To Russia with lease

By bne IntelliNews September 6, 2007

Nicholas Watson in Prague -

Two deals announced during one August week illustrate how the leasing business in the more developed parts of emerging Europe is moving from the end-of-the-beginning stage to the beginning-of-the-end stage.

On August 2, the leasing subsidiary of Hungary's regional banking group OTP gobbled up one of the few remaining local leasing firms in Croatia, Z Plus Leasing, bringing near to a close the consolidation process whereby large foreign financial institutions buy up small local outfits. A week earlier, the leasing unit of banking major ING reached an agreement with the giant US financial institution Citigroup to acquire its Citileasing unit in Hungary, marking the start of the consolidation phase among these big players.

"In most of the countries of Central Europe, international leasing companies dominate the scenery. We now see a tendency for some of them to step back, initiating a second round of consolidation," says Alexander Schmidecker, head of CEE Markets at UniCredit Global Leasing. "As for UniCredit Leasing, we are convinced that being one of the first movers in each country is crucial for success."

This process of consolidation is sure to pick up over the coming months and years, say analysts, as the phenomenal growth rates witnessed in the auto, equipment and real estate leasing markets during the 1990s in Central Europe retreat toward the less exuberant levels typical of the more mature markets of Western Europe.

That trend in Central Europe has occurred somewhat quicker than many had predicted, testament to the boom that the industry has enjoyed since its introduction following the fall of communism. In fact, some of the Central European markets - Czech Republic, Hungary, Poland and Slovenia - are even more competitive than many of their Western counterparts.

Why? Industry players say that leasing has taken hold in places like the Czech Republic - the largest in Central Europe and the 13th largest in the whole of Europe - because in contrast to more traditional market economies where leasing was introduced into the market as an alternative to existing forms of finance such as bank loans, leasing firms were actually some of the first players in the retail lending market. The reason for this is the banking sectors that communism left behind were, by and large, decrepit, undercapitalised and incapable of lending, or if they did, then lending wisely. The Czech Republic suffered a credit crunch in the 1990s as undisciplined lending led to a series of banking scandals that eventually cost the country some 31% of its annual GDP.

The leasing industry was also helped by the rapid pace of growth in these countries as governments, companies and consumers, buoyed by the roaring economy, needed lots of money to pay for all the shiny new infrastructure, hospital equipment, trucks, machinery and cars. There was "extraordinary growth in machinery and equipment," says Arkadiusz Etryk, CEO of Raiffeisen-Leasing in Poland.

Multilateral lending institutions, like the European Bank of Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation, also got into the act with programmes to develop the various leasing markets in the region, seeing this form of credit as a way to increase the range of financial products in the market and provide finance to businesses that couldn't access the traditional channels. "Leasing is a critical form of financing for start-up and expanding enterprises, particularly SMEs, which typically lack credit history and collateral to access bank credit," a spokesman for the IFC says.

Of course, not everything has gone smoothly. Fraud has always been a plague on leasing houses, with organised crime using leasing companies in the same way they use insurance companies. In places like Poland where leasing isn’t licensed, the number of leasing companies mushroomed during the 1990s, forcing the late arrivals especially to aggressively tout for business. As the industry slowed, a series of bankruptcies has followed like night follows day.

Still room to grow

According to the European Federation of Leasing Company Associations, by the end of 2005 the countries of Poland, Hungary and the Czech Republic held a combined 60% of the leasing market in CEE. Although growth may be slowing in these parts of Europe, it's still considerable and, most importantly, will continue to be a significant contributor to the parent group's top and bottom lines.

For example, Slovak leasing companies signed contracts worth €1.1bn in the first half of the year, up 9.1% from the year-earlier period but slower than the 30% increase in the whole of 2006. Leasing firms operating in Hungary signed new contracts worth €2.2bn in the first half of the year, up 7.5% from the same period a year ago, with small and medium-sized businesses (SMEs) accounting for about 36% of this new business in the period.

In terms of money, in 2006 UniCredit's leasing operations contributed some 12.5% to the overall revenues of the group's corporate division, which totalled some €5bn. In terms of net profit, leasing contributed for some €180m, or 12.4%. "Leasing is a very important revenue contributor to the corporate division of UniCredit Group and that's why UniCredit Group has developed this global product line to give more strength to the leasing business, to emphasize cross-selling and really make use of this revenue and profit unit within the group," says Edith Holzer, head of marketing and communications for UniCredit Global Leasing/CEE Markets, explaining why her company has embarked upon a massive reorganisation of its business to bring all its national leasing companies in 16 countries under one roof.

Even so, the leasing industry, like everything else, is always looking for the next "big thing" - and like other businesses, from private equity to used cars, it expects to find it in Russia and further afield in the CIS, especially Kazakhstan.

