fish. Hence the importer had to purchasescales to control the weight of the fish he was selling to itscustomers. This shows that in situations where 100 percent prepayment has been made, all additional costs orlosses are borne by the buyer.

On the other hand, if the seller agrees to grant deferredpayment terms to a customer in a country with unstableforeign currency regulations, problems may arise even ifthe importer has the requisite funds and is willing to pay.One customer of our bank could not receive paymentfrom Belarus due to new regulations, which came intoforce after the goods had been shipped. According tothese regulations the customer could not pay in USD oreven in Belarus roubles since the seller was not a residentof Belarus. Any acceptable barter product was consideredas strategic, the use of which was prohibited for exchangepurposes.

To summarize, one can note that:

both ways (prepayment and deferred payment) canbe risky for buyers and sellers;

prepayment conditions will work only if the part-ners are honest, trust each other and have longstanding business relations;

prepayment conditions freeze the buyer’s moneyfor an unlimited time; they enable the seller to usethe buyer’s money and take advantage of the buyer,thus putting partners in unequal positions;


instead of prepayment, some customers requireperformance bond from the seller/its bank; thismode might improve the situation;

deferred payment, at least in the successor States ofthe Soviet Union, remains a very risky way of doingbusiness. The problems which arise usually do notrelate to the performance of the partner (buyer), butrather to the country where the partner is based(country risk). Nobody knows what regulatorychanges concerning international trade might bemade applicable after the goods have been shipped.

In my opinion, the present situation on the market,where the seller dictates conditions to the buyer, is notnormal. The main reasons for this are the weakness of thebanking system and the overall economic instability inthe transition countries. Small-sized companies cannotcount on the help of government-owned insurancecompanies and have to rely on their own resources.

Now, I would like to highlight some payment schemesdeveloped by the Baltic Transit Bank, which are appli-cable in this risky environment, and under which none ofthe partners obtains unfair advantage.

Company A in country B sells company C in countryD one truck of goods. The buyer (company C) is unableto make a prepayment but for company A it is too risky togrant deferred payment terms. As a compromise, thecompanies conclude a contract for goods to be stored in awarehouse rented by the buyer while the seller keeps thetitle of ownership. As soon as the buyer makes a partialpayment to the seller, the latter instructs the warehouse torelease the amount of goods proportionate to the payment.

This method is acceptable for both parties: the buyerknows that the goods are available at any moment. At thesame time, he does not have to freeze his working capital,while the seller retains the ownership of the goods untilthe payment is received. The storage cost has to be agreedby the parties and should not in any case be higher thanthe storage cost in the seller’s country.

In another example, company A plans to sell itsproduct on a market in country B. To avoid the servicesof middlemen, company A registers a subsidiary com-


pany in country B. The question is: how is it possible tokeep the transaction under control while being outsidecountry B?

The answer is as follows: after the subsidiary companyis registered, company A makes the following steps:

hires a minimum number of employees (as a rule,one manager-secretary and one accountant);

signs with them both the labour agreements andcontracts of their responsibility against the homecompany;

rents a storage space in country B and keeps thegoods at the rented store;

instructs the manager and the store to release eachlot of the goods after it has been prepaid and thebank’s confirmation regarding the prepayment hasbeen received.

As an alternative to the schemes described above, adocumentary collection could be used. Unfortunately, notall local banks and customers have a clear understandingregarding the terms and definitions of modern banking in-struments. Often, the bank meets with confusion and amisunderstanding of various export finance practices.Therefore banks should seek to share their knowledgewith their customers and public at large.

In summary, I would like to emphasize the following:

the payment conditions in trade among transitioneconomies when 100 per cent prepayment isdemanded is abnormal;

these conditions are prevalent because the banks inthe transition countries are weak and the economicsituation is unstable;

the government-owned insurance institutions arenot interested in covering the financial risks ofsmall and medium-sized companies in internationaltrade;

exporters and importers are often not familiar withthe terms and definitions of banking instruments.They need to be assisted and trained by banks.


Winding up, let me express the belief that practicalseminars targeting the banks’ customers will helpimprove the above-mentioned situation. In particular, theBaltic Transit Bank is planning to organize regularly aseries of seminars on various relevant topics. In my view,such events promote closer ties between the bank and itsclients, and help establish the basis for more productivecooperation.

3. Discussion

Kenneth Owen (Hansabanka, Estonia) asked BeatHaenni (Trade Finance Consultant, Switzerland),whether in his opinion customers tended to contact thebank at late stages of contract negotiations.

Beat Haenni agreed that many companies made themistake of omitting the discussion of payment termsduring contract negotiations. Ideally, the exporter, im-porter and their respective banks should discuss theexport transaction together with the perspective that it isnot being a one-off deal but a continuous businessrelationship. Unfortunately, this is not always the caseand often it is difficult to determine the department in thecompany (e.g., sales, marketing or finance), which isresponsible for defining the payment terms of a deal.

Governments in western countries often organize trademissions to various developing countries where theexporters seek to expand the activities. Unfortunately,bankers, who potentially could provide assistance toexporters, are often underrepresented on such missions.Chambers of Commerce could serve as a useful platformfor choosing the participants of trade delegations andensuring the representation in those of both exporters andbankers.

Kenneth Owen asked Dmitry Latishev (Baltic Tran-sit Bank, Latvia) about his bank’s experience in assessingrisks when dealing with newly formed companies intransition economies, where traditional criteria such ascredit history were difficult to use.

Dmitry Latishev replied that every bank wishing towork successfully in transition economies should adopt


the “know your customer” principle. Unfortunately,many financial institutions in these economies have notyet developed long-standing relationships with theirclients because both the banks and their customers havebeen present on the market for only a few years. Clearly,newly emerged companies also lack lasting relationshipswith their trading partners abroad. Therefore, on the onehand, banks are willing to offer their services and use theavailable financial resources but on the other, they are of-ten unable to take on the risks of the client.

This being said, during the last two or three years, thesituation has improved. For example, many banks havemoved away from the practice of demanding a 100 percent coverage of funds under letters of credit. Unaware ofthe instruments offered by banks, however, companiesoften carry out their export transactions under primitiveschemes and take on a considerable amount of risk.

Another problem highlighted by Dmitry Latishev wasthe lack of trust between exporters and importers in thetransition economies, which resulted in stagnating trade,particularly between the Baltic and CIS countries. Andanother major obstacle to better trade finance opportuni-ties is the lack of cooperation between the government-supported organizations (such as ECAs) from differentcountries.

Anita Kurme (Multibanka, Latvia) shared the experi-ence of the Multibanka in the area of trade finance. Thisbank has been formed on the basis of the Latvian divisionof the Vneshekonombank of the Soviet Union, whichbefore the beginning of economic transition was the onlybank in the country that financed trade transactions withforeign countries.

In Latvia, the newly established commercial bankshave sought to do business in the area of trade finance.Unfortunately, they have often lacked sufficient know-how to offer to their customers. Due to its above-mentioned past experience, Multibanka has been able tofill this niche, providing its customers with a number oftrade finance instruments. However, the customersthemselves have had to be trained to use them.

Anita Kurme confirmed that elevated risks in tradefinance were often associated with the short credit history


of many clients. While this is a multi-faceted problem,she mentioned the language of documentation as anoverlooked but often very important issue. For example,in financing trade with Russia western banks often do nothave sufficient expertise to deal with documents that areprepared in Russian – this is where the Baltic banks havea distinct advantage over their western colleagues.

In more general terms, recently Latvia has made con-siderable progress in developing trade finance facilities,which is illustrated by the rapid growth of documentarytrade operations. Various seminars organized by westernbanks or financial institutions now focus on complex andadvanced issues in trade financing.

The professional qualification of transition bankers isnow not inferior to that of their western colleagues. Whilethe latter perhaps possess more extensive experience,transition bankers, due to the small size of their organi-zations, have to acquire an in-depth knowledge of everypart of the business. In transition economies, even legalissues have to be sometimes dealt with by bankers, sincelawyers do not have sufficient knowledge of all theinstruments involved in trade finance operations. Andwith regard to some particular instruments, such astransferable letters of credit, Latvian bankers oftendemonstrate more experience than their western Europe-an colleagues.

Anita Kurme also noted the importance of the LatvianAssociation of Commercial Banks and, in particular, itsrole in organizing regular meetings to discuss topicalissues and problems in banking. These meetings are oftenattended by experts from adjacent sectors such asinsurance and law firms, merchandising companies, etc.Such events help bankers meet with their colleagues andshare their knowledge and experience. So far these eventshave proven to be a potent means of acquiring know-howin the various areas of the banking business.

Veronika Shemyakina (Promsvyazbank, RussianFederation) emphasized that, in her view, bank riskremains a major problem in trade finance. More speci-fically, the lack of information about other banks,particularly in transition economies, results in stringentcollateral requirements in inter-bank transactions, which,


in turn, force banks to impose high collateral require-ments on their customers. As a possible solution to thisproblem, she proposed an acquisition by banks of interna-tionally accepted financial ratings, which can serve as areliable indication of a bank’s creditworthiness and,therefore, help ease the collateral requirements.

Arturs Akis (Vendomatic Ltd., Latvia) mentionedthat in his company’s experience, failure to properlystructure a letter of credit transaction has often becomethe major obstacle to concluding contracts with tradingpartners. He urged the bankers present at the seminarreflect on this problem and put forward some practicalways of overcoming it.

Dmitry Latishev replied that companies shouldalways seek advice from their bankers before concludinga deal. He used an example of a customer of the BalticTransit Bank who had concluded a contract for thedelivery of equipment to Latin America. A letter of creditwas opened in favour of the exporter. Already the firstpoint on the list of terms of the letter of credit asked for aninvoice where exporter had to declare that all the infor-mation provided in the invoice was true and correct. TheLatvian customer had missed this important point whilepreparing the invoice, and on the ground of such discrep-ancy the bank in Latin America refused to pay against thedocuments. This example shows that difficulties mightarise even in standard situations of a letter of credittransaction, particularly when the importer imposesadditional demands.

Kenneth Owen noted that it was very important forthe banker to travel together with the client and take partin negotiations in order to identify and possibly solve aris-ing problems. He referred to Hansabanka’s experience infinancing the export of Lada cars to various parts of theworld. Recently, a buyer was asked to open a letter ofcredit to purchase cars to Ukraine. The client was awarethat the cars were pledged to Hansabanka as security andwas worried that the bank would make a claim under theletter of credit but not release the cars, that it held assecurity. The only solution to these types of problem is tohave a person-to-person discussion involving all theparties taking part in the transaction. Therefore, goodbankers and account managers should be prepared


to travel with their clients and meet their counterparts inorder to settle the terms and conditions of the deal.

Vladislav Fioshin (Baltic Transit Bank, Latvia) em-phasized that difficulties in financing trade with Russiancompanies often arose due to their lack of trust in Russianbanks. They reject their services and prefer to involvewestern financial institutions instead. This, in his opinion,is a strange situation, taking into consideration the rela-tively large size of Russian banks and their good relation-ship with their colleagues in the Baltics.

Jonas Placiakis (Lithuanian Export and ImportInsurance, Lithuania) shared the relevant experience ofLithuanian exporters. He mentioned that the Lithuanianeconomy was very export oriented, with the yearlyoutflow of goods and services equivalent to around 30 percent of GDP. Lithuania’s main export industries aretextile and furniture, while the country’s principal tradingpartners are located in eastern Europe. Given the nature ofthe exported goods, they are usually sold on an openaccount basis. In order to assist Lithuanian exporters inobtaining financing, two years ago the Lithuanian ExportCredit Agency developed a scheme under which itinsured the exporter’s sales turnover. Having such aninsurance, the company can obtain a bank credit line,from which the funds are available upon the presentationof a sales invoice. Such a scheme also provides aneffective solution to the problem of high collateralsdemanded by banks: the insurance provided by the ExportCredit Agency effectively serves as collateral.

