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UNITED NATIONS
    ECONOMIC COMMISSION FOR EUROPE

COMMITTEE FOR TRADE, INDUSTRY AND ENTERPRISE DEVELOPMENT




ELIMINATIN...
The views expressed and the designations employed in this publication
are those of the authors and do not necessarily refl...
CONTENTS
                                                                                                                 ...
Page
IV     Banks as Partners in Export Finance: the Experience of Transition
       Economies ..............................
Preface
      The purpose of this series of trade and investment guides is to assist econo-
mies in transition, as well as...
INTRODUCTORY REMARKS

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


            ...
currency due to export promotion generates additional
       income and enables enhanced imports of both consumer
       a...
their stance on certain issues of relevance to foreign trade
promotion.
   I hope that the readers in both developed and t...
WELCOMING ADDRESS BY:

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


                            I...
Unfortunately, the financial crisis in Russia has badly
      influenced the growth rates of the Latvian economy. In
     ...
should introduce more up-to date management methods
and further train business persons to work in the market
economy. This...
Welcoming address by:
Mr. Zenon Olbrys,
President and Chairman of the Board, Baltic Transit Bank, Latvia


               ...
CHAPTER I
IMPORTANT FEATURES OF TRADE FINANCE IN
TRANSITION ECONOMIES: SECOND HALF OF THE 1990s
Note by the UNECE secretar...
2   Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects


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


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  1. 1. UNITED NATIONS ECONOMIC COMMISSION FOR EUROPE COMMITTEE FOR TRADE, INDUSTRY AND ENTERPRISE DEVELOPMENT ELIMINATING OBSTACLES TO EFFICIENT TRADE FINANCE IN TRANSITION ECONOMIES: PRACTICAL ASPECTS PROCEEDINGS OF THE SEMINAR held on 4 and 5 May 2000 in Riga (Latvia) Geneva/New York 2000
  2. 2. The views expressed and the designations employed in this publication are those of the authors and do not necessarily reflect the views of the United Nations Secretariat nor do they express any opinion whatsoever on the part of the Secretariat concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. All material may be freely quoted or reprinted, but acknowledgement is requested, together with a copy of the publication containing the quotation or reprint (to be sent to the following address: Trade and Investment Promotion Section, Trade Division, United Nations Economic Commission for Europe, Palais des Nations, Geneva 10, CH-1211 Switzerland). ECE/TRADE/267 UNITED NATIONS PUBLICATIONS Sales No. E.01-II-E-4 ISBN 92-1-116772-8 ISSN 1020-7384
  3. 3. CONTENTS Page Preface .............................................................................................................. v Introductory Remarks by Ms. Danuta Hübner Executive Secretary, United Nations Economic Commission for Europe ........ vii Welcoming address by Mr. Bernhard Gerdhard State Secretary, Ministry of Economy, Latvia .................................................. xi Welcoming address by Mr. Zenon Olbrys President 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 of Trade Finance: Some Practical Experiences in Different Groups of Countries................................................................................................. 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 and Problems ................................................................................................. 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 iii
  4. 4. Page IV Banks as Partners in Export Finance: the Experience of Transition Economies ............................................................................................... 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 and Export Promotion Schemes 1. Mr. Alexandru Vrabie, Director, Bucharest Branch, Eximbank (Romania) ................... 67 2. Mr. Martin Drabek, Senior Director, Banking Section, Eximbank (Slovakia)................. 69 3. Discussion ....................................................................................... 77 IVI. Government Support to Trade Finance: Risk Insurance and Guarantees ....................................................................................... 81 1. Mr. Jonast Placiakis Director General, Lithuanian Export and Import Insurance (Lithuania) ................................................................................. 81 2. Mr. Michael Spivey Director 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 iv
  5. 5. 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 and commercial 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 substantial contribution 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 Support Exports 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: unpubli@unog.ch New York: Tel. +1-212-963 8302 – Fax. +1-212-963 3489 – e-mail: publications@un.org v
  6. 6. INTRODUCTORY REMARKS Ms. Danuta Hübner, Executive Secretary, United Nations Economic Commission for Europe It is my pleasure to introduce to you the proceedings of the Seminar on “Eliminating Obstacles to Efficient Trade Finance in Transition Economies: Practical Aspects”. This Seminar took place in Riga (Latvia) on 4- 5 May 2000. It was jointly organized by the UNECE secretariat and the Baltic Transit Bank (Riga). The Baltic Transit Bank as well as the Moscow-based Alfa Bank provided financial support to this event. Two features of today’s world have become particular- ly prominent in recent years. The first one is the speed with which modern technologies develop. Modern telecommunications and the Internet are rapidly trans- forming all aspects related to the international movement of commodities, labour and capital. Therefore, and this is the second remarkable feature of today’s world, the economy is experiencing rapidly growing internatio- nalisation and globalisation of production and exchange, which have already now attained levels unthinkable a decade ago. Both of these trends create tremendous opportunities for individual companies, on the one hand, and for coun- tries liberating themselves from excessive government controls and autarkic trends, on the other. In the context of rapid globalization, the issue of trade promotion, in general, and of trade finance, in particular, has become highly relevant for the transition economies of central and eastern Europe and the Commonwealth of Independent States. Over the past decade of market trans- formation in these countries, foreign trade has proved to be a potent means of facilitating reforms and smoo- thening the hardships of transition. In particular, growing exports in several countries of the region have been a result of successful structural reforms. At the same time, the increase in revenue and growth resulting from these exports have, in turn, influenced favourably internal transformations. The growing inflow of convertible vii
