Trade finance market will feel impact of changes at state banks

Vneshtorgbank, which is 99% owned by the Central Bank, is to be privatised by 1 January 2003, and the government is considering a proposal to sell a 20-25% stake to the European Bank for Reconstruction and Development.

Vneshekonombank's commercial banking business is to be merged with Roseksimbank, the underfunded export credit agency, to produce a commercial bank that will both provide export credit and seek to facilitate inward investment into Russia. Vneshekonombank's function as the vehicle for repayment of Soviet-era sovereign debt will be hived off into a separate agency.

On 1 December the Vneshekonombank and Central Bank managements reported back to the government with detailed plans for the restructuring. On 25 October ministers, meeting with Central Bank chairman Viktor Gerashchenko, had decided that a Roseksimbank share issue would be swapped for Vneshekonombank assets and then Roseksimbank renamed Vneshekonombank of the Russian Federation.

As for the sale of the Central Bank's stake in Vneshtorgbank, the government is determined it should take place next year - mainly because of pressure from the IMF. (The Fund insists that such Central Bank interest in commercial banking conflicts with its regulatory role - as it did after the 1998 crisis, when the Central Bank pumped hundreds of millions of dollars into Vneshtorgbank to staunch heavy losses on currency forwards.)

Prime minister Mikhail Kasyanov said on 9 November that a final decision on the sale of Vneshtorgbank - which he described as "a mighty and well-developed establishment" ranked among the world's top 40 banks - will be taken by the end of January. He said the bank could end up owned 25% by the EBRD, 25% by the state and 50% by other investors.

It is also possible that, if no other buyers emerge next year, the government could itself buy the Central Bank's stake, to satisfy IMF requirements. Then the government (as distinct from the Central Bank) would then control both Vneshekonombank and Vneshtorgbank - which might in that case easily be merged.

Vneshekonombank president Andrei Kostin has publicly indicated that he would welcome such a merger. Asked about the prospects for a merger in an interview with the government newspaper Rossiisskaya Gazeta last month, he replied that he is a "proponent of centralisation and concentration of banking capital", without which "we just won't survive" in the face of foreign competition.

"We already face strong competition from the big western banks, which, for example, they provide credit and services to our big oil companies. They have greater capital bases and cheaper credit." Vneshtorgbank and Vneshekonombank together handle only 15% of Russia's total trading volume; "the rest has, by and large, been offered up to western players. If we want to take on the competition we should unite."

Vneshtorgbank expands export credit business

Anatoly Noshko, vice president of Vneshtorgbank, said in an interview with Trade Finance that the bank is developing its export finance business, particularly with Rosoboroneksport, the state arms exporter. "This is our biggest export credit client. We issues guarantees to Rosoboroneksport for sales of military equipment up to and including missile defence systems, and we expect this business to expand."

State-owned Rosoboroneksport has developed rapidly since its formation last year from a merger of Rosvooruzheniye and Promeksport. Export revenues for January-November 2001 were $3.6 billion. Rosoboroneksport chairman Andrei Beliyaninov said in a recent interview with Vedomosti business newspaper that it is adding holdings in arms manufacturers to its role as an export agency, and that he hopes that the company's relationship with Vneshtorgbank and Vneshekonombank will help it to raise project finance on the international markets.

Noshko said Vneshtorgbank is issuing export credit guarantees for a wide range of Russian companies. "We have mutual credit agreements with many of the major export credit agencies. Under the agreement with Japan, which mainly covers imports to Russia, we recently arranged guarantees for a $50 million contract for the import of high-technology equipment.

"As well as our long-standing business with China and India, we have agreements with Italy, under which gas export contracts are signed; with Hermes of Germany; with the Black Sea Trade and Development Bank; and with the EBRD under the trade facilitation facility.

"We offer a full range of products to Russian exporters: LCs, credits of various kinds for up to 180 days and guarantees."

On the forthcoming privatisation, Noshko said: "It is unfortunate that Russia's state banking sector has been the target of one-sided criticism. People shout about privatisation, and claim that there is opposition to it. But the sort of privatisation now being proposed for Vneshtorgbank, with EBRD participation, is fully supported both by Vneshtorgbank management and by the Central Bank.

"Assuming that the decision is taken at the political level, and I believe it will be, the privatisation could well be complete by the end of 2002."

Vneshekonombank responds to private banks' challenge

Aleksandr Zelenov, head of international finance at Vneshekonombank, said in an interview that the bank plans to develop further its strong vanilla trade finance business, which includes a lucrative management contract for Russia's rupee clearing system with India.

"The scheme has a turnover of about $2 billion per year," Zelenov said. Repayments on India's debt to the Soviet Union, which was transferred to Russia in 1991, are made into Vneshekonombank correspondent accounts in India; debt repayment terms specify that the money must be used to pay for imports from India (mainly tea, tobacco and rice). Vneshekonombank, on behalf of the finance ministry, tenders credits weekly in Moscow to Russian banks and importers.

"We also do various trade finance products for Russian companies trading with partners around the world. The largest partners in this business, apart from India, are Turkey and China. Our client base among exporters ranges from Rosoboroneksport to the privately-owned food manufacturer Wimm Bill Dann."

Vneshekonombank's annual report states that its settlement processing business - 96% of which is with India, China and Finland - grew 57% from 1999 to 2000. Balances in customer accounts in clearing and soft currencies 2.44 billion rubles were on 1 January 2001. The bank processed $4.5 billion of export and import payments in 2000. Of this, $3.4 billion was LCs, including $677 million in Indian LCs and $185 million in Chinese LCs.

The bank had $1,195 million of export guarantees on its books on 1 January 2001, mainly for major Russian exporters.

The state banks' dominant position in trading and currency clearing business with Soviet-era partners is under attack from private Russian banks.

MDM Bank reported that in 2000 it issued $131 million in LCs and $81.7 million of guarantees "including pre-export, post-export and post-import finance" - "a business we are developing not least because of our relationships with the Russian subsidiaries of international finance houses", according to bank president Andrei Melnichenko.

Bank Zenit reported $120 million worth of transactions with clearing currencies in 2000, relating both to current settlements (with India) and repayment of Soviet loans (with India, Vietnam and Bangladesh). Bank Zenit states in its 2000 annual report that it conducted about 20% of Russia's import-export transactions with India (including documentary transactions, pre-export funding, loans for consumer goods imports and other services). It has also established correspondent relations with the Bank of China.

The ministry of anti-monopoly policy appears to be encouraging the private banks. It recently criticised Vneshekonombank's predominance in the Chinese market, and instructed it to reduce fees for currency clearing operations with North Korea.

A version of this article appeared in Trade Finance, December 2001/January 2002 Posted 15.12.01; © 2001 Simon Pirani