Dmitry Latishev mentioned that many importers,including those from western countries, were reluctant toopen letters of credit in favour of transition economies’exporters. The usual quoted reasons for this are the lackof qualified personnel and the high cost of a letter ofcredit transaction. Also, western exporters often refuse totrade using letters of credit and insist on prepaymentterms.

Beat Haenni replied to that comment saying that in hisview such an attitude reflected clear ignorance on the partof the western exporter. The demand for prepayment alsomeans a complete lack of trust in the customer and itscountry. While there undoubtedly exist significant risks


in trade with transition countries, these risks should beaddressed not through a simple demand for prepaymentbut by forging closer links with the buyer and its bank tofind common and mutually beneficial solutions.

Payment terms can play a major role in a situationwhere exporters compete between each other. When thisis the case, it is the importer’s task to bring the competi-tive idea into the market.

Kenneth Owen suggested that while partial prepay-ment may be acceptable in certain situations, 100 per centprepayment left the exporter with no real incentive to shipthe contracted goods. In order to reach a more balancedsolution (for example, prepayment of goods that arewithin the control of the freight-forwarding company),more detailed negotiations between the partners oftenprove to be helpful. He agreed that Baltic banks held adistinct advantage over their western colleagues as theywere able to deal with documentation in Russian; forexample Hansabanka has been advising credits forDeutschebank covering shipments by rail where all therail bills were in Russian. Clearly, in this case localbankers could read, understand and check thesedocuments far better than the documentary section ofwestern banks.

Dorota Cichocka (Kredit Bank S.A., Poland) support-ed Dmitry Latishev’s idea that customers in transitioneconomies were often forced to accept prepayment terms.According to her estimates, over 90 per cent of foreigntrade operations in Poland are settled on that basis. At thesame time, she emphasized that her bank was able to offervarious products addressed both to exporters and import-ers. All these products are based on letters of credits,where future inflows of cash on open LCs are discountedby the bank. The customer always has to contact the bankwhile negotiating the deal to be informed on the instru-ments acceptable for the transaction.

Dorota Cichocka also mentioned that, in her view,Polish customers were better informed on the work offoreign export credit agencies such as COFACE andHERMES, than on services offered by their Polishcounterpart. This ignorance often forces the banks to bearrisks by themselves.


Kenneth Owen underlined the importance of collabo-ration between transition economies banks in facilitatingtrade finance in the region. He referred to a Hansabankaclient in Lithuania, who had been buying steel plate fromUkraine to supply it further to a Polish shipyard. Such atransaction involves dealing with risks relating to threedistinct countries. While having been able to structure therisk on the first part of the deal, Hansabanka was notprepared to accept the risk of the Polish customer whodemanded deferred payment terms for the steel plate itwas buying. Hansabanka then used the services of itscorrespondent bank in Poland, which knew the customerand agreed to discount every invoice received andaccepted by the shipyard for a period of 12 months. Thisexample shows the possibility of mitigating the riskthrough cooperation with local banks, which have a betterunderstanding of their home market.

Ivan Fedak (SIA Fedak, Latvia) underlined a numberof problems associated with export-import financing andbank-customer relationships in transition economies. Inparticular, when exporting to western countries whereimporters often ask for deferred payment, companies facea number of issues, which they find difficult to settle dueto lack of experience. Equally problematic are transac-tions on deferred payment basis within Latvia, as the legalframework needs to be improved to allow creditors tocollect overdue debts in a fast and efficient manner.

Ivan Fedak also emphasized the difficulty of obtain-ing bank credits due to unreasonably high collateralrequirements and escalated commission payments. In hisview, banks need to adopt a more client-orientedapproach and to make an effort to understand the needs oftheir customers. He suggested that banks create workinggroups consisting of experienced professionals thatwould carry out detailed analyses of clients’ needs on acase-by-case basis and also act as a consultant on legaland financial issues.

Dmitry Latishev replied that many of the above-mentioned issues had been successfully tackled byLatvia’s leading financial institutions. Many banks havecreated corporate client departments to deal more closelywith clients’ needs and problems. The most competitivebanks in Latvia no longer demand excessive collaterals


from companies. At the same time, it is not unusual for aclient to demand a credit or financial guarantees worthover USD one million without committing any of his ownfunds – and no bank will agree with such terms.

Dmitry Latishev also mentioned that factoring hadbeen successfully used for trade both inside Latvia and forexport operations to western countries and the CIS.Factoring operations are facilitated by the codes ofpractice developed by the two worldwide factoringassociations, which bring together the leading companiesin the area. Factoring is particularly appropriate for small-er transactions amounting to several hundred thousandUnited States dollars. This instrument allows deals to bestructured in a mutually beneficial way: the importer canobtain deferred payment terms, while the exporter canbenefit from more favourable conditions with respect toproduct price or quantity.

CHAPTER III

MEDIUM AND LONG-TERM TRADE FINANCE:AVAILABLE SCHEMES AND PROBLEMS

1. Mr. Kenneth Owen, Head of TradeFinance Department, Hansabanka(Latvia)

This presentation focuses on the following issues:

(a) Forfeiting operations,

(b) Creation of trade finance consortia

(c) Development of a private insurance market

(d) Cross-border leasing operations.

(a) Forfeiting operations

Forfeiting can be defined as an instrument in medium-and long-term trade finance where a bill of exchange or apromissory note is issued by a buyer. Such a bill ofexchange or promissory note is a clear obligation to pay,and can be used in court as an evidence of debt. This debtinstrument can be avalized or guaranteed by a bank orother financial institution. “Aval” is a commitment by abank to pay under the debt; although under the UK lawthis term is not specifically mentioned, it is a commonlyaccepted security in banking practice. Most importantly,such notes or bills are sold or purchased on the forfeitmarket on a “without recourse” basis, i.e. the paymentobligation lies fully on the primary party or the avalizerand not on any of the subsequent holders of the security.

The first forfeiting transactions were undertaken bySwiss trading companies supplying grain to Russia over50 years ago. At the moment forfeiting is used for

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transactions spanning periods of between 6 months and 5-7 years for a variety of products, such as machinery,equipment, etc. The primary restriction on the time periodis the availability of a long-term forward market for thecurrency of the transaction. Long-term deals are carriedout predominantly in such currencies as the US dollar,Euro or pound sterling, for which the indicated forwardmarket is available.

Forfeiting can often be used in conjunction with othertypes of trade finance. For example, a recent financingpackage for Latvian Railways was 85 per cent financedunder the United States Eximbank scheme and 15 per centpart financed through bills of exchange drawn on LatvianRailways and payable over a period of two years.

In Latvia, bills of exchange legislation has beenadopted enabling refinancing operations between theCentral Bank and commercial banks. According to thislegislation, banks are prohibited from discounting bills ofexchange that have more than 180 days to maturity.Obviously this stipulation does not reflect properly theinterests of the trade finance market, where imports ofmachinery and equipment are usually financed overlonger time periods. In this context, let me suggest thatthe dialogue between the private sector and Governmentsregarding the regulation of financial services shouldcontinue. Legislation should be very clear and shouldcorrectly cover the types of instruments and transac-tions that commercial banks are trying to finance.Should this fail to happen, local banks may find them-selves at risk of losing their business to internationalbanks, which do not operate under the same regulatoryrestrictions.

In many cases the purchaser of a forfeiting instrumentis not a bank but an investor from the country of origin.Most large banks produce rate sheets on a monthly orquarterly basis, which give a good indication of a maxi-mum time horizon and rate for a transaction in a particularcountry. This information is particularly valuable toexporters seeking to enter a new market with a productthat needs long-term financing.

As opposed to banks having forfeiting operations,forfeiting companies are usually not bound by the same

Medium and Long-term Trade Finance: Available Schemes and Problems 53

regulatory rules, and, hence, have different capitaladequacy and provisioning requirements. This allowsthese companies to achieve higher yields due to lowertransaction costs. Also, the specialist companies do notnecessarily hold the security to maturity and often try tobenefit from the movements of market interest ratesapplicable to the securities before maturity. In thisrespect, the forfeiting product can be seen not just as amechanism for creating finance for long-term projectfinancing, but also as a tool for capitalising on move-ments in the financial markets.

(b) Trade finance consortia

A trade finance consortium is defined as a partnershipof two or three banks (or a “Club”), or of three or morebanks (or a “Syndication”) which finances the business ofa common client or a specific product type. The reasonsfor which banks choose to share business are threefold.First, is prudential risk management: when sharing banksare unlikely to use up their country “limits” for one dealor one client. Secondly, there exist sectoral, entity andcountry constraints imposed by regulatory authorities ofthe home jurisdiction. Finally, the third reason is the so-called “additional comfort” factor. This can be obtainedthrough participation of a local bank, which brings localknowledge and expertise regarding the issues of rules,regulations, competition, etc. Therefore, creating partner-ships with local financial institutions becomes a veryimportant part of complex trade finance transactions.

In the near future we are likely to witness a conso-lidation of the banking market in transition economies,which will take place mainly through strategic alliances.International financial institutions should be attracted tolocal markets as partners to share the business and bringtheir expertise, financial muscle and cheap funding. Inthis respect, the role of the Central Bank is paramount,because it can and should initiate a legislative system thatis uncomplicated, efficient and well suited for foreignbanks.

(c) Private insurance market

The term “private insurance market” does not covergovernment-supported schemes or ECAs, but relates to


the operations of large insurance companies, underwritersand syndicates. For example, “Lloyds of London” is notan exchange, or an enterprise, or a corporation, but amarket, where groups of companies or syndicates or indi-viduals gather and agree upon risks they are prepared totake.

Insurance should not be regarded as competing withbanking activities but rather as part of the financial“package”. An insurance company can share a percent-age of risk with a bank, thus leading to more attractiverates for customers and enhancing the credit facilitiesavailable. The insurance market covers insolvency,bankruptcy and liquidation as well as confiscation, ex-propriation and currency default. Very often, the bankor the exporter may be satisfied with the exposure on acountry but may not trust the counterpart, or vice-versa. In these cases, insurance is an effective and oftenlow-cost way to mitigate part of the risk. The regulato-ry authorities should find ways of recognising andrewarding prudent risk management (risk sharing) andrisk insurance by banks and their clients.

(d) Cross-border leasing operations

In the final part of this presentation, we shall discusscurrent developments in cross-border leasing, a type ofleasing whereby the ownership of the leased productremains outside the country of operation.

In general, companies prefer to lease ‘externally’ fortwo basic reasons. The first reason is tax related – withincertain countries there exist ‘tax holidays’ or tax allow-ances for the purchase of fixed assets, so an entity in sucha country may wish to remain the owner of the asset. Thesecond reason is related to foreign exchange risks, i.e. thepurchase of the underlying asset may be in United Statesdollars requiring repayment in that currency. Therefore,the risk of restrictions on foreign currency transactions orof non-availability of foreign currency over the deferredpayment period often makes it more suitable to retainownership of the asset outside the country of use.

At the same time, leasing is a very appropriate instru-ment for transition economies for two reasons. First, localentities often have little balance sheet value, and, there-


fore, struggle to obtain long-term bank financing topurchase equipment and machinery. Second, legislationin countries such as Estonia and Lithuania prevents banksfrom lending without collateral, making leasing (wherebythe ownership remains with the lessor) a very attractiveproduct.