  7. 7. currency due to export promotion generates additional income and enables enhanced imports of both consumer and investment goods, facilitating structural adjustment and the modernization of national economies. From this standpoint, an unobstructed and adequate flow of funds to finance exports and imports can contribute importantly to a successful transition. Another relevant aspect is the critical nature of financ- ing for small and medium-sized enterprises in the context of their establishment, growth and expansion into export activities. Information provided to nascent private sector companies on how to build constructive relationships among themselves, with commercial banks and insurance companies, as well as with government trade-supporting institutions, is often a key element of their success. We attach a great deal of importance to this issue because the development of productive networks between private enterprises, banks and other financial institutions is one of the factors rendering the transition to the market economy sustainable. It is appropriate to emphasize that the Riga seminar was organized as a public-private partnership project where a regional commission of the United Nations collaborated with interested banks from the region. For us in the UNECE secretariat, this is another sign of the productivity of public-private cooperation in areas of practical significance for the transition process. We are convinced that the joint public-private organization of seminars, workshops and similar events in economies of the European region is a cost-effective and efficient means to build a platform for the exchange of opinions between various stakeholders and the development of rec- ommendations for Governments. These Proceedings provide an account of the vast spectrum of opinions on ways and means to remove ob- stacles to financing trade in transition economies coming from trading companies, bankers, insurers and represent- atives of Government trade-financing agencies. The variety of views presented at the seminar not only helps identify problems obstructing access to trade finance; it is also instrumental for finding solutions to these problems and, in fact, might inspire government bodies to adjust viii
  8. 8. their stance on certain issues of relevance to foreign trade promotion. I hope that the readers in both developed and transition economies will appreciate the wealth of relevant infor- mation that these Proceedings contain. I also hope that this publication will stimulate further the discussion of theoretical and practical issues related to market economy transformations in central and eastern European countries and the CIS. ix
  9. 9. WELCOMING ADDRESS BY: Mr. Bernhard Gerdhard, State Secretary, Ministry of Economy, Latvia It is my great pleasure to open this seminar, devoted to issues that are highly relevant to the development of the Latvian economy. There is no doubt that the unobstructed funding of foreign trade is essential for business people entering new markets and extending existing ones. It is also important for exporters wishing to reduce commercial or political risk-induced losses. Unfortunately, trade finance instruments are not sufficiently developed in transition economies, including Latvia. The legal basis for crediting, guaranteeing and insuring exports is still being developed. That is why I consider the theme of our seminar today very important and I hope that through an open exchange of opinions we shall be able to better understand problems related to the funding of foreign trade and, possibly, identify some solutions. I am very pleased to see in this room representatives from public institutions, organizations involved in export and import promotion and from the private sector. Hopefully, the seminar will provide an opportunity for an extensive exchange of ideas among the various interested parties. Opening the seminar today, I would like to make a brief overview of the current economic situation and policies implemented in Latvia. It has to be admitted that the general business environ- ment in the country is improving and conditions for development of the national economy are getting better. The consistent reforms in Latvia are starting to bear fruit. GDP and investments are growing, and living standards are also slowly improving. In the period from 1996 to mid-1998 average annual GDP growth was 6 per cent. xi
  10. 10. Unfortunately, the financial crisis in Russia has badly influenced the growth rates of the Latvian economy. In 1998, GDP grew by 3.9 per cent and in 1999 by only 0.1 per cent. This being said, since mid-1999 the situation has been improving and during the first months of 2000 the economic results were quite encouraging. During the first quarter of this year, exports and industrial production experienced a rapid increase, and Latvian ports shipped a high volume of cargo. The financial ratios are also good, and the budget has received more taxes than was planned. The activity of the stock exchange has also gained momentum. This makes us feel optimistic about the future. We envisage a 4 per cent GDP growth for 2000, and I think we shall be able to increase growth rates to 6 per cent subsequently. During the years of independent development, our country has managed to reorganize its economy. Latvia has implemented a liberal trade policy, thus enabling competitive sectors to benefit from their advantages in the international market. Currently, Latvia's imports and exports with EU countries constitute more than half of its total volume of exports and imports. This is despite the fact that during the years preceding the restoration of its independence, Latvia did not conduct any foreign trade outside of the former socialist countries area. Integration into the European Union is one of Latvia’s priorities, as Latvia considers itself as a European country. In December 1999, with the invitation of the European Commission to start the accession negotiations, Latvian-EU relations entered a new phase. On 10 February 1999, Latvia was the first among the Baltic States to become a full-fledged member of the World Trade Organization (WTO). Upon accession to the WTO, Latvia has invested a lot of effort into harmonizing and improving its foreign trade legislation. Latvia now has broader opportunities to participate in world trade based on unified principles. We are very well aware of the fact that economic reforms in Latvia have not been completed. The restruc- turing of the national economy should continue; we xii
