Ben Aris in Moscow -
Following Western sanctions and the collapse of the Russian ruble's value in December, you would have thought that the trade financing business for Russian banks would be in desperate trouble. But actually it is doing well and has turned into something of a safe haven business line for those banks that offer the service.
Four Russian banks dominate the business: Alfa Bank, VTB Bank, Sberbank and Promsyvazbank (PSB). The sanctions imposed on a handful of Russia's leading state-owned banks (including VTB and Sberbank) have affected the whole business, and made funding trade deals a lot harder.
"Syndication has become much more difficult, but we have no problem financing or issuing letters of credit for export," says Alexander Mesheryakov, managing director of PSB and head of global transaction banking. "Foreign banks have limited operations to state banks to a maximum of 30 days as per the terms of the financial sanctions. PSB is not under sanctions; all our problems have more to do with the general deterioration of the Russian economy and the negative outlook for this year, than anything like the Russia sovereign downgrade."
PSB managed to close a syndication loan to fund trade financing deals in the autumn of 2014 after sanctions were imposed, although Mesheryakov says it remains impossible to issue Eurobonds. Still, this has proven to be less of a problem. PSB’s funding needs have fallen due to the general drop in volumes, but more importantly the bank has seen significant inflows of fresh deposits. "We are over-liquid now. Our customers are not panicking, but we have seen lots of people switch banks looking for more stable banks and we have had a big inflow of new deposits," says Mesheryakov.
Trade finance deals come in three flavours: letters of credit, letters of guarantee and trade loans. While the first two instruments are still in use, Western banks now refuse to contemplate trade loans, which means that if the trade deal is done on debt, PSB has to lend the money from its own resources, whereas before it could borrow to fund the transaction.
The sanctions have also hit Russia's export business with Asian counterparties. While countries like China have openly supported Russia in its clash with the EU and US, Asian banks still rely on funding from US banks and these lines of credit have been closed to anything involving Russian companies. The Russian state has stepped in and PSB has increased the amount of work it does with the Russian export credit agency, which can guarantee deals or provide funds.
Political problems notwithstanding, 2014 was actually a good year for trade in Russia, with trade financing growing by 13-14% in cash terms in the first three quarters. But volumes fell sharply in the last quarter as the ruble went into freefall and trade volumes tumbled by some 30-40%.
Imports were obviously hard hit by the devaluation of the ruble, which lost about half its value in the last few months of 2014, however exports have done well. "Oil producers were hurt, as in addition to the devaluation, the price of oil itself fell heavily. But all the other products – such as machinery, coal, timber – have done well, as their costs are in rubles and revenue in hard currency," says Mesheryakov. "Even when you factor in devaluation, these companies are still making significant profits and buoying trade finance."
Thus trade finance has become something of a safe haven business line for banks in times of crisis; irrespective of the value of the ruble or extent of the hostilities, companies still need oil, gas and wood to make things.
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