This situation is not uniform in all transition econo-mies, though. For example, Poland does not have verygood leasing regulations, so the market has developedslowly. However, the Baltics could become a major cen-tre for leasing activities in the region, and could servecountries within the CIS with their leasing needs, i.e. theownership of assets for use in other countries could beheld in the Baltic States.

To make progress in facilitating trade financing intransition economies, the latter should harmonize theirlegislation. In particular, the tax treatment of variousbusiness operators should be the same in all countries.Ending my presentation, let me express my belief that thedialogue between governments and the business commu-nity should continue and that legislation influencing thebusiness environment should be developed in cooperationwith the private sector.

2. Tomas Dvorak, Deputy Financial Director, SKODA Export Co. Ltd (Czech Republic)

Skoda Export Ltd is a company that has been activeworldwide for nearly 35 years. The reference list ofSkoda Export includes approximately 100 power stationsthat Skoda either constructed or to which it supplied theequipment, as well as other products such as locomotives,trolley-buses, etc. Throughout its existence, SkodaExport has used various mechanisms to finance itsoperations.

In the beginning, Skoda offered its customers long-term supplier credits, with the debtor being grantedrepayment terms of up to 10 years. The economic changesthat took place in the region of central and eastern Europemade it impossible to continue this type of financing.


As a result, Skoda Export has pursued closer coopera-tion with local banks and the Czech Export Credit Agency- EGAP. The company has also developed further itscooperation with foreign institutions, creating supplierconsortia. Export sales of machinery and equipment oftenrequire complex financing schemes, which involve theparticipation of foreign banks.

I would also like to say a few words about alternativemechanisms for financing long-term projects. Suchinstruments include BOO (build-own-operate) and BOT(build-operate-transfer) projects. Under BOO, the suppli-er, instead of delivering the equipment to a third party, isconstructing his own plant, thus owning and operating it.Under BOT the plant is built and operated by the supplierwho is paid out of the project revenues and after a certain,agreed period of time transfers the plant to the owner.

Regarding the various risks relating to export transac-tions, I should underline the importance of political risk.For example, Skoda Export has concluded an agreementwith the Government of Pakistan, which was cancelledafter just two months due to the change of government inthe country. Another example also relating to Pakistanillustrates the relevance of transfer risk. In that instance,Skoda Export supplied a large power station on the basisof a long-term supplier credit. All the instalments werepaid up until the moment when Pakistan was deniedcredits due to nuclear testing. This has considerablyworsened the possibility of receiving due payments inconvertible currency.

When alleviating country risk, Skoda Export has totake into consideration the exposure limits of variousexport credit agencies. Bank risk is also an importantissue: for long-term projects lasting 5-10 years it isimportant to be confident in the financial standing of theclient’s bank. For this reason, Skoda Export largelyprefers to deal with leading and highly-rated financialinstitutions.

Unfortunately, in many transition countries financialinstitutions are not strong enough to cover large transac-tion amounting to tens or hundreds of millions of USD.For this reason, from time to time Skoda Export insists ongovernmental guarantees of the buyer’s solvency. When


this type of security is not available, as is the case in somecountries, this can be a serious obstacle on the path ofmutual cooperation.

Finally, I would like to emphasize the importance ofadequate regulations in export transactions. In transitioneconomies, it is often very difficult to accept and applythe local law for long-term transactions due to itsinadequacy and/or the lack of stability. For this reason,trading partners often have to agree on the application ofappropriate western legislation.

3. Discussion

Beat Haenni noted that sometimes the debtor reactsnegatively to the sale (forfeiting) of his notes because hemay feel that he is losing control over the party he owesmoney to. The customer can also be discontented whenthe transaction is insured by the exporter, perceiving it aslack of trust in his own or his country’s creditworthiness.

Kenneth Owen replied that the client should beinformed before the deal is made that there is always apossibility of the debt being sold to a third party due tomovements on the financial markets or changes in thebank’s financial strategy.

Beat Haenni asked about the typical payment termsgranted by Skoda Export. Tomas Dvorak (SKODAExports CO. Ltd, Czech Republic) replied that a typicalarrangement involved a 10-15 per cent advance payment,and around a 10 per cent payment during the imple-mentation of the project. The rest of the contract’s valueis covered by a credit, which is granted either by SkodaExport itself or arranged with the cooperation of Skoda-affiliated banks or banks belonging to the export consor-tium. The duration of loans depends on the financialpossibilities of ECAs and, in the case of power stations,typically does not exceed 10 years.

CHAPTER IV

BANKS AS PARTNERS IN EXPORT FINANCE:THE EXPERIENCE OF TRANSITION ECONOMIES

1. Veronika Shemyakina, Head of ProjectFinance, International BusinessDepartment, Promsvyazbank(Russian Federation)

I would like to introduce Promsvyazbank. The bankwas established five years ago and was initially focusedon servicing telecommunication companies. However,after the 1998 crisis, the bank recognized the necessity tooffer its clients a wider range of services, including thoserelated to international transactions.

As a first step towards implementing international op-erating standards, Promsvyazbank invited internationalauditing companies such as Arthur Andersen and, subse-quently, KPMG to undertake an impartial audit. The sec-ond step involved the acquisition of an internationalfinancial rating from Thomson Financial Bankwatch. Thebank has received CCC Senior Debt – Long-Term rating,LC-3 Short-Term Debt Rating, and an IC-D Intra-Country Issuer rating.

Simultaneously, Promsvyazbank has invested consid-erable efforts into the enlargement of its correspondentbank network in western countries. As a result,Promsvyazbank has managed to offer some new productsto its customers. In particular, when structuring newtransactions involving L/Cs and, in particular partiallycovered L/Cs, it benefits from credit lines opened bywestern banks.

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One of the major problems impeding exporters’ accessto trade finance in Russia is the high cost of capital on thedomestic market. In particular, long-term financing isvery expensive in Russia and, therefore, is unaffordablefor many Russian companies. This forces local banks toseek cheaper funding on the international marketsthrough participation in EBRD programmes or coopera-tion with foreign ECAs. Drawing on foreign sources canfacilitate long-term financing of investment, in particularpurchases of production equipment.

On the banking side, participation in internationalcooperation helps local financial institutions to developtheir structure, improve risk and liabilities managementtechniques, and assists in their further integration intointernational financial markets.

2. Meirambek Karazhigitov, Expert onInternational Financial Institutions,Kazkommertsbank (Kazakhstan)

Let us start with a brief overview of the bankingsystem of Kazakhstan.

As everywhere in the CIS, Kazakh banking history isrooted in the very beginning of the 1990s when, after thecollapse of the Soviet Union, commercial banks startedmushrooming. Within the space of just two years, thenumber of banks reached 300. By 1998, however, thisfigure had decreased to 71 and in 1999 it fell further.According to the forecast of the Kazakhstan CentralBank, the consolidation of the banking sector willcontinue and the total number of banks should fall to 25 to30, which will meet the demand for financial services.

The decrease in the number of banks can be attributedto a programme launched by the National Bank ofKazakhstan about 3 years ago. Under this programme, ex-isting banks were classified into three groups. Group “A”included banks, which were complying with the inter-national standards established by the Basel Committee onBanking Supervision, group “B” – the banks, which werepartially meeting these requirements and group “C” – thebanks failing to meet these requirements.

Banks as Partners in Export Finance : the Experience of Transition Eocnomies 61

Banks in groups B and C were granted two years torestructure their activities to meet both the internationaland the local adequacy standards for financial insti-tutions. Banks failing to meet these requirements after theend of the term were to be merged, consolidated, deprivedof their banking licence or transformed into creditpartnerships.

Out of the 51 banks currently operating, 8 major bankscontrol around 65-70 per cent of the financial sector. Thisfigure includes foreign banks such as ABN-AMRO,which started its operations in 1993, as well as Citibank,HSBC, Société Générale, as well as banks from Turkeyand China, so that the intensity of competition in thesector is visibly strengthening.

Along with the reform of the banking sector itself, anumber of measures have aimed at strengthening thecountry’s financial sector in general. One very importantstep was the pension reform and the establishment ofprivate pension funds. Now there exist 14 private pensionfunds in Kazakhstan, which are restricted by law in theirinvestment activities and are investing a significant partof their resources into government bonds. In my opinion,the continuous demand for such securities by pensionfunds prevented the collapse of the Kazakhstan State debtmarket after the 1998 Russian financial crisis.

At the present moment, banks in Kazakhstan areactively trying to attract deposits from the population:where, according to the National Bank’s estimates, asmuch as around one billion USD are still kept “under themattresses”.

In order to strengthen public confidence in the bankingsector, the government has introduced two laws. The firstlaw deals with the confidentiality of banking information.In particular, it restricts the access of tax and customsauthorities to information relating to the accounts ofphysical persons and of corporations. Such informationhas to be disclosed only in case of court proceedingsagainst such physical persons or corporations.

Secondly, an insurance fund protecting individualsavings has been established. The capital in this fundamounts to USD 70 million, and the banks, which havebecome members of this insurance fund, have to con-


tribute to it as much as 0.15 per cent of their annualprofits. Under this scheme, in case of a commercialbank’s failure, deposits of up to KZT (Kazakh Tenge)200,000 would be reimbursed at 100 per cent, and thoseof up to 400,000 – at 80 per cent and so on.

The major outcome of these initiatives has been thestrengthening of the banking sector, which was one of thefactors allowing the financial industry to survive throughthe Russian crisis.

This being said, after the devaluation of the Russianrouble in August-September 1998, Kazakhstan has expe-rienced significant economic and financial difficulties. Inparticular, a greatly increased inflow of Russian goodshas caused downward pressure on the national currency.After several months of market interventions in an at-tempt to defend the tenge, on 4 April 1999 the NationalBank was forced to introduce a free floating regime forthe national currency. This decision was accompanied byan announcement that depositors who had not withdrawntheir funds before February 2000, would be compensatedat the rate effective on the day before the introduction ofthe floating rate. Despite some criticism from the WorldBank and the EBRD, this measure has helped to preventa major collapse of the national currency.

Let me now give a little bit more information on theKazkommertsbank. Kazkommertsbank is a private bankestablished in 1990, and in terms of equity capital andcapitalisation, is the largest in Kazakhstan. The control-ling stake is with the management of the bank, 32 per centof the shares are held by the Bank of New York – nominalshareholders under the programme of ADRs and GDRslaunched in July 1998 for the amount of 50 mission USD.Since 1997 the bank has raised funds five times on the in-ternational capital market, and in May 1998, its first cor-porate eurobonds were issued for the value of USD 100million.

Kazkommertsbank works actively with internationalfinancial institutions such as the EBRD, IFC, DutchFMO, German DIEG, etc. The bank has 80 million USDworth of “blank” trade finance facilities from westernbanks – around 50 per cent of this volume can be utilisedfor trade finance. The bank’s client base consists mostly


of private export-import companies, which work exclu-sively through letters of credit or letters of guarantee. Asa matter of fact, the maximum amount of prepayment thatKazakh importing companies are allowed to make is30 per cent of the value of the contract.

3. Discussion

Iouri Adjoubei (UNECE secretariat) asked VeronikaShemyakina what in her view were the major problemsexperienced in the relations between Russian banks andtheir corporate customers, as well as partner banks, withinthe CIS.

Veronika Shemyakina replied that the main problemwas the lack of understanding of particular bankinginstruments by foreign traders. In Russia, each customer’scase is, in a way, unique, and often requires the structur-ing of complex transactions. For example, one recenttransaction handled by Promsvyazbank involved as manyas 10 participants. Many Russian exporting enterprisesprefer to work on a 100 per cent prepayment basis. In suchcases, foreign partners require performance bonds, whichneed to be confirmed by European banks. The outlook ofmost Russian exporters is short-term, and often a bank’sefforts to promote more advanced forms of settlement fallon deaf ears.