  11. 11. should introduce more up-to date management methods and further train business persons to work in the market economy. This is the major reason why we need seminars like yours. We also hope that such events might help us to consolidate and improve the institutions responsible for the promotion of Latvian exports. I would like to express my gratitude to the organizers of this seminar, and to the participants, and express hope that it will not only constitute a platform for the exchange of opinions, but will also promote mutual contacts and cooperation. xiii
  12. 12. 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 to Efficient Trade Finance in Transition Economies” to Riga, the capital of the Latvian Republic. We, the Baltic Transit Bank, are proud that the United Nations Economic Commission for Europe has chosen our charming city as a venue for this conference and our bank as the coorganizer of the conference. I hope that during the next two days you will be able to discuss 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 to overcome 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 in cooperation with the Baltic Transit Bank. Many thanks to the UNECE for their hard work during the preparations for this conference. I am familiar with the list of moderators and I am sure it will be a great pleasure for us to hear to their talks. We, the Baltic Transit Bank, are at your disposal and if you have any questions or need assistance please do not hesitate 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. xiv
  13. 13. CHAPTER I IMPORTANT FEATURES OF TRADE FINANCE IN TRANSITION ECONOMIES: SECOND HALF OF THE 1990s Note by the UNECE secretariat INTRODUCTION The development of transition economies’1 foreign trade 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 the region have been a result of successful structural transfor- mations and the revenue and growth resulting from these exports have, in turn, favourably influenced internal reforms. The increased inflow of convertible currency due to export growth generates additional income and en- ables enhanced imports of both consumer and investment goods, 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 evolution of trade finance risks and instruments used in short- and long-term export and import transactions; and examines the changing role of Eximbanks, export credit agencies and other government agencies engaged in trade finance 1 The European transition economies refer to the formerly centrally planned 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 Republic of Yugoslavia. Among the newly independent republics of the former Soviet Union, a distinction is made between the Baltic States, Estonia, Latvia and Lithuania, and the remaining republics which cooperate within 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
  14. 14. 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 trade finance and promotion, and provide some guidance to international organizations active in this area. EXECUTIVE SUMMARY: MAJOR FINDINGS In the second half of the 1990s, the growth of trade in the European transition economies was unstable and tended to slacken. At the end of the decade, the value of both exports and imports showed negative growth rates, and this fall was particularly pronounced in the CIS countries. At the same time, developed market economies increased their role as the principal trading partners of European transition economies, and a growing demand from western markets has helped maintain the volume of exports in most of the central and eastern European countries and the Baltic States. The CEEC and Baltic countries have increased the share of high value-added goods (consumer goods, machinery and equipment) in their exports to developed market economies, while food products and intermediate goods (including chemicals) have become major compo- nents of their exports to other transition countries, in particular, members of the CIS. In contrast, primary commodities (crude oil, natural gas, oil products, metals and cotton) have continued to dominate the composition of exports from the CIS countries, making their export revenues particularly sensitive to changes in commodity prices. Recently trade payment conditions have tended to im- prove for those CEEC and Baltic States which are more advanced in the transition process and have stagnated or deteriorated for the other transition economies (CIS, in the first place). Imports to the CIS are conducted almost entirely on a prepayment basis, since very few western partners accept letters of credit issued by local banks. A major obstacle to the financing of CIS countries’ exports, and, in particular, the development of L/C transactions has been the weakness of the CIS banking system.
  15. 15. 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 of transition economies’ foreign trade, while the lack of working capital and pre-shipment finance continues to impede exports from countries at the earlier stages of transition. Access to long-term trade financing is still limited in central and eastern European countries and practically un- available in the CIS. Even with assistance from govern- ment-sponsored schemes, commercial banks are unable to provide long-term credits to exporters and importers because of the narrow capital base on the one hand, and high 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 with developed market economies and among themselves. However, the available data show that from 1995-1997, the value of barter in CIS countries’ trade declined both in absolute 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 instrument for assisting the transition process. The general paucity of efficient sources of trade financing is a major impediment. Access to private finan- cial sources is frustrated by companies’ lack of working capital and track record, (i.e. the lack of credit ratings), the undercapitalization of commercial banks and the high share of non-performing loans in their portfolios, as well as banks’ insufficient expertise with risk management and trade finance instruments. In addition, excessive security and 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. Both domestic banking sectors and local security markets have been affected adversely, while the access of local finan- ciers to international financial markets has been handi- capped. Spillover effects have been most pronounced in the countries that maintained extensive trade links with