Eastward bound

If the projections are to be believed, Russia's leasing market will grow at average rate of 24% per year from 2005's $9bn to $26.9bn by 2009. The total value of the leasing market in 2006 is estimated at $12bn, which represents 2% of GDP, some way behind OECD member countries where the leasing market represents 5% of GDP. So by all accounts, there's some way to go.

Russia has all the prerequisites for that gap to be filled. GDP growth is strong, coming in at 6.7% in 2006 and is forecast to be 6.5% this year. Retail ending is on fire, as ordinary Russians take mortgages and car loans. In the first half of 2006, Russians borrowed $56bn, up from $41bn at the end of 2005 and just $22bn at the end of 2004. As the corporate auto business grows, there is wide scope for related services, such as corporate car financing and management. Datamonitor believes Russian firms, like their Western counterparts, will start to recognise the benefits of operating a fleet on rental contracts, looked after by specialised firms.

Aging Soviet infrastructure, from transport to hospitals, also needs to be replaced in a massive investment programme that will transform the economy. In 2011, the value of the Russian construction industry is forecast to reach $91.83bn, contributing 7.2% to total GDP. And companies too are replacing their aging equipment as their businesses grow, together with the prospect of huge IT projects on the horizon as they modernize. The multilateral lenders are also very active in Russia, with the EBRD expecting Russia's share of its total lending budget to rise to 41% by 2010. It is already heavily present in Russia's leasing market; for example, in May it announced a $30m loan to the leasing company Promsvyazleasing, which provides leasing to SMEs.

Furthermore, while leasing is currently centred on the two main urban centres of Moscow and St Petersburg, there is expected to be a major development of the regions as they start to benefit from the booming economy. One of the major beneficiaries over the coming years will be the Black Sea city of Sochi, which earlier this year won the right to host the 2014 winter Olympics. Dmitry Sergeev of Trust Investment Bank reckons total investment in regional development from Olympic projects could amount to $12bn.

Last but not least, leasing has had the stamp of approval from the most popular man in Russia - President Vladimir Putin. "Leasing has proved to be an effective tool to attract funds to the real sector of the Russian economy," Putin has said.

Such promises have inevitably already attracted interest from foreign leasing companies, though so far analysts say they have been rather cautious about getting into Russia. Among the largest are Unicredit Leasing operating under its local unit Loсat Leasing Russia, Raiffeisen Leasing, ING Leasing, Arval (BNP Paribas) and Europlan, plus several specialized companies such as Scania Leasing, Volvo Finance Group, DaimlerChrysler Leasing Avtomobili. According to the Russian Association of Leasing Companies, six out of the top-20 leasing companies in Russia are backed by foreign capital.

Why the caution? This being Russia, there are, of course, challenges specific to the country. The first is the notorious corruption in the country, "as well as the selective interpretation and application of laws," says Krzysztof Bielecki of ING Lease Holding. Second, the highly fragmented market (there are over 700 leasing firms, 120 of note) is still dominated by local firms, some of them state owned. These state-backed firms, say industry players, can offer more competitive rates than those provided by the foreign leasing firms.

However, industry insiders say that as the Russian leasing market matures, so too does the Russian consumer, meaning price loses its position as the sole determining factor. While price is always an important consideration, so too are products and services. "We have a fast process of approving an application. For example, if a farmer needs a new tractor, he doesn't care if it costs an extra €20-30 rent more per month, he needs it now. We can approve a leasing contract in one to two days," says UniCredit Global Leasing's Schmidecker.

Furthermore, large centralised leasing firms like UniCredit have networks across Europe, so if a customer is expanding into several markets at once, it can arrange leasing contracts in all those different markets.

Inevitably, leasing firms are also looking further afield in the CIS, which has been a magnet for investment over the past few years as commodity prices have soared. Azerbaijan is experiencing a period of dizzying economic growth, with GDP estimated to have risen 36% in 2006, following a 26% increase in 2005. The IFC's leasing investments there have resulted in $34.4m in new business.

Another country enjoying an oil boom is Kazakhstan, which like Russia requires huge amounts of infrastructure investment at the same time that its population is splashing out on cars and houses. UniCredit intends to enter the Kazakh market from 2008, following its €1.63bn purchase of local bank ATF Bank in June this year.

"In Kazakhstan the commercial environment is surprisingly good and it's an environment where we think we can repeat the success of the other 13 countries. It's a huge market," says Schmidecker.

Kazakhstan is also one step further toward the next giant market for the leasing industry: China. "If you look back 10-15 years ago we were just in Austria and now we are approaching Kazakhstan and China. If you go back 10 years, no one would ever believe you were thinking about Kazakhstan and China," marvels Schmidecker.

Send comments to The Editor

Related Articles

Drum rolls in the great disappearing act of Russia's banks

Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more

Kremlin: No evidence in Olympic doping allegations against Russia

bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more

PROFILE: Day of reckoning comes for eccentric owner of Russian bank Uralsib

Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.