Ivan Fedak enquired whether Kazkommertsbank usedescrow account terms in trade finance transactions.

Meirambek Karazhigitov (Kazkommertsbank, Ka-zakhstan) replied that, so far, the bank has used escrowaccount terms in only one transaction, involving the saleof caviar. In fact, this scheme has failed to acquirepopularity with the bank’s customers and is used on alimited scale.

Beat Haenni asked for more information regarding theKazkommertsbank’s efforts to promote exports, in partic-ular in the sector of small and medium-sized enterprises.

Meirambek Karazhigitov admitted that work withSMEs was one of the weak points of the bank’s activities,since around 70 per cent of the accounts in the bank were


held by large corporate clients. Following advice from theEBRD, Kazkommertsbank has started programmes to at-tract smaller corporate clients.

Kenneth Owen commented that the major export in-dustries of the CIS countries such as metal, oil and gashave been historically dominated by large enterprises.Therefore, the gestation and growth of SMEs takes alonger time and they are yet to emerge as the real back-bone of the economy. Moreover, existing strict govern-ment control over certain industries in the successorStates of the Soviet Union does not encourage SMEs. Forinstance, in Uzbekistan, cotton production is still control-led through a central government scheme. In the alumin-ium industry of Russia, a number of companies operatingindependently (e.g., in Bratsk, Novosibirsk, etc.) weremerged into one Russian-wide large aluminium holding.

Michael Spivey (Eximbank, United States) referringto the experience of the United States’ economy, indicat-ed that in 1985 there were about 18,000 banks in the Unit-ed States, by 2000, this number had dropped to 8,000, andby the time the consolidation of the banking industry iscomplete there are expected to be less than 5,000 banks.While traditionally United States’ banks have been sepa-rate from insurance companies, securities houses, etc., weare now witnessing the creation of large financial con-glomerates. These companies often cannot respond to thechallenges of smaller companies, notably in the area oftrade finance. It is the Export-Import banks and non-banklenders that can fill the existing gap.

In particular, the already mentioned consolidation inthe banking sector creates certain lacunae in particular ar-eas of the market. To fill those, the Eximbank has beentrying to encourage smaller local banks, which have tra-ditionally relied on domestic credit and mortgage lending,to become more involved in the export financing busi-ness. To the same end, Eximbank has tried to promote co-operation with the so-called “asset-based” lenders such asJohn Deer Credit, GE Capital, etc. The issue, however,still remains a challenge, particularly in the area of smalland medium-sized companies.

Dmitry Latishev voiced concern that a lack of reliableinformation on potential customers in importing countries


was a major obstacle to the growth of exports from tran-sition economies. To address this problem, he suggestedto enhance cooperation between exporters and the trade(economic) departments of embassies. This type of coop-eration can be a potent means of obtaining relevant infor-mation both on a country and on individual customerswithin that country. The customer-associated risk relatesto commercial risk, and should be dealt with throughworking closely with correspondent banks.

Michael Spivey underlined that the United States Ex-imbank actively participated in trade missions on a gov-ernment-wide basis. At the same time, it alsoaccompanies private company missions to individualcountries. Information on the services offered by Ex-imbank was disseminated through information packagestranslated into foreign languages. With regard to Latvianbuyers, for example, the information on Eximbank oper-ations would be translated into Latvian, which would helpbuyers interested in acquiring United States goods. Ex-imbank also regularly sends business development offic-ers to foreign countries. Finally, the United StatesDepartment of Commerce offers American traders aproduct called Agent Distributor Service which, for a feeof USD 250, provides any United States company withlists of qualified foreign buyers, agents and distributors oftheir product in a particular country.

The Internet is bound to change the face of trade fi-nance and provides a unique opportunity for banks inemerging markets. For example, the Internet can offernewer banks a chance to embrace business opportunitiesin ways that may be not feasible for established banks.

CHAPTER V

GOVERNMENT SUPPORT TO TRADE FINANCE:DIRECT FINANCING AND EXPORT PROMOTION SCHEMES

1. Alexandru Vrabie, Director, Bucharest Branch, Eximbank (Romania)

On behalf of the Romanian Eximbank, I would like tothank the organizers of the seminar for giving thecountries present an opportunity to express their opinionson current problems in trade finance.

Let me briefly inform you of the objectives and majortypes of support provided to Romanian exporters by theEximbank.

The organization and functions of the Eximbank, aswell as the mechanisms of foreign trade promotionthrough banking and insurance instruments are stipulatedby the recently adopted “Eximbank Law”.

The objective of our bank consists in providing effi-cient support to exports of Romanian products by issuingloans and insuring credits. This support is also lent toenterprises effecting deliveries abroad in countriesbelonging to zones of high political and commercial risk.

The basic mechanism of financial support for theRomanian foreign trade was laid in 1992. In institutionalterms, this mechanism includes the following elements:

1. The Inter-ministerial Committee for Guaranteesand Credits to Foreign Trade, which conductsanalyses, offers advice and acts as a decision-making body, and

2. Eximbank of Romania, which is a banking andinsurance agency designated by the State to imple-ment supporting operations in the area of foreigntrade.

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As much as 75 per cent of the Bank’s shares are heldby the State Property Fund, with the rest being splitbetween five Financial Investment Companies, whichcorrespond to the country’s main geographical regions.Eximbank operates both in its own name and in the nameof the State. The Bank enjoys modern managementtechniques aimed at promoting Romanian export produc-tion.

Eximbank provides to customers the followingservices:

guarantees to Romanian exporters;

reimbursement of advances as well as guarantees toexporters participating in international biddings;

importer guarantees to industries providing partsused in manufacturing sophisticated products andproducts with long production cycles which are forexport;exemption from import duties, value-added tax and customs duties on imports comple-menting the production of complex exports andproducts with long production cycles;

sovereign guarantees of the Romanian State, whichare issued to foreign exporters of machinery andequipment aimed at the technological re-equipmentor creation of new Romanian enterprises.

Proposals regarding such guarantees are prepared byspecial directorates of Eximbank dealing with countryrisks, products, industries, etc. The final decision on theseguarantees is taken by the Inter-ministerial Committee forGuarantees and Credits to Foreign Trade.

In order to ensure a competitive environment for ex-porters similar to that in western Europe, a special “Inter-est Rate Stabilization Fund” has been established. Theobjective of this Fund is to balance high interest ratesprevalent among Romanian commercial banks, which in-hibit the competitiveness of Romanian exports. The Fundreimburses up to 50 per cent of interest paid by Romanianexporters, under the condition that their exports are cost-efficient and the interest paid by the exporter exceeds 20per cent per annum.

Government Support to Trade Finance: Direct Financing and Export Promotion Schemes 69

Regardless of the nature of their capital (State, private,or mixed, of foreign or Romanian origin), exporters ben-efit from risk coverage against non-payment in caseswhere the modalities of payment do not include insur-ance. This service is also extended to exporters conduct-ing sales to geographical areas with high political risk.The export risk insurance of the Eximbank plays an im-portant role in supporting the system of commercialbanks and insurance companies, and contributes to the in-ternational expansion of the latter.

Along the same lines, Eximbank is providing financialsupport for the acquisitions of equipment required to ex-pand export production capacity. To this end, the Minis-try of Finance has concluded a credit agreement tofinance a “Project of Industrial Development”. Accordingto this agreement, Eximbank is authorized to implement acredit line opened by the National Bank. This credit line,in its turn, is intended for on-lending funds extended bythe World Bank. Here, Eximbank provides refinancingfor commercial banks participating in the project.

The Eximbank’s programme for small and medium-sized enterprises aims at providing direct financing toSMEs for investment projects as well as at refinancingthrough participating commercial banks. Financing isprovided to individual companies which prove to be eli-gible according to certain criteria. In more general terms,the objective of this programme is to enhance the compet-itiveness of individual industrial sectors, create new jobsand strengthen the domestic market.

Among other relevant operations, Eximbank also dis-counts commercial paper and provides guarantees on itsown behalf when foreign banks extend financing to do-mestic economic agents.

2. Martin Drabek, Senior Director, Banking Section, Eximbank (Slovakia)

I would like to outline a number of problems that theSlovak economy is facing. These problems have an im-portant influence on the accessibility of trade finance.Then, I will highlight the activities of the Slovak


Eximbank and describe the major services it provides toforeign traders.

Regarding the first group of issues, the followingproblems are of relevance to trade finance:

the lack of creditworthy projects/borrowers in thearea of exports;

high interest rates in previous years; recently theyhave drastically fallen leading to a loss of demandfor the services of Eximbank on behalf of banks andborrowers;

problems related to pre-shipment financing; theseproblems relate to the high loan default risk whenthe exporter is unable to comply with the contractu-al conditions;

the lack of long-term funds and the reluctance to ac-cept longer-term risks;

the high loan concentration and insufficient capitaladequacy of many banks;

the high proportion of classified loans in banks’portfolios;

the depressed capital market;

the insolvency or lack of liquidity of a large numberof companies.

In general terms one can distinguish three groups ofproducts within which Slovak exports are deemed to becompetitive. These are: (1) intermediate or semi-finishedproducts; the competitive advantage here is based onprocessed raw materials available domestically (woodprocessing, glass industry, production of cement, etc.);(2) high value added products (machinery, transporta-tion/vehicles, electrical engineering and electronics,chemicals, etc.); (3) end-user/consumer products witha comparative advantage of low labour costs (textileand clothing products).

Unfortunately, Slovak exports are primarily composedof goods with low value added such as intermediatematerials, energy, labour- and capital-intensive com-modities. According to the statistics available, the shareof sophisticated, technologically-advanced products and


capital goods in overall exports has been increasingrecently. At the same time, it remains insufficient.

With regard to imports, the Slovak Republic dependsheavily on purchases abroad of raw materials (particu-larly from Russia) and imports of machinery andelectronics from the European Union and other OECDcountries.

In terms of its geographical destination, more than90 per cent of exports go to OECD countries, with asmany as 61 per cent going to EU States. Another impor-tant export area are the countries belonging to the CentralEuropean Free Trade Agreement (CEFTA). One canfinally note the gradual reduction of trade volumes withthe Czech Republic: its share in exports fell from onethird in 1994 to 18 per cent in 2000.

Over the last two years, the trade balance of Slovakiahas improved with regard to almost every country orgroup of countries with the exception of Russia. In 1999,the overall deficit of foreign trade fell from SKK 80 mil-lion to SKK 45 million, which should be interpreted asa very positive development. The driving forces behindthe recent improvements in the balance of trade are: animport surcharge, the depreciation of the Slovak crownagainst the USD, and the recent growth of import demandin other European economies, notably Germany.

Despite an accelerated growth in Slovak exports overrecent years, one can point to their still low per capitavolume: Slovakia‘s USD 2,200 worth of exports percapita is significantly lower than Austria‘s USD 11,000 orLuxembourg‘s USD 30,000 per capita.

Now, let me introduce the activities of the SlovakEximbank.

The Slovak Eximbank was founded in 1997 undera special law as a sui generis institution, acting as a ”one-stop shop“ for exporters, providing both funds andinsurance cover. The mission of Eximbank can be definedas the “promotion of Slovak exports to overseas marketsby providing export credit cover and funding to Slovakenterprises on terms commensurate with those offered byECAs in OECD countries“.