  16. 16. 4 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects Russia prior to the crisis, namely the Baltic States and the other countries of the CIS. Although some countries (the Baltic States, in particular) have been more successful in dealing with the negative effects of the crisis, many problems, 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 have initiated 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 export credit insurance programmes in most transition econo- mies, they are generally thought to have a positive impact on export development. The highest export growth rates have been shown recently by eastern European countries, where ECAs are relatively efficient and well managed. In the Baltic countries, which have enjoyed export growth rates comparable to that of central and eastern European economies, export credit agencies have been successfully expanding their operations. In contrast, in most countries of the CIS, the scale of export credit insurance remains modest. Recent financial and economic crises, and the resulting weakened domestic economies, have rendered transition economies more vulnerable to changing world market conditions. The aggravation of risks has emphasized the importance of export-credit insurance. Under these condi- tions, the maintenance of trade volumes among transition economies largely depends on the flexibility of ECAs, their prompt reactions to partners’ failures and innovative techniques of claim settlement. To this end, an exchange of information and cooperation among the relevant government agencies of different transition economies may help them to learn from each others’ experience and to 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
  17. 17. Important features of Trade Finance in Transition Economies: Second half of the 1990s 5 slacken. Overall their annual export growth rates at current prices plummeted from over 25 per cent in 1995 to about 8 per cent in 1996, 4 per cent in 1997 and, finally, became negative in 1998 and 1999 (minus 3 per cent and minus 6 per cent, respectively). The import growth rates followed the same pattern, decreasing from 32 per cent in 1995 to less than half a per cent in 1998 and finally turning 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 countries showed an even steeper downward trend: the export growth rate went down from 23 per cent in 1995, 10 per cent in 1996, less than one per cent in 1997 and minus 15 per cent in 1998 (the data for the first nine months of 1999 show a 9 per cent decrease). On the import side, growth rates showed a similar trend. Both in central and eastern European countries and the 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 negative signs in 1999 (a fall of about 4 per cent for central and eastern European countries and 17 per cent for the Baltic States). Here again, the performance of the CIS member States was worse than average: import growth rates dropped from 26 per cent in 1995 to 8-9 per cent in 1996 and 1997, and plummeted to a negative 14 per cent in 1998. Preliminary data for 1999 show an almost one third decline in USD value of CIS imports.2 In the 1990s, developed market economies, and those of western Europe in particular, increased their role as the major aggregated trading partner of transition economies. By the end of the decade their weight in total exports and imports of central and eastern European countries exceed- ed 70 per cent; the same re-orientation of trade toward the developed part of the world was characteristic during the past decade also for the CIS countries. The growing demand from western markets has helped maintain the exports of the central and eastern European 2 UNECE Economic Survey of Europe, 2000, No. 1, p. 3 - 11.
  18. 18. 6 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects countries and the Baltic States. In contrast, in 1998 and 1999 it was adversely affected by Russia’s economic cri- sis. Declines in exports from Russia and several other CIS State during 1998 and 1999 was largely a result of falling commodity prices and, to a lesser extent, the currency in- stability and banking system disruptions related to the above-mentioned crisis. In 1999, though, the rising prices of oil and metals partially offset the adverse effects of the crisis and contributed to maintaining the export levels and revenues of the CIS producer-countries. In the second half of the 1990s, the commodity struc- ture of the central and eastern European countries and the Baltic States’ exports was influenced by import demand in developed market economies and the CIS. Their ex- ports to the first destination consist mainly of consumer manufactures and machinery and equipment (central and eastern European countries). In contrast, by 1999 food products and intermediate goods (including chemicals) were major components of their exports to other transi- tion economies and CIS States in particular. This pattern is, to a large extent, the reverse of trade structures that were characteristic for those countries in the years imme- diately following the desegregation of the Soviet Union. Primary commodities have continued to dominate the composition 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 cotton and gold sales largely determine the export structure of central Asian countries. The dependence of CIS export revenues on primary commodities makes them highly sensitive to changes in commodity prices. On the import side, the CIS countries purchase predominantly machin- ery and transport equipment, agricultural products and food, fuels and chemicals. The commodity structure of the CEEC and CIS exports suggests particular forms of financing. The development of high value-added exports to developed market econo- mies from countries of central and eastern Europe increasingly requires medium- and long-term export credits and developed export insurance schemes. On the other hand, food and intermediate goods exports from
  19. 19. Important features of Trade Finance in Transition Economies: Second half of the 1990s 7 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 between the time when the exporter needs funds for production and transportation, and the time when 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 offer attractive payment terms to foreign buyers. The role of payment terms as a marketing tool 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 least costly 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, informing their 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 commodities from the CIS economies may not need elaborate long- term financial arrangements but may demand considera- ble investment in export production (i.e. pre-shipment financing 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. The latter influences the competitive positions of domestic producers in several ways (see box I). In various transition economies, the peculiarities of exporters’ and importers’ cooperation with financial institutions depend
