Trade finance is an unconventional form of bank lending that involves financing clients’ foreign trade operations by attracting foreign bank funds. Victoria Ermakova, the Senior Vice President of the commercial bank talked to the WEJ about this particular sector of the Russian banking system.

Victoria, how long has the trade finance service been represented on the Russian market? And why do so many companies turn to you for the guarantees your bank provide?
The history of trade finance in Russia is only 20 years old, it has developed rapidly because of Russia’s recent integration into the global economy, especially during the last five years. Now, there are several factors that determine the attractiveness of our documentary options – the presence of political risks, the fact that most domestic companies are completely unknown to their foreign counterparts, and the low rating of the state all play a role. Russian companies are faced with lower working capital and investments for development than in previous years.

But this can all be prevented by looking at the production equipment of many enterprises – a lot of companies prefer buying new equipment abroad. What is the most convenient form of payment for a safe transaction? The answer is trade finance, in which the bank acts as a financial intermediary. The lack of a long history of cooperation with foreign partner companies raises some concerns in Russian and foreign organizations, especially when it comes to the reliability of the buyer or seller. With this instrument, exporters can be confident that they will receive payment secured by a bank loan. At the same time, the importer makes sure that everything is done in accordance with the conditions of the contract and its delivery terms.

What main tools are used in trade finance operations? And what is your opinion on the prospects of further development of this particular form of banking in Russia?
A wide range of instruments are used to carry out documentary options today in Russia, such as documentary letters of credit, bank guarantees and counter-guarantees, standby letters of credit, and bills of exchange. Some of them are in demand not only in foreign trade transactions, but by inside trading participants. Often, the departments of banks, which are responsible for trade finance, organize the financing of transactions where the international element is either entirely missing or partially contained. These situations usually arise when there are trade relations between two residents, at least one of which is a company with foreign capital. Nevertheless, trade finance was originally positioned as a banking product focused on the participants of foreign trade, so the prospects of this direction will depend on the situation on international markets. Looking at the short-term perspective, the increase in demand for services will occur with the growth of foreign trade in Russia. Trade financing will retain its attractiveness in terms of the cost of credit resources. It can be assumed that the most popular tools will be documentary credits and bank guarantees, both of which are time-tested and traditional tools that market participants understand and which are regulated by international standardized rules.

Has the competition in the trade finance market increased in recent years?
Since the end of 2010, the activity of Russian and foreign financial institutions intensified. Foreign banks are opening credit lines for Russian banks, which were previously shut down due to the crisis, financing terms are increasing, and interest rates are gradually reducing. In these circumstances, banks are more eager to enter the market, which leads to a permanent increase in competition and a stronger desire by market participants to offer better conditions for their customers, which contributes to the demand for trade finance. With current competition between private commercial banks, as well as the competition between large government stateowned banks and banks with foreign capital, an important task for us was to correctly identify the target customer segment. It makes no sense to compete with governmental and state-owned banks for the representatives of big business equally. Various branches and representative offices of foreign companies prefer working with the subsidiaries of foreign banks operating in the territory of the Russian Federation, because they know the brand of the bank and they are confident that it is reliable. Therefore, an optimal way of developing our business further is to orient ourselves around small and medium-sized Russian businesses – overall, we orient ourselves around medium-sized businesses to a greater extent, because this particular sector is in a less advantageous position in terms of opportunities for attracting financing and often has very little experience in international transactions. We help companies, that are not well known abroad, get loans and guarantee the fulfillment of all contract obligations with the support of one of the largest banks in the country.

What is required from the bank when it comes to collaborating with foreign partners? Can you highlight some significant difference when working with financial institutes from different countries?
When it comes to the development of cooperation with foreign banks, we are required to have maximum concentration, agility, and transparency. I would say that the only differences are good organization and well-established mechanisms for working with representatives from Germany, Austria, and France. When working with Asian countries, however, it requires more patience and perseverance. The INTERCOMMERZ Bank has established relationships with the following banks Commerzbank AG (Germany), Raiffeisen Bank International (Austria), Banca Monte dei Paschi di Siena S.p.A (Italy), UBI Banca (Italy), ROSBANK/Societe Generale Group, Banesto (Spain), Catalunya Caixa (Spain), Banque de Commerce et de Placements (BCP) (Switzerland), ICBC, other, as well as with Export Credit Agencies (ECAs). In the second half of 2012, we plan to increase our volume of trade finance transactions by two-fold, and get up to $100 million as a result.

What are the requirements for clients and their business to get access to finance?
They need to have experience in their field, as well as a steady turnover, international business standards, and transparency. Our target customer is a medium-sized company with a turnover of 600 million rubles, or about $20 million, a year. For us, it is important to support a client’s business and provide it with all the necessary tools to work with its foreign counterparts.

Text: Anastasia Yakovleva