Total assets of the Slovak Eximbank represent aboutUSD 125 million and its equity stands at USD 70 million.The difference between the two figures mentioned aboverepresents the State funds that have been entrusted to Ex-imbank – a subordinated debt, with no specific maturityattached to it.

In 1999, the Bank’s net income after tax amounted toUSD 3 million. Two major principles guide the opera-tions of the Eximbank. The first one is finding financingsolutions to support creditworthy transactions while ob-serving the rule of prudent management. The second prin-ciple calls for transparency and consistent rules in thelending process in order to prevent favouritism, protectthe bank‘s assets and make sure the taxpayer‘s money isused in an effective manner.

Historically, the Eximbank was intended to becomea major banking institution, with a projected headcountrising to 300. The management of the Bank chose directfinancing as the principal activity but exercised limiteddue diligence and was unable to achieve appropriate riskmitigation. At the end of 1998, a new management wasappointed, which implemented a programme of restruc-turing and streamlining of the organization. The Bankwas considerably downsized, with the number of staff notexceeding 110 at the beginning of 2000.

At the same time, the focus has been changed from di-rect lending to refinancing, the latter implying channel-ling funds through commercial banks via credit lines toexporters. There has also been a modification of refinanc-ing schemes enabling more efficient financial control, theintroduction of new products and, finally, the promotionof high value-added exports.

With regard to the product range offered by Eximbankto Slovak exporters, one should mention that approxi-mately USD 70 million are allocated to banking activities,which encompass the following products:

refinancing facilities;

small volume refinancing through the bill ofexchange programme;

bank guarantees and bonds;


At the same time, new products “in the pipeline”include:

loans denominated in foreign currencies;forfeiting and factoring;project financing; import loans to support acquisition of state-of-the-art technology.

More specifically, refinancing facilities are designedfor larger manufacturers or exporters, with the minimumamount of the loan rising to USD 250 thousand (seeBox VI). Financing is undertaken by a commercial bankthrough an on-lending scheme. The purpose of the fundsis to provide short-term working capital financing, whichincludes the financing of export receivables and pre-ship-ment financing. These refinancing facilities are intendedto ensure the viability of projects so that they are subjectto meticulous scrutiny and review by the commercialbanks.

1 Refinancing loan facility extended to a commercial bank (1 year revolving)2. Funds on-lent to exporters (working capital financing)3. Loan collateral4. Eximbank´s recourse to end-user (exporter) in case of default by commercial bank5. Use of funds

Box VI

Slovak Eximbank: Re-financing facility funding

Commercial Bank

Exporter

EXIMBANK

Pre-shipment Receivables

1

2 3

4

5


The refinancing facilities scheme (see Diagram 3) isapplied in order to mitigate the risk of Eximbank. There-fore, only financially sound banks are eligible for cooper-ation. All applicant banks are subject to carefulexamination, while the client banks already cooperatingwith Eximbank are subject to on-going monitoring andcredit review. Eximbank also mitigates the credit risk ex-posure through recourse to the end user in case of com-mercial bank default. The Bank exercises due diligenceand risk management, which implies putting ceilings onthe credit lines to banks based on financial ratios, size ofthe bank, performance record and non-public informa-tion. The shortcomings of this system are that the cooper-ation with the private sector becomes a tedious and ratherinflexible process.

In terms of pricing of its products, the aim of Ex-imbank is to ensure that Slovak exporters can compete onlevel terms with exporters in other countries. Eximbankpractises uniform pricing for banks, i.e. the interest ratecharged to the commercial bank is pegged to the discountrate, currently 8.8 per cent, on which the commercialbank can add a margin of up to 3 per cent. To give incen-tives to exporters, Eximbank offers certain reductions orbonuses – for example a reduction of interest rate (over60 per cent) for exporters of high value added products ormanufacturers that produce predominantly for export.Another incentive applicable when getting insurance withEximbank is the possibility for the exporter to partiallyoffset the interest rate charge against the premium paid.

Eximbank’s funding via the bill of exchange pro-gramme is targeted at small and medium-sized enterprisesand is applicable for amounts not exceeding USD 250thousand. The major purposes of this scheme are pre-shipment and export receivables’ financing, and themethod of disbursement involves a commercial bankdrawing a bill of exchange to its own order, which is thenaccepted by the exporter. The main advantages of the billof exchange discounting scheme are simpler administra-tion, flexibility (tailoring conditions to export contract re-quirements) and the possibility of roll-overs.

In addition to loans, Eximbank also provides bond andpayment guarantees. The bonds in question are not debtinstruments. They rather represent bid bonds, perform-


ance bonds, advance payment/refund bonds, retentionmoney bonds and maintenance/quality bonds. I shouldalso emphasize that payment guarantees are used ona limited scale as they are sometimes perceived as toorisky.

Re-financing through loans represents almost 90 percent of the overall transaction volume of the Eximbankwith the bill of exchange programme and guarantees rep-resenting 6 per cent and 5 per cent of the activities, re-spectively. The breakdown by territory of exportssupported by

Eximbank is consistent with the overall trade structureof Slovakia with the supported export sales destined pre-dominantly for EU and CEFTA countries.

As was already mentioned, one of the products to belaunched by Eximbank in the near future is project financ-ing, which represents the financing of capital investmentsundertaken by an economic unit. This type of financingimplies that the project generates sufficient cash to coverits operational expenditures and to service the debt usedfor its financing. In the context of project financing, theEximbank’s role will consist of:

Assessment of the economic feasibility, viabilityand risks of projects financed by domestic and for-eign banks applying for State guarantees;

Participation in syndicated export loans;

Provision of comprehensive project financing forSlovak exporters through buyer credit;

Export credit political risk coverage and provisionof guarantees.

Among the Bank’s strategic objectives for the future isto increase the share of top 100 exporters serviced by Ex-imbank (from 25 per cent to 50 per cent), and that of at-tracting additional funds, in particular, through the use offoreign exchange resources, forfeiting activities and im-port refinancing loans (see Box VII).


Box VII

Strategic Objectives of the Slovak Eximbank:budgeting of banking activities

Current Projection

1999 2000 2001 2002 2003

Per cent of total Slovak export supported 2.1 3.0 4.5 6.0 7.5

No of exporterTop 100 25 30-35 35-40 45 45-50

Other 30 50 100 150 250

Funding requirements (USD million equivalent)

In SKK

In Foreign currency

68

-

88

25

100

50

113

75

125

125

Allocation of resource to products (USD million equivalent

Export refin. loans 57 88 105 123 150

SME loans 4 9 13 15 20

Guarantees 7 11 13 15 20

Forfeiting - 5 8 10 13

Import refin. loans - - 13 25 50

TOTAL: (USD million equivalent)

The introduction of new products and conditions relat-ed to new products is hampered by the lack of flexibilityof the current law, especially with regard to proceduralmatters. These constraints need to be eliminated by minoramendments slated for legislative approval.

In 2001, an entirely new legislation is expected to be in-troduced. This would establish the Eximbank asa corporation, ensure the compliance of Eximbank opera-tions with EU requirements, enhance its ability to raisefunds on international financial markets, provide a link tothe State budget and, finally, enable it to issue guaranteesin the name of the State.

Among the current issues relevant to the work of theEximbank, I should mention the interest rate conditions.Since the interest rate is pegged to the discount rate, the re-cent fall of the latter rendered Eximbank loans less attrac-tive for the exporters. Therefore, Eximbank will seek


approval from the Government to change the mechanismfor setting up interest rates. For example, the introductionof a base rate consistently below market rates is feasible.In relation to sources of finance, Eximbank is in the proc-ess of raising foreign currency denominated debt to thevalue of EUR 25 million.

In order to harmonize its procedures with EU stand-ards, the Eximbank intends to spin off its commercial ormarketable insurance activities and redefine procedureswithin the bank to ensure greater flexibility.

Finally, I would like to draw your attention to severalfactors which should contribute to the enhanced econom-ic growth of Slovakia.

Emphasis should be made on imports of advanced so-phisticated technology

which would contribute to the restructuring of the Slo-vak economy and the sustainable development of foreigntrade. Another important factor is foreign direct invest-ment – there is evidence that higher FDI from multina-tional companies (such as Volkswagen or AssiDomän)contributes to the exchange of goods between countries.As far as import-intensive products are concerned, I donot think that Eximbank will in the future be less interest-ed in supporting such production since there is generally92-95 cents of import costs for every USD of exportrevenue.

3. Discussion

Alexandru Vrabie (Eximbank, Romania) was askedto give some figures showing the scope of the activities ofthe Eximbank in Romania.

Alexandru Vrabie replied that the Bank had 2,000 cli-ents and each year as much as USD 100 million wereavailable for various operations. Unfortunately, thesefunds are not fully utilized every year. The delay betweenthe export shipment and the time when the money arrivesat the exporter’s bank is rather long and lasts approxi-mately three months. To cover the associated risk, the Ex-imbank provides guarantees that the exporter will receivethe reimbursement no later than a certain date.


John Enemark (Den Danske Bank) asked about therates the Eximbank offered to banks and clients in Roma-nia under its export-import support schemes.

Alexandru Vrabie answered that the usual rate for ex-porters was one or two percentage points higher than theinternational rates offered to Eximbank. To other banks,funds are provided without interest.

Beat Haenni highly appreciated the scope of Ex-imbank’s services to Romanian exporters, particularlythose aimed at: compensating the high financing costs ofexporters; promoting imports and closer cooperation withcommercial banks; and encouraging cooperation betweenthe World Bank and the banking system in Romania. Hewas interested to know whether all these activities werefully operational. Referring to Eximbank’s programme tosupport SMEs, he noted that many such companies haddifficulties or reservations about accessing large organi-zations such as Export-Import banks; he asked how, inpractice, Eximbank of Romania promoted itself withinthis part of the industry.

Alexandru Vrabie confirmed that the referred tomeans of export and import promotion were fully opera-tional. He also informed the seminar that there were onlytwo commercial banks under State control remaining inRomania, and both were to be privatized during the year.Under these conditions, it is very important to have a lawon the Eximbank as it will be the only bank remaining un-der State control. At the same time, Eximbank maintainsstrong links with the commercial banking system. Withreference to SME promotion, there were two ways ofdealing with this issue: acting through regional branchesand business centres, or by collaborating with small spe-cialized banks. Eximbank meets representatives of otherbanks on a monthly basis to discuss the opportunitieswhich will open up within the next month. There also is asystem of postal distribution of advertisements and infor-mation regarding the activities of the Eximbank particu-larly targeted to SMEs.

Alexandru Vrabie also noted that the funds availableat Eximbank were not fully utilized, the major reason forthis being enterprise payment arrears to the State and oth-er suppliers, which create impediments to new borrowing.


Court proceedings related to enterprise indebtedness canlast for up to several years. Under these circumstances, itis very difficult to find viable projects, which can eventu-ally become profitable and it is also problematic to fi-nance projects on a long-term basis.

Veronika Shemyakina enquired as to whether the in-terest cover for the exporter was available to non-clientsof the bank, and whether the money from the interest ratecoverage funding went directly to the client or wentthrough the client’s bank.

Replying to the second part of the question, Alexan-dru Vrabie replied that the funds were transferred to thebank of the client. As for the first part of the question, henoted that it was the Inter-governmental commissionwhich determined the projects to be subsidised in thisway, Eximbank only implemented these decisions.

Veronika Shemyakina enquired whether the SlovakEximbank practised cooperation with banks and export-ers under framework loan agreements or whether it oper-ated exclusively on a case-by-case basis.