  20. 20. 8 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects D ia g r a m 1 : C O F A C E S h o r t T e r m C o u n tr y R is k s 2 0 0 0 M o d e r a te H ig h r is k L ow r is k R is k B o s n ia - H e r z e g o v in a A lb a n ia F Y R o f M a c e d o n ia P o la n d C z e c h R e p u b li c Y u g o s l a v ia S lo v e n i a S lo v a k ia R o m a n ia H ungary C r o a tia U k r a in e E s to n ia R e p u b li c o f M o ld o v a B e la r u s L a tv ia B u lg a r ia G e o r g ia L it h u a n ia R u s s ia A r m e n ia A z e r b a ija n K a za k h sta n U z b e k is t a n T u r k m e n is t a n T a jik ist a n K y rg y zsta n S o u r c e : “ R is q u e P a y s 2 0 0 0 ” M O C I D ia g r a m 2 : Risks 2000 C O F A C E M e d iu m - T e r m C o u n t r y R is k 2 0 0 0 V ery h ig h H ig h M o d e r a t e ly r is k R e la t iv e ly R is k h ig h r is k G ood g o o d r is k r is k B o s n ia - H e r z e g o v i n a R o m a n ia A lb a n ia B u lg a ria F Y R o f M a c e d o n ia L a t v ia P o la n d E s to n i a Y u g o s l a v ia L i th u a n ia C zech R u s s ia S lo v a k i a R e p u b lic U k r a in e C r o a tia H ungary B e la ru s S lo v e n ia G e o r g ia A rm e n ia A z e r b a ij a n K a z a k h s ta n U z b e k i s ta n T u r k m e n is ta n T a j i k is t a n K y r g y z s ta n S o u rc e : “ R isq u e P a y s 2 0 0 0 ” M O C I both on the level of that economy’s development and the level of market reforms that have been implemented. SHORT-TERM INSTRUMENTS AND FACILITIES The transition to a market economy in countries of eastern and central Europe and the CIS has opened up new profit opportunities for entrepreneurs from devel- oped market and transition economies. At the same time,
  21. 21. Important features of Trade Finance in Transition Economies: Second half of the 1990s 9 it has revealed considerable limitations and inefficiencies in the existing trade financing infrastructure. The experience of the last decade has shown that the past decade’s drastic systemic transformations, accompa- nied by an unstable and often contradictory institutional and regulatory environment, as well as the emergence of thousands of new actors has significantly enhanced foreign trade risks within the CEEC, Baltic and CIS countries. These high risks, in their turn, have strongly affected the availability and cost of trade finance in central 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 shown that most economies of central and eastern Europe have improved their positions. Alternatively, the situation has not changed or has even worsened for the majority of CIS and south eastern European countries. Earlier this year, the French Export Credit Agency COFACE issued short and medium-term country risk ratings as they stood at the end of 1999. Diagram 1 shows that in terms of short-term country risks, most east and central European and Baltic countries, and especially those 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 (Czech Republic, Slovakia, Croatia and Bulgaria). The diagram also reveals that perceived short-term risks were consid- erably higher for the CIS States and countries of southeast Europe. Of the former, only the Republic of Moldova and the Russian Federation were rated by the Agency as moderate country risks (see Diagram 2), while all the other CIS member States were considered as highly risky partners. Hence, COFACE advises western exporters to the CIS countries to negotiate pre-payment terms where possible: prepayment remains “an irreplaceable norm” for dealing with Russian companies, for example. As a matter of comparison, for Hungary, Poland and the Czech Repub- lic, open account and documentary credit terms are most commonly advised. In the same way, for the Baltic States, deferred payment (letters of credit, supplier credit
  22. 22. 10 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects 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 according to the least costly payment modes (open account, sight draft) are used rarely, if ever. For example, a recent survey of over 1,000 representative offices of German companies operating in Russia indicated that in trade transactions with Russian firms, 46 per cent of German companies asked for prepayment, only 29 per cent accepted deferred payment, and less than 12 per cent were prepared to trade on letter of credit (L/C) terms.4 In most CIS countries, letters of credit are issued by local private banks only in those cases where the custom- er can deposit the requisite funds in its account well before the transaction takes place. Prior to the 1998 finan- cial crisis, western banks were in some cases ready to confirm letters of credit from CIS banks. However, after the crisis, only a few western banks have accepted L/Cs issued by CIS commercial banks. In December 1999, the head of the Russian State-controlled Bank for Foreign Trade (Vneshtorgbank) indicated that “western banks have practically stopped normal credit transactions with the Russian banking system [Russian banks] as letters of credit are not accepted in import transactions”.5 For this reason, export trade with the CIS by compa- nies of developed market economies is conducted almost entirely on a pre-payment basis. This situation particular- ly distorts the trade of those countries where commercial banks are not authorized by the National Banks to service deals involving prepayment (e.g. Turkmenistan), con- firmed letters of credit then being the safest instrument for 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.
  23. 23. Important features of Trade Finance in Transition Economies: Second half of the 1990s 11 In the context of CIS exports to the west, the major obstacle to the development of letter of credit transactions has been the weakness of the CIS banking system. west- ern bankers often indicate that only a few Russian banks have sufficient know-how to act as an advising bank in a letter of credit transaction where a western bank acts as an opening bank. This is probably the major reason for the predominant use of various types of prepayment not only in the import but also export transactions from the CIS member States. Importers from developed economies, as well as their banks, thoroughly investigate only the performance risk for 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’ banks look very closely at the financial position of exporters, notably tax arrears and utility bill payment records. Indebted companies are unlikely to win the contract because, in the case of competing claims on the exportable product, importers from developed market economies and their banks do not expect to win a court case against local creditors. The difficulty of obtaining sufficient pre-shipment working capital remains one of the most important obstacles for exporters in European transition economies (CIS in particular). More specifically, the problem lies not so much in the lack of short-term funds, but rather in the reluctance of commercial banks to extend credit without burdensome collateral requirements. As a result of this prudent approach to risk-taking, companies are required to pledge various types of security (asset-based collateral, cash deposits, contract-based cash flow commitments) often creating too heavy a burden on the exporter’s resources. According to a recent study by the International Trade Centre (ITC), excessive collateral requirements by banks significantly affect not only small firms trying to expand their export operations, but also larger firms, seeking to upgrade production equipment and technology.7 7 ITC “Improving The Financing of Exports From eastern Europe”, Division of Trade Support Services Technical Paper, 1997.
  24. 24. 12 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects To summarize, as was already mentioned in the 1996 UNECE study on Trade Finance in the Transition Econ- omies on the same subject, wider use of modern payment terms in trade by all CIS countries is hampered by major weaknesses of the financial sector in these countries (see below). Topics requiring further discussion: 1. What are the most relevant trade finance risks in different groups of transition economies? 2. What are the conditions that must be met for a transition from prepayment to less expensive payment terms (L/C, documentary collection)? 3. What are the factors favouring the reduction of collateral requirements by local banks? Long-term instruments and facilities (a) Risk perceptions To be competitive, exports of capital goods must be backed by favourable credit terms, extended for a period of 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 transition economies, also require cohesive support from the finan- cial sector.8 For this reason, macroeconomic instability and the overall weakness of the banking systems in many countries of the region considerably inhibit medium and long-term financing of foreign trade. It should be mentioned that, until 1998, at least well es- tablished companies from eastern European countries and the CIS enjoyed relatively easy access to foreign funds for expansion and restructuring, and banks were eager to lend to the fast-growing countries. However, the 1998 Russian financial collapse has considerably reduced the possibili- ties for bank financing both at home and abroad. This circumstance has left many exporters and importers in 8 Ibid.
  25. 25. Important features of Trade Finance in Transition Economies: Second half of the 1990s 13 transition economies searching for alternative sources of financing. Here again, the opportunities of foreign traders have been 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 at the end of 1999 the medium-term country risk ratings were closely correlated with the progress of market reforms and the success of economic stabilization. The Czech Republic, Estonia, Hungary, Poland and Slovenia, being the most immediate candidates for joining the European Union, represented relatively low risks for banks and exporters, while Croatia, Latvia, Lithuania and Slovakia were classified as moderately high risk. The diverging perceptions of risks associated with trade and investment 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 available in different countries as a component of the countries’ overall risk rating. The forfeiting scores reveal that, at the end 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 Soviet Union countries, ratings were attributed only to the Baltic States and Kazakhstan. All other CIS member States, including Russia and Ukraine, were qualified as “offering no sustainable access to forfeiting markets”.10 While traditionally the use of forfeiting is driven by an exporter’s need to reduce risks and get a quick reward, recently interest in forfeiting services has also come from eastern European importers seeking alternative financing 9 Forfeiting is a financial instrument aimed at reducing the risk of the 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’s country guarantees payment. Once the goods have been delivered and the contract fulfilled, the exporter sells the paper (i.e., the bills or notes) to a forfeiter without recourse and at a price determined by the forfeiter itself. Thus, the exporter receives payment instantly and transfers the risk of non-payment to the forfeiting company. 10 “Euromoney”, September 1999, pp. 250-255.
  26. 26. 14 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects methods after their habitual sources of financing disap- peared following the 1998 crisis.11 Importers from such countries as the Czech Republic and Croatia whose preferential access to the bond markets was lost as a result of the crisis have been successful in at- tracting the big forfeiting companies such as London West LB, London Forfeiting and DOG Trade Finance for import financing. For instance, recently London Forfeiting (with Zagrebacka Banka guaranteeing the deal) has put together the financing for John Deere to sell USD 15 million worth of tractors to a number of buyers in Croatia. The financing has been extended for seven years (with a two-year grace period) as opposed to the usual 1 to 3 years.12 The volume of individual forfeiting transactions with companies from CIS countries has yet to attain the levels of those undertaken with firms from central and eastern Europe. As a comparison, while in Hungary or Poland a single forfeiting deal can be worth up to USD 50 million, the value of individual forfeiting transactions in central Asia recently has not exceeded USD 5 million.13 In the context of intra-CIS trade, forfeiting is still uncommon because of the high risks inherent in long-term transac- tions, the relative weakness of local commercial banks as well as the lack of companies specializing in this type of financing. (c) Leasing Another potentially attractive financial solution for companies seeking to sell and purchase capital equipment is transborder leasing. Leasing services have enjoyed buoyant growth in countries of central and eastern Europe. The total volume of new lease financing in Hungary, Poland, the Czech Republic, Slovakia, and Slovenia rose from USD 1.3 billion in 1993 to more than USD 4 billion in 1996. In 1997, European transition economies 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.