Martin Drabek (Eximbank, Slovakia) replied thatevery loan under the refinancing scheme was examinedon a case-by-case basis. Even when the commercial bankhas a long-standing client there still remain risks (such asbankruptcy of the bank) so that every nomination has tobe examined on the basis of strict economic criteria thatare applied to both the project and the client.

Michael Spivey asked whether the Slovak Eximbankspecified the type of collateral the commercial bank need-ed to demand from clients in order for them to qualify forfunding.

Martin Drabek answered that the Eximbank providedbest practice recommendations but was flexible on thetype of collateral agreed with the bank on a case-by-casebasis.

Beat Haenni asked first, whether the Slovak Ex-imbank provided any insurance products, second, how theEximbank encouraged applications from SMEs and third,how long it took to process an application from anexporter.


Martin Drabek replied to the first question that Ex-imbank provided insurance coverage for supplier andbuyer credits against commercial, political and produc-tion risks. At the same time, direct funding by the Bank isnot contingent on insurance, i.e. the provision of loansdoes not necessarily require insurance coverage by theEximbank, although incentives to buy the insurance areprovided.Martin Drabek agreed that often SMEs shyaway from Eximbank financing. Recently, Eximbankhas launched a programme aimed at popularizing itsservices among the SME sector. The above-mentionedbill of exchange programme targets SMEs and is car-ried out through commercial banks (this eliminates thedanger of competition between the Eximbank andcommercial banks). However, it is difficult for SMEsto find banks willing to provide financing, particularlyin the case of a new company that can offer only limit-ed collateral.

Typical turnaround time that is required for the SlovakEximbank to process completed applications varies be-tween two hours and three days. However, and here Mar-tin Drabek agreed with Michael Spivey, producing allthe documents required to complete the application canbe a lengthy process.

Kenneth Owen inquired on how the Eximbank wasplanning not to compete with the commercial banks onthe forfeiting market.

In Martin Drabek’s view the answer to this very im-portant question was still not quite clear, but a possiblesolution involved filling in the niches left by the commer-cial banks.

CHAPTER VI

GOVERNMENT SUPPORT TO TRADE FINANCE:RISK INSURANCE AND GUARANTEES

1. Jonast Placiakis, Director General,Lithuanian Export and Import Insurance (Lithuania)

To begin, let us review some basic facts regarding theintegration of Lithuania into the world economy. Thestatus of this integration is best reflected by the ratios ofexports and imports to GDP which were, respectively,28 and 45 percent in 1999. With such an open economy,any instability in foreign trade can significantly influenceour country’s economic situation. That is one of thereasons why all the players in the domestic economy – beit from the State or the private sector – try to reduce exportrisks.

Lithuanian Export and Import Insurance, which isunder the National Export Credit Agency, was estab-lished in 1997 and is now covering the main part ofcommercial and political risk of Lithuanian exporters.The State is represented by the Ministry of Economywhich has a controlling percentage of shares. The Agencyoffers supplier credit insurance, political risk insurance,insurance of investment abroad against political risk, andsmall and medium-sized business loan insurance. Theinsurance contracts issued by Lithuanian Export andImport Insurance are backed up by government guaran-tees. The assumed credit risks are reinsured with thelargest, well-known reinsurance companies such asMunich Re and Cologne Re.

Established two years ago, our national export creditagency achieved quite good results in 1999. The wholeassumed risk portfolio amounted to USD 13.75 million on1 January 2000 as compared with USD 0.36 million ayear ago (an almost 40-fold increase). Over the same

81


period, the share of the Lithuanian export credit insurancemarket accounted for by the Agency (i.e. direct insurancepremiums underwritten) increased from less than 2 percent to almost 44 per cent. During 1999, the company ex-tended credit limits to 402 foreign buyers from OECDand non-OECD countries such as Russia, Belarus,Ukraine, Latvia, Estonia and Slovenia. The covered ex-port turnover amounted to USD 75.8 million.

Despite the growing volume of operations, the presentmodel has revealed the following shortcomings:

Legal relations between the Government and theExport Credit Agency (ECA) are not sufficientlydefined;

The insured risks are not divided into marketableand non-marketable risks;

As opposed to common practice in other countries,the Agency does not offer medium- and long-termcredit insurance;

The Agency offers small and medium-size domes-tic business loan insurance (this is not characteristicof the activities of other export credit agencies).

With the objective of encouraging export credit insur-ance with government participation, Lithuanian Exportand Import Insurance has decided to revise and consider-ably modify the present model. The new features shouldbe based on the significant experience accumulated byforeign ECAs, international legal conventions and ourforecasts of future trends in world trade.

A prerequisite for undertaking this restructuring isdividing the insured risks into marketable and non-marketable ones. The new scheme enables splitting of theprivate and the mandatory State parts of export creditinsurance. This also forms a pre-condition for anypossible partial privatisation of the company.

The first step under the new scheme was the evaluationof the potential of export credit market. For this purpose,the Agency ordered market research on Lithuanianexporters, including an analysis of customs declarationsand questioning of individual business operators. One ofthe questions put was as follows: “Do you agree with the

Government Support to Trade Finance: Risk Insurance and Guarantees 83

statement that insurance against non-payment risks is themost efficient way to decrease non-payment risks inexport transactions?”. As many as 52 per cent of allrespondents answered positively.

In addition to the national export credit agency, thereis a private credit insurance company operating on theLithuanian market. For the time being, this privatecompany focuses its activities mostly on the internalmarket, while the operations of Lithuanian Export andImport Insurance company are directed towards exportpromotion.

In the future, the division of risks, which is the hall-mark of the new model, might also create opportunitiesfor cooperation between the State-sponsored agency anda private company. On the one hand, the two public andprivate companies can compete in insuring marketablerisk, and customers would benefit from this competition.On the other hand, the national State agency would covernon-marketable risk on the State account and withgovernment guarantees. So the relationship between thetwo companies can be seen as one of partnership andcomplementarity, creating considerable benefit for bothparties.

I believe that Lithuanian Export and Import is on theright way in restructuring its activity and that alignmentwith internationally accepted principles of export financ-ing will allow more efficient servicing of the Lithuanianexporter.

2. Michael Spivey, Director of Business Development, Eximbank (United States)

This is an overview of the United States’ Eximbank’sactivities in the area of trade finance.

The United States Eximbank is a government agencywhose sole mission is to support short, medium and long-term financing for international customers of UnitedStates-made goods and services. In many cases,Eximbank financing is the most cost-effective option forpurchasers of United States goods and services. Thetypical cost of financing by Eximbank would amount to


LIBOR+1/2 per cent, i.e. to approximately 6.5 per cent.Eximbank can support financing not only in United Statesdollars, but in other convertible currencies such as Euros,French franks, Deutschmarks, etc. It provides financingfor approximately USD 15 billion worth of exports annu-ally, and over its 66 year history it has supported exportsworth over USD 400 billion.

Essentially, three types of financing from the Ex-imbank are available: short-term financing covered byinsurance, medium-term financing (for capital goods)which includes both medium-term insurance and guaran-tees, and long-term capital goods financing accommo-dated through long-term guarantees or direct loans.

Short-term credit insurance enables United Statesexporters to offer short-term credit to their customers andin many cases allows exporters and importers to interactdirectly without the use of financial intermediaries. Suchinsurance is, therefore, an attractive substitute for cash-in-advance, letters of credit and bank financing. Short-termis defined by the Eximbank as a 180 days shorterfinancing. In certain cases related to exports of capitalequipment, the Bank finances transactions for a period ofup to 360 days under its short-term insurance. Most of thetransactions are conducted on an invoice basis, so that nocollateral is required and no promissory notes are beingissued. Typical all-in cost of the credit financed byEximbank averages 9 per cent or less per year.

As a recent illustration of a typical short-term financ-ing transaction one can refer to an example of EntechKereskedelmi Es Mernoki BT – a small commercial andengineering company based in Budapest. This companyhas received a USD 20,000 60-day open account creditfrom its United States supplier Cardinal Scale Manu-facturing. This credit financed the purchase of newweighting instruments and helped to expand the businessof both companies.

Referring to this example, one can contest the prevail-ing opinion that Eximbank and other ECAs supportpredominantly large transactions. In fact, 85 per cent ofthe deals financed by Eximbank are short-term smallbusiness transactions. Eximbank is interested in support-ing all types of United States exports sales. As an


example, in 1999 it supported a USD 250 worth deliveryof textbooks to Nairobi. On the other extreme, Eximbankalso financed a USD 2 billion multi-aircraft transactionwith Saudi Arabia. This shows that Eximbank canaccommodate very different needs.

With respect to medium-term insurance and guaran-tees, I should indicate that the United States Eximbank’spolicy covers 85 per cent of the importer’s bill, with thelatter making a 15 per cent down payment to the exporter.The repayment terms for this programme are one to fiveyears for deals under USD 10 million. In September 1999,for example, Eximbank guaranteed a USD 5.1 millionmedium-term loan to Latvian Railways (LDZ), whichwas issued by a New York-based Austrian bank. Thefive-year loan was used by LDZ to purchase state-of-the-art telecom equipment. This equipment allowed theLatvian Railway System to reach compliance withEuropean Union transportation standards. The five-yearloan was extended at an interest rate based on theUSD LIBOR +0.3 per cent, i.e. 6.3 per cent.

Eximbank has special incentives for environmentalprojects worth over USD 350,000, for which themaximum tenure is extended to seven years. Themedium-term repayment terms are matched with theUSD amount of the transaction, so that projects worthless than USD 80,000 can be financed for up to two years,those within the range of USD 80,000 – 175,000 for threeyears, those worth between USD 175,000 - 350,000 forfour years, and projects exceeding by value USD 350,000for five or seven years (in the case of an environmentalproject).

Finally, to cover long-term financing needs, our bankprovides direct loans and guarantees on loans made bycommercial banks, the latter solution being largely pre-dominant. The guarantees are provided for transactionsexceeding USD 10 million that have repayment terms offive to ten years. In some cases, such as exports ofenvironmental products or aircrafts, the maximum termcan be extended to 12 years.

Under certain circumstances, Eximbank also allowsthe capitalization of interest during the constructionperiod and it can finance up to 15 per cent of local costs.


As an example of Eximbank’s activities in the area oflong-term financing, a USD 30 million loan guarantee tofinance the purchase of circulating fluidized bed (CFB)boilers in a power plant in Poland can be mentioned. TheCFB boilers were used to upgrade two Turow Units in thepower plant, and Eximbank provided USD 6.5 million inadditional finance for local costs and capitalized interest.This transaction involved a repayment guarantee fromPoland's Ministry of Finance.

There are several limitations on Eximbank financing.For example, it cannot support the purchase of militaryequipment, although it does have a separate programmefor financing exports of United States military goods,sponsored by the Ministry of Defence. Eximbank alsocannot support transactions which do not have at leastsome United States content.

Now, I would like to highlight some financial arrange-ments aimed at providing working capital for SMEs andvarious financing services the United States Eximbankprovides in the area of export credit insurance.

In 1983, the United States Eximbank established aguarantee for working capital which provides pre-exportfinancing for exporters. It is primarily designed to providefunds to smaller businesses when they begin manufactur-ing goods for export. Needless to say, the availability ofthese funds is critical for exporters since one of their mainchallenges is the reluctance of banks in the United Statesto extend loans, especially to small businesses, when theyare related to exports. It is deemed to be a high risk loanand without Eximbank’s guarantee most of these loanswould never be issued.