  27. 27. Important features of Trade Finance in Transition Economies: Second half of the 1990s 15 leasing operations in different countries of the region. If the markets in the Czech Republic, Poland and Slovenia grew by 8, 28 and 12 per cent respectively, volumes of transactions declined by 19 per cent in Slovakia and as much as 35 per cent in Estonia..14 According to experts of Leaseurope Association, the expansion of the EU to selected eastern European countries will stimulate invest- ment, creating an important potential for lease financing. The importance of leasing has increased in various sectors and industries. It has been growing the fastest in services, followed by manufacturing and construction, and agriculture, forestry and fishing. In countries which have suffered the most from the consequences of the 1998 financial crisis, the share of short-term leasing (up to 2 years) has increased, reflecting the instability of the economic situation and the conse- quent rise in investors’ risks. At the same time, an increase in the amount of long-term leasing deals (with a duration of 5 to 10 years) has occurred due to a wave of restructuring of lease payments for those lessees who have run into payment difficulties. Over the last decade, leasing in general, and trans- border leasing in particular, has become an important instrument of long-term trade and investment finance. In 1998 about 80 per cent of leasing transactions in eastern and central European and Baltic countries and the CIS financed the acquisition of equipment and only 20 per cent the acquisition of real estate. The use of leasing makes it easier for the lender (lessor in this case) to preserve the security behind financing by keeping ownership rights on the leased title; in certain cases, both lessor and lessee may also acquire some tax gains15. The importance of leasing in transition economies may grow in the future. In Russia, for example, according to the Ministry of Economy’s forecast, the proportion of leasing may grow from being equivalent to about 2 per 14 Leaseurope Association “Annual Report 1999”. 15 “Multinational Business Review”, Fall 1999, pp. 89-96.
  28. 28. 16 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects cent of total investment in 1997 to about 20 per cent in the year 2000.16 Non-conventional trade During the second half of the 1990s, barter and countertrade continued to play an important role in the domestic trade of CIS countries17, their trade with devel- oped market economies and among themselves. At the beginning 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 value of barter in CIS countries’ trade declined both in absolute terms and as a proportion of exports and imports. In most of the countries for which data are available, the share of barter dropped from about 20-25 per cent of exports in 1995 to 10-15 per cent in 1997. However, these transac- tions remained important for many countries, for example Belarus (28-30 per cent in 1997), Republic of Moldova and Azerbaijan (10-14 per cent) and Ukraine (9-10 per cent). In the trade of the Russian Federation, the share of barter in 1997 was about 6 per cent for exports and 8 per cent for imports. However, in absolute terms, these percentages still represented important values (about USD 4.5-5 billion in each case).19 Anecdotal evidence attests to a continued use of countertrade between traditional Soviet-era partners. Recent examples include a three-way deal to supply gas from Turkmenistan through Russia to Ukraine. The deal is 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 Commission 1999, 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.
  29. 29. Important features of Trade Finance in Transition Economies: Second half of the 1990s 17 Ukraine to deliver 20 billion cubic metres of gas from 1999 to 2005. As much as 10 billion cubic metres Ukraine will have to pay in kind to Gazprom for gas transit, the rest will be covered by payments in cash (40 per cent) and deliveries in kind (food and other goods). Another example of a big barter deal involves Ukraine handing over to Russia eight Soviet-made Tu-160 strategic bombers to cover USD 1.8 billion in natural gas debt.20 Payments in kind are also used outside of intra CIS trade. For example, a Latvian pharmaceuticals company ”Olainpharm” has reached a deal involving the export of medicines in exchange for Russian coal.21 It is also esti- mated that about one third of the annual trade turnover between Bulgaria and Russia (worth USD 1 billion) is ef- fected through barter transactions. In 1999 Gazprom agreed to accept, in partial payment, building materials equivalent in value to 30 per cent of its gas deliveries to the Bulgarian State construction company Glavbul- garstroi. In the same way, Glavbulgarstroi covers the cost of importing nuclear fuel to Bulgaria’s Kozlodui atomic power plant. For this purpose, this company has signed a USD 15 million contract with the Russian Atomic Energy Ministry (Minatom) to build a housing complex for the workers of a Novosibirsk chemical plant.22 It is seen from the above that Minatom uses countertrade as a project finance instrument. As was already indicated in the 1996 UNECE study, in the CIS countries countertrade plays a major role in main- taining trade volumes and supply in individual regions. For example, in 1999 the Russian Government proposed to the Association of Southeast Asian Nations (ASEAN) several barter agreements involving food deliveries from the member States of the Association to the Russian Far East in exchange for Russian machinery and equipment.23 The empirical evidence suggests a sustainability of payments in kind that cannot be explained only by enterprise 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.
  30. 30. 18 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects 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 unit of 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 companies an 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 the Internet 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 of exports by one rouble leads to a decrease in barter sales of as little as 17 kopecks. Moreover, this proportion applies to exports directed to both cash-constrained CIS States and non-CIS countries. The same study has provided ev- idence that barter is used by all industries despite their technological 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 more costly than barter due to high taxes, insecure property rights, imperfect credit markets, as well as rent-seeking by banks and other intermediaries.24 It is also important to emphasize that exchanges in kind 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. In addition, recent years have borne witness to the emer- gence of specialized intermediaries (similar to those 24 Guriev, Ickes, op.cit., p. 9.