These are collateralized loans; the collateral that thelenders take represents the “accounts receivables” and se-curity interest in the export-related inventory. The UnitedStates Eximbank provides a 90 per cent guarantee to thelender, but, unlike, for example, the Slovak Eximbank, itdoes not fund the lender. Instead, Eximbank establishesunderwriting parameters and allows the commercialbanks to underwrite the credit, disperse the funds, obtainthe security and monitor the credit. In essence, Eximbankprovides the line of credit, and there are various levels ofcredit provided. There are approximately 150 participat-


ing lenders, 50 of which are active and use the programmeon an on-going basis.

Since 1983, Eximbank has supported approximatelyUSD 6-7 billion worth of working capital guarantees. In1999 alone, the Bank supported about USD half a billionand hopes to increase the volume to USD one billion peryear, which should be achievable within two years.

Reverting to the export credit insurance programme, itshould be indicated that Eximbank began offering exportcredit insurance in 1961. It accounts for 85 per cent of alltransactions conducted by the Bank. In 1999, the insur-ance coverage amounted to USD 3.7 billion, of whichabout one third was extended to the small business sector.As much as 90 per cent of this coverage was short-term.The insurance provides two types of financing: short-termand medium-term. Among short-term products, one candistinguish between one-buyer and multi-buyer types ofpolicy. The latter is a type of turnover policy, whichallows an exporter to export to several different buyers inEximbank also offers a bank letter of credit insurance pol-icy, for example in the example of the Republic of Korea,the Bank insured banks for USD 5 billion. Eximbank in-surance covers both political and commercial risks; ap-proximately 90 per cent of all policies are issued on acomprehensive basis.

Medium-term insurance is very similar to the guaran-tee programme and it covers 100 per cent although theEximbank requires a 15 per cent down payment by theimporter. Medium-term insurance allows one to five yearfinancing for transactions under USD 10 million.

3. Mr. Louis Habib-Deloncle,Chairman/CEO, Assurance, Financeet Développement (AFD) (France)

This presentation highlights the trends in trade financeinsurance in the context of the changing patterns of worldtrade.

It is particularly important to avoid addressing tomor-row’s problems of finance and insurance with solutions


from yesterday. With this in mind, let me make a briefoverview of trade insurance history during the twentiethcentury.

At the beginning of the century when government-sponsored Export Credit Agencies did not exist, exportswere covered by private insurance companies. Most ofthese collapsed in the 1930s, due mainly to bad relation-ships with banks. At the end of the Second World War,most countries decided to set up government agencies tosupport foreign trade. At that time foreign trade wasmainly bilateral and Governments were taking care ofsovereign financial relationships between themselves.The system of ECAs functioned very well until the mid1970s. At the same time, it has created certain negativeattitudes among industrial firms that based their exportdecisions entirely on the ECAs’ support.

By this I mean that some industrial exporting firmsconsidered a transaction completed as soon as the goodswere shipped, and left all the payment risk to be taken bythe government agencies. I find this attitude erroneousbecause, without any doubt, in reality the exporttransaction is finalized only when the payment for goodsand services delivered is received from the importer,otherwise it turns into a gift to the importer’s country thecost of which is being covered by the domestic taxpayer.

With the formation of the European Union, two rulescame into force preventing government agencies fromacting as they had done in the past. The first one is a reg-ulation prohibiting subsidies to exports, preventing ECAsfrom charging rates that are too low for export-supportingoperations. The second rule demands that governmentagencies insure only viable operations. The latter wascaused by considerable budgetary damages inflicted bythe financial losses of leading ECAs (in 1991 COFACEalone lost Euros 2.5 billion and more recently HERMEShas lost DEM 3 billion).

Dramatic changes in the world of insurance and fi-nance were also triggered in 1982 by the world debt crisis.

During the past 20 years world trade has grown rapid-ly. According to the World Bank, in 1985 the world tradeturnover reached USD 2 800 billion. In 1999, this figurerose to around USD 7,000 billion representing a 2.5-fold


increase. Also, the forms of international trade andfinance have multiplied. Various types of contractsnowadays include traditional export transactions, barterdeals, investment with the import of raw materials to beresold abroad, bonds, etc.

There are a huge variety of risks linked to these opera-tions: political, commercial and financial, all of whichimply different situations and diversified solutions. Nowand even more so in the future, no single entity would beable to provide a universal solution to a vast range ofproblems faced by exporters and investors. This meansthat our attitudes to risk have to change.

When assessing the risk inherent in a transaction or aproject, the first objective is to understand why thisparticular client company seeks to operate abroad. Clear-ly, bringing in the macro-economy, the decision toexpand abroad means that the strength of a company isbacked up by the economic strength of its country oforigin. But why do exporters seek to insure theiroperations? Because the decision to export might involveconsiderable costs for the company. In order to minimizerisks, the exporter will be looking for a continuous long-lasting relationship with clients abroad. This is theessence of the so-called business strategy. It is obviousthat large multinational companies are pursing complexmulti-national strategies, but even smaller industrialfirms need to build business strategies for their foreignoperations.

Obviously, the exporter knows his business better thanthe insurer who is servicing the trade flow. This beingsaid, the best way to establish good working relationshipswith a client is to agree from the beginning that the twoparties work together and share the risk: insurers andinsured are not rivals but partners interested in thesuccessful performance of the contract. This type ofapproach is beneficial to everyone: both the insurer andthe insured are interested in the transaction being carriedout all the way to its completion, that is until the finalpayment is received. If such cooperation is not achieved,the insurer is forced systematically to pay against claimsand insurance premiums are likely to go up, thus handi-capping exports and damaging the economy.


The biggest challenge in terms of handling risks isfaced by small exporters who are just starting theiroperations abroad. Here, in my view, Governments needto step in, providing not just financial support but alsosome basic information services regarding foreignmarkets, industries, buyers, etc. Subsequently, whenthese companies acquire sufficient experience, the marketcan solve most of their problems.

The first concern of the exporter when choosing aninsurer is that of insurer’s credibility. How can the latterbe judged? Firstly, by capital and surplus figures on theinsurer’s balance sheet. Secondly, by its good trackrecord – i.e. the capacity of the insurer to providesolutions adapted to the needs of customers.

Once the exporter and the insurer start workingtogether, they need to chose the risk coverage for a trans-action. Here, the insurer takes the lead: if he assumes, forexample, that a risk associated with a particular country isthat of currency inconvertibility, he will ask the exporterto cover the transaction for that risk only. This means thatthere exists a diversified demand from the insured – andthis is favorable for both the insured and the insurers.When the situation can deteriorate due to a single politicaldecision or event, the insurer seeks to avoid an excessiveconcentrations of risks and reduce the probability of atotal loss on transaction in the country.

How do insurers select risks?

First of all, in my view, the concept of country risk isno longer valid. A country is not a risk, but a bearer ofrisk. Country assessments are important on the macro-economic level, but at a micro level, in practice, one couldfind operations with acceptable risk levels in the so-called‘bad countries’ and very risky operations in the so-called‘good countries’.

Second, with regard to political risks, one should notethat risk selection becomes more and more complicated,because the political decision-making itself becomesmore and more complicated. Political decisions are nolonger made by a single entity (government), they aretaken at various levels such as federal, municipal, etc.Hence, the need to assess risks in much more detail arises.


In its turn, this need requires working in partnershipswith local insurers for mutual benefit. Informationreceived from local insurance companies can contributeto finding better solutions for securing the interests of theclient.

Western insurance companies can assist their partnersin emerging markets in developing a portfolio of servicessimilar to that existing in the west. This is a type ofpartnership where both the information and the risks areshared in the form of re-insurance, etc. This scheme usesall the leverage that the market offers in order to providethe coverage. Hence, the next point: spreading the risk.This is being done using a variety of coverages but alsousing a variety of clients. And the final point – sharing therisk, especially for larger operations. There are possi-bilities of sharing the risks with the client (i.e. providingpartial coverage), with the re-insurers and with otherinsurance companies, private or governmental.

At various seminars and conferences, we have beenworking hard to promote rules within the European Unionthat would enable insurers to access the Central Banks’data, which would provide valuable assistance to thedevelopment of export and finance. However, theanalysis of a balance sheet is not sufficient in transitioncountries where links between economic and politicalplayers are very strong.

Let me express my strong belief that the exporter mustbe the leader in this partnership, its driving force, with theinsurance company backing it. However, in case offailure the insurance company must seek ways to recoverthe losses together with the client. That’s why the issuesof confidentiality can be very important. In his relation-ship with the client, the insurer has to be sure to respectthe three basic principles: full disclosure of the opera-tion’s details, due diligence (the exporter must protect thecommon interests), and cooperation for the recovery oflosses. Be it an export transaction or an investment, it isessential to see whether the project is viable in the countryof the buyer or the host country.

Finally, I would like to emphasize that the privateexport credit insurance market that has been operating foronly 20 years is still young. Nevertheless, its capacity is


rapidly growing and already now, private insurance canprovide trade operations’ coverage worth USD hundredmillion. In many cases it can offer a viable alternative togovernment-sponsored insurance.

4. Discussion

Jonast Placiakis was asked to comment on possiblecircumstances and risks that encourage companies todraw on the services of the Lithuanian Export and ImportInsurance (country risks, non-payment risk, etc.).

Jonast Placiakis replied that the Lithuanian Exportand Import Insurance has operated for only about oneyear and a half, and it was yet difficult to draw conclu-sions on the motivation of customers. However, theresults of the company survey mentioned earlier indicatedthat as many as 52 per cent of respondents named exportcredit insurance as the most effective way to protectagainst risks. It is true that the quality of insurance shouldbe judged by its claims payment. However, exportersshould be prepared to pay more for insurance if theyaspire to get more in the case of customer non-payment.An insurance policy is a product, which is difficult to sellin general, and only big marketing efforts coupled withintensive direct face-to-face negotiations with exporterscan lead to good results.

With regard to insurance for SMEs, the LithuanianExport and Import Insurance fully covers long-term loansthat are issued by banks. However, the existing model isnot perfect in the sense that the banks have no incentivesto participate in risk sharing, thus stepping aside from theevaluation of projects and issuing loans only under theguarantee of the insurance company. Jonast Placiakisexpressed his strong conviction that the banks shouldshare the burden of risk together with the insurers.

Beat Haenni disagreed that export credit insurancewas the best way to deal with risk. In fact, an insurer is in-suring the credit management of the company, i.e. theperformance of the staff that is entrusted to manage theexposure of the company to such receivables. If one fol-lows the logic of relying on insurance, in a few years timeinsurers may face an increasing number of claims made


due to the failure of the exporters to manage their risk ex-posure. The general lack of know-how of risk assessment,which is typical, probably, for many companies in emerg-ing markets, contributes to this excessive reliance on in-surance. In any case, insurance should not dispense thecompany of carefully assessing the risks involved in anexport transaction.

Vladislav Fioshin asked Jonast Placiakis if theLithuanian Export and Import Insurance made public theresults of its company surveys and whether it providedrecommendations on business strategy and developmentto companies.

Jonast Placiakis replied that the results of companysurveys were published and communicated during pressconferences. As for recommendations, these are usuallymade during direct negotiations with clients. The qualityof information remains the crucial factor in export creditinsurance, since insurance is not a physical object such asa car or a factory, but rather the credit risk of a client as-sociated with operations abroad. In general, it is difficultto obtain information relating to importers in CIS coun-tries, and especially information on smaller buyers.

Several participants put questions regarding the re-quirements of the United States Eximbank related to thefinancial standing of buyers.

Michael Spivey noted that Eximbank, as an exportcredit agency, was neither an aid agency nor a grant agen-cy. Eximbank, therefore, expects re-payment and, in fact,its charter stipulates that it must have reasonable insur-ance of re-payment as a condition for its transactions.This implies, on a transaction basis, that Eximbank hascredit standards that must be met. In a medium-termtransaction, for example, Eximbank will request financialstatements, credit reports and references, and will under-write the transaction just like other financial institutions,showing, however, a greater degree of flexibility, as is of-ten required in emerging markets.

A good example of how Eximbank interacts in theworld market is that of its exposure in the Republic ofKorea. Prior to June 1997, it had almost no exposure. Af-ter the Asian crisis, while private banks and insurancecompanies fled the market, Eximbank stepped in on a


short-term basis and provided USD 5 billion in short-termcredits that assisted the Korean economy in that very crit-ical one-year period.

With this reference, it is appropriate to mention that theEximbank is an independent agency. Its board of directorsis appointed by the United States President for a term andlargely acts independently; it is not, therefore, a sub-agen-cy of any other department such as the Treasury or Statedepartments. The decision to support South Korean buy-ers and banks was made by the Bank independently; at thesame time, it was made in coordination with other gov-ernment entities of the United States and was part of abroader decision to support the economy of the Republicof Korea. The Bank believed in the economy of that coun-try and, while offering this substantial support, did notlose one dollar. It was a very positive experience in a verycritical moment of the country’s economic crisis. Todaythe Republic of Korea is well on its way to a full recovery.

The procedure to follow depends on the type of financ-ing which the importer is looking for. If a client is seekingshort-term financing and is interested, for example, inpurchasing a consumer good, the best way to access Ex-imbank is to contact the United States seller. Foreign buy-ers should encourage their United States sellers to contactEximbank because, on a short-term basis, the latter arebeneficiaries of the insurance and should be responsiblefor making the application for the insurance. It is conse-quently in the exporters’ interest to contact Eximbank oranother insurance carrier. Although private insurancecompanies offer perhaps less expensive premiums, Ex-imbank has a tradition of carrying out transactions in var-ious countries, even if these are experiencing financialcrises.

In cases of medium and long-term transactions, Ex-imbank would issue a letter of interest, which is a non-binding expression of interest. It is typically issued to theUnited States exporter, but the buyer can also apply forone usually after he has decided which United Statesgoods to buy and discussed the price and terms of financ-ing. An importer, therefore, might want to apply for aletter of interest somewhere in the early or intermediatestages of the transaction. Even in medium- and long-termdeals, it is preferable to put the burden to apply for financ-


ing on the United States seller although, if he is unwillingto do so, the importer can apply as well.

Dorota Cichocka enquired whether the exportershould fulfil certain requirements to be accepted by Ex-imbank. Michael Spivey replied that the only documentrequired by the Bank was a sales invoice. There are alsosituations where the Bank asks the exporter to provide apromissory note or a security interest in the goods, butthis is the exception and not the norm.

Tomas Dvorak asked if there were any restrictions inthe coverage of local costs in respect to long-term financ-ing. Michael Spivey answered that there were restrictionson the amount of local costs Eximbank could support:these should not exceed 15 per cent in cases of long-termor “environmental” transactions. There are no other re-strictions.

Dmitry Latishev asked, as a first question, how longit took for Eximbank to make a decision regarding aproject and, as second question, whether Eximbank hadany specific credit lines available for individual countries.With respect to the first question, Michael Spivey notedthat the time required to take a decision varied dependingon the time scale of the transaction. For short-term trans-actions, the turnaround time is less then one week fromthe date the Eximbank receives a complete application.For medium-term transactions it is approximately 9 daysfrom the time the complete application is received,whereas for long-term transactions it varies between 30and 45 days. However, having the complete application isoften a major challenge as elements such as a missing sig-nature or an incomplete or out-of-date financial statementoften delay the transaction. Once the application is ac-cepted, it moves quickly, and hopefully the developmentof the Internet should contribute to processing applica-tions even faster.

With reference to the second question, it should bementioned that Eximbank does not have any funds allo-cated to a certain country. Transactions are usuallyapproved on a “first come, first served” basis. The case ofthe Korean facility represents, in this sense, a special casebut should be seen in a broader context; Eximbank did nothave to get a special appropriation for that facility.


Beat Haenni commented that, having used both gov-ernment-sponsored and private credit risk insurance onmany occasions, he came to the conclusion that the qual-ity of the insurance could be judged only when claimsarose. He suggested that despite the rapid growth in insur-ance services in countries of transition it still remained tobe seen how well the ECAs performed to promote exportsand protect exporters from claims. At the same time, pro-cedures for application for insurance by SMEs needed tobe simplified and facilitated.

Michael Spivey agreed that the value of insurancecould be seen only when claims arose. Moreover, anycredit agency or private insurance is always tested intimes of crises, such as the Latin American crisis of the1980s or the Mexican crisis of 1994-95.

As for Eximbank, in the working capital guaranteeprogramme, it has denied less than 7 per cent of claims; inthe programme’s 16-year history there have been 79claims on the Bank, out of which 6 were denied. The rea-sons for denial were very serious violations of agree-ments. With respect to short-term insurance, the Bank’sdenial rate amounted to about 10 per cent. With respect tomedium-term insurance programme, there have been nodenials.

Regarding the problem of reaching out to small busi-nesses, Michael Spivey noted that it was a challengingtask for the Bank to cover the United States and market itsinsurance with only 400 staff and a limited budget. Forthis reason, the Internet would become increasingly im-portant in the export insurance business to cover a largevolume of small transactions. Within the next two years,Eximbank will begin accepting applications and even do-ing some of credit scoring via the Internet. At the momentthe Bank is contracting with a hardware and software pro-vider to implement a credit scoring system. Some of theECAs, in Canada or the United Kingdom, for example,are already successfully operating such systems.

Dmitry Latishev underlined the fact that many com-panies in Latvia were looking for long-term financing toimprove their technological basis. Local banks have diffi-culties in offering long-term financing due to the structureof deposits, which tend to be mainly short-term. In his


opinion, it would be beneficial if Eximbanks in developedcountries could allocate specific credit lines to financialinstitutions in emerging markets, which would facilitatethe financing of imports.

Michael Spivey replied that Eximbank offered bank-to-bank facilities mostly on a medium-term basis in coun-tries such as Mexico and Brazil. The Bank is prepared todiscuss this in more detail with any interested party.

Martin Drabek enquired whether private insurancecompanies used country coverage limits to manage risk.Louis Habib-Deloncle replied that the answer to thisquestion depends on how we understand the basic con-cept of an “event”, which is difficult to define unambigu-ously. For example, a United Nations resolution can havemany indirect consequences for several countries. Shouldthis be considered as a single event or rather should theevent be treated in each case as a set of individual impli-cations of the resolution for each country concerned?AFD has fixed limits per risk and per policy, and has fixedcumulative limits per country. However, these limits arenot aggregated, but are rather based on Possible Maxi-mum Loss (PML), a concept that has been tested in prac-tice over 15 years and has proved to be successful. Thismeans that the excessive exposure accumulation on onecountry is no longer valid as a goal; the main goal of acompany now is to avoid a total country loss.

Beat Haenni asked Louis Habib-Deloncle to say afew words on the accessibility of private insurers forSMEs. In Louis Habib-Deloncle’s opinion the market isvery flexible and client-oriented, including the specificneeds of SMEs. Underwriters examine carefully the pecu-liarities of the client’s business – so that they can take de-cisions quickly. The second aspect is that the role of thebroker is not only to place the risk, but to advise his clientabout the possibilities of coverage he may have and tohelp him structure his insurance programme with the bestcost/quality ratio. Fortunately, there is a growing numberof international brokers who can understand the risk andgive proper advice to their customers.

Iouri Adjoubei enquired, whether, in perspective, pri-vate insurers and State-supported agencies should be re-garded as competitors or complementary operations and,


secondly, what factors determined the choice of an ex-porter between a private or a State insurance agency.

Louis Habib-Deloncle replied that perceptions playedan important role in these matters. Keeping in mind thatECAs were set up to promote national exports, they areacting more as export development agencies rather thanexport insurance agencies. This former role is very impor-tant; however there is a danger that, being associated witha government agency, the exporter may consider paymentto be guaranteed.

At the same time, consistent losses by ECAs are a bur-den on home taxpayers. Therefore, the time has come forECAs to reconsider their role and mission and to evaluatetheir readiness to work on market terms. If both privateand public insurers operate on equal terms, and there is nodiscrimination or distortion of competition, they can andshould cooperate. The development of private insurancecompanies in transition economies is a very importantfactor that can provide to local foreign traders variouspossibilities for diversification and the management ofrisks existing on international markets.

Louis Habib-Deloncle cast some criticism on the con-cept of ‘marketable’ and ‘non-marketable’ risks. Duringthe last 15 years the private insurance market has demon-strated that it could accept any kind of risk, including po-litical as long as those risks were “insurable”. There arethough risks that are very difficult or impossible to insuresuch as currency fluctuations over a long period of time.But the government agency will not accept to do this ei-ther. To repeat, regarding “insurable” risks, private insur-ers are ready to share any of those with the governmentagencies.

CHAPTER VII

SUMMARY OF GENERAL DISCUSSION

On behalf of the participants, Beat Haenni thanked theUnited Nations Economic Commission for Europe andthe Baltic Transit Bank for organizing the seminar, whichhad discussed problems from various angles and verythoroughly. The aim of the seminar was to try to find so-lutions to problems hampering the financing of foreigntrade in transition countries. The participants had lookedat the problem from all the standpoints and stages of ex-port operations: the views of exporters, bankers and insur-ers all being covered. He then invited the participants toconclude the meeting by compiling a list of the most im-portant obstacles to efficient trade finance, which hadbeen brought up during the two days of discussion.

The following obstacles to efficient trade finance intransition economies were highlighted:

Lack of information on banks that could be in-volved in an export transaction as guarantors

Lack of experience and know-how regarding tradefinance techniques in transition economy banks andcompanies, and inadequate training opportunities

Reluctance of transition economies’ banks to takerisks

Lack of consistent and systematic policies in riskmanagement by banks

Lack of dialogue and cooperation with westernpartners in developing and implementing paymentterms applicable in trade among developed econo-mies

High cost of insurance for exporters from transitioneconomies

Government restrictions on the development of pri-vate insurance companies

99


Insufficient recognition of exporters’ problems andinadequate support to exporters from the govern-ment Export Credit Agencies

Lack of government support to Export CreditAgencies

Lack of cooperation between banks, customers andExport Credit Agencies

Limited human resources of Export Credit Agen-cies

Inactivity of government-supported export promo-tion agencies.

The participants formulated the following recommen-dations aimed at alleviating the above trade financeproblems:

To enhance their standing, financial institutions intransition economies should apply for ratings fromindependent international agencies (Thomson Fi-nancial Bankwatch, Moody’s, Standard & Poor’s).These ratings should concentrate more on individu-al companies rather than countries

Banks in transition economies should more activelyshare information and successful experiencesthrough their network and professional associations

Governments should better define the roles and ob-jectives of Export Credit Agencies (ECAs) andgrant them full faith and credit; this would facilitateraising loans by exporters

Public exposure and accessibility of Export CreditAgencies should be increased through variousmeans, the Internet, in particular

Partners in western and emerging markets shoulddevelop effective means of transferring trade fi-nance know-how;

Cooperation with IBRD and EBRD should be en-hanced, transition economies’ exporters should beencouraged to participate in TACIS and other EU-training seminars on trade finance.

Printed at United Nations, Geneva United Nations publicationGE.01-31077–October 2001–2,445 Sales No. E.01.II.E.4ECE/TRADE/267 ISBN 92-1-116772-8

ISSN 1020-7384

eliminating obstacles to efficient trade finance in

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