  31. 31. Important features of Trade Finance in Transition Economies: Second half of the 1990s 19 flourishing in east-west countertrade in the 1970s) which focus on developing multi-party barter schemes, reducing their cost for the players. All those factors add up to a lock-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 and the new opportunities which it creates for on-line counter- trade (see box II). In summary, the medium-term future of countertrade and barter is unclear. The opening of markets and a grow- ing exposure to outside competition will tend to reduce the number of inefficient enterprises and the network of their 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 preserve non-viable enterprises and the requirements for stability of supply in particular regions and for particular products will contribute to maintaining countertrade transactions. Topics for further discussion: 1. What are the factors determining long-term risks in trade finance? 2. Is country risk the most important risk in the long- term perspective? 3. What are the benefits of forfeiting to importers from the central and eastern European countries, the Baltics and the CIS? 4. Can forfeiting and leasing substitute for the lack of bank financing in transition economies? 5. Do countertrade and barter, in particular, substi- tute for conventional trade or, rather, supplement it? What are the major factors perpetuating barter? What are the perspectives of countertrade in the medium- to long-term future? 25 Ibid.
  32. 32. 20 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects SOURCES OF FINANCE 1. Company’s own funds In the second half of the 1990s and the beginning of the 2000s, the use of trading companies’ own working capital for export production and imports has been largely frustrated by undercapitalization and insufficient operat- ing profitability. For example, in Russia in the first half of 1998 (that is before the financial crisis broke out), more than 51 per cent of medium-sized and large enterprises operated at a loss. In September 1998, the share of enterprises having overdue receivables amounted to 72 per cent of their total number and those having over- due payables to 71 per cent. At that time, the value of overdue payables was estimated at over 40 per cent of GDP.26 New private companies, including those having potentially competitive products, often have to rely on borrowed funds both in their domestic operations and in exports. In the absence of such funds, important non-bank sources of financing have been tax arrears and the non- payment of utility bills.27 2. Commercial bank credit The availability of commercial bank credit crucially depends on the state of the banking system. The financial sector in the countries of central and eastern Europe, the Baltics and the CIS is known to have undergone radical changes during the transition. The original monobank has been replaced by a two-tier banking systems across all countries in the region and a considerable number of commercial banks have emerged. During the last decade, many of them, particularly in central and eastern Europe, dedicated considerable efforts to 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.
  33. 33. Important features of Trade Finance in Transition Economies: Second half of the 1990s 21 banking sector reforms, tightened market entry requi- rements, forced inefficient banks to exit, and recapitalized or merged weak but viable banks. Despite undeniable progress, the financial systems in transition economies remain underdeveloped, commer- cial banks being largely under-capitalized and small by western standards. Even in countries of central and east- ern Europe and the Baltics which are relatively advanced in institutional reforms, financial sector weakness is apparent. As an example, in the 11 European Union countries that have signed up to the Euro, bank assets (worth USD 17,000 billion), represent an equivalent of 260 per cent of their GDP. A similar indicator for the central European countries (Poland, the Czech Republic, Slovenia, Slovakia and Hungary), shows combined bank assets worth USD 257 billion, which does not exceed 92 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 per 11,000 inhabitants. 28 The underdevelopment of the banking sector is even more apparent in countries of the CIS. In many member States of this grouping, the bulk of financial services is still rendered by only a few banks. In Azerbaijan, for example, four State-owned banks account for 80 per cent of total bank assets. At the same time, only one of them (International Bank of Azerbaijan, IBA) is sufficiently capitalized and fully operational, while the other three are technically insolvent.29 Non-performing assets and bad debts continue to weigh heavily on the balance sheets of banking insti- tutions in the region. For example, in 1999 the banks Ceska Sporitelna and CSOB, accounting for about half of the total turnover of banking services in the Czech Republic, had bad loans amounting to 44 per cent and 30 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.
  34. 34. 22 Eliminating obstacles to efficient Trade Finance in Transition Economies: practical aspects For the reasons referred to above, the banking sector in transition economies often lacks the capacity to provide market-based financial services to private enterprises. During 1994-1998, the sum of loans to the private sector was equivalent on average to 27 per cent of GDP in east- ern Europe and the Baltics, and to only 9 per cent in the countries of the CIS. This is well below the EU countries’ average of over 50 per cent.31 Constraints to efficient trade financing have also been attributed 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 very important. At the same time, research conducted by the European Bank shows that it is not necessarily the most burdensome. Often, the lack of access to long-term bank loans, heavy collateral requirements imposed by financial institutions, as well as the additional costs im- plied by the paperwork and other bureaucratic proce- dures imposed by banks, impede the access to finance more 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 the region. However, their capacity to adequately evaluate the creditworthiness of exporters, especially new small companies, is limited, and they prefer to deal with large and well-known clients, particularly in the commodities’ export sector. For this reason, the enhanced penetration of foreign financial institutions into the local markets for banking and insurance services can seriously amplify the availability of trade finance, particularly for SMEs, only in conjunction with a strengthening of the local financial sector. To summarize, the following major weaknesses of the banking systems in European transition economies should be mentioned: Insufficient capitalization of local commercial banks, a lack of resources for the pre-shipment sup- port of exporters and an inability to issue adequate payment guarantees; 31 IMF “World Economic Outlook”, October 1999, p.69. 32 EBRD “Transition Report 1999”, p.153.

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