Download Working in Russia

Il Ruolo del Settore Finanziario
Foro di Dialogo Italo-Russo
M. Luisa Cicognani
Milano, 26 April 2005

Russia Business Environment

Russian Financial Market Overview

How Does EBRD Assist
Business Environment - Strengths
Robust economic performance over the last 2 years

Strong GDP growth and sharp acceleration in domestic
investment

Sound management of public finances, with large surplus
of federal budget for the 5th consecutive year

Gradual decline of inflation while exchange rate remains
firm

Acceleration of foreign investment including FDI inflows

Reserves are at record high, well over USD 100 bn

Structural and institutional reforms have remained broadly
on track
Business Environment - Weaknesses
However, still a vulnerable and fragile economy

Slow down in the pace of the reform in 2003-2004,
implementation remains weak

Emergence of significant uncertainties and risks regarding the
protection of property rights

Lack of clarity about the role of the state in the economy

Corruption remains an area of concern (2.8 out of 10 as per
Transparency International Corruption Perceptions Index for
2004)

Volatility of the financial markets and capital flows

Accumulated FDI stocks only 6.5% of GDP, only one fifth of the
average level of the other transition economies

Weak micro economic foundations for enterprise sector
Russia’s Challenges
Diversification,
modernisation of
economy
Transparency &
Corporate
Governance
Build an
enterprise
sector
Strengthen
independence of
judiciary
Reforming public
institutions and
clarify role of the
state
Accelerate
reforms and
implementation
Russian banking sector – a snapshot

Number of banks falling, but still around 1,300

Banking assets grew by 26% in 2004, reached 42% of
GDP. Total Assets: USD 243 billion (Citigroup: USD 1.3
trillion end 2003)

Sberbank accounts for 28% of total assets (but 62% of
deposits)

Foreign banks account for around 7% of assets

Sector-wide return on capital of 19%

Consumer lending fastest growing sector, now
represents 20% of total loans
6
Status of banking reform

Law on Deposit insurance introduced

Law on Credit Bureaux adopted January 2005

Obligatory compilation of financial statements
to IFRS

Move to substance over form in supervision

Improvements to bankruptcy law
7
Reform priorities for 2005-8

Raise competitiveness of banks

Raise capitalisation requirements

Simplify merger and acquisition process

Enhance banking supervision – focus on risk
management capabilities
8
Financial Instrument Alternatives in
Russia
Financial Product Complexity
Russia‘s Position:
Bond/Debt Market developed
Limited Project Finance Transactions
Project Financing Greenfield Joint
Venture
Capital Markets
(DCM, ECM & VC)
Corporate Debt
Secured/Unsecured
Commodity Trade
Financing
ECA Financing
Developement of Legal and Regulatory Framework
Vendors and ECA Financing
Vendors/ Export Credit Agencies

Improving as some ECAs have room for financing new projects (i.e.
Hermes, NCM, USExim, etc.);

Long-term coverage becoming available;

Requires matching of imported sourcing to ECA resources;

Increasing penetration of suppliers ready to offer financing;
Expanding opportunities for large companies
considering large international orders
Banking Market
Domestic and International Banks

Domestic Banks :
–
–

Availability of funding, notably amongst large institutions such as
Sberbank and VTB
Deposit structure generally limits tenors to 1-5 years
International banks :
–
–
–
Increased lending activities with focus on top borrowers
Limited tenors and on-shore security
Tenors on uncovered risk can be extended with support of multilaterals
such as the EBRD
Increased liquidity especially for top private
and state companies
Russian loan market development:
Volumes and Tenors 1999-2004
Volume (USD mm)
Average tenor (yrs)
12000
4.5
3.5
8000
3
2.5
6000
2
4000
1.5
1
2000
0.5
0
0
1999
Source: Dealogic Loanware
2000
2001
2002
2003
2004
Average tenor (yrs)
Volume (USD mm)
4
10000
Comparisons with the rest of Europe

2003 average returns
– Western Europe
– New EU*
– CIS

2003 average tenors
– Western Europe
– New EU*
– CIS

189 bppa
99 bppa
312 bppa
6 yrs
4.1 yrs
2.05 yrs
First 9 months of 2004 volume
– Western Europe
– New EU*
– CIS
*New EU includes Bulgaria & Romania
USD 470 bn
USD 9 bn
USD 9 bn (of which Russia = 67%)
M
Source: Dealogic Loanware and EBRD
BN
en
EB
RD
Pa
rib
as
Ci
tig
ro
up
G
Ba
nk
So
c
P
BP
RO
ba
nk
er
z
IN
G
Co
m
m
s
AM
Na
te
xi
AB
N
ria
HS
BC
G
ro
up
RZ
BAu
st
HV
B
Na
ro
dn
y
CS
FB
Ha
nd
el
.
HS
H
No
rd
W
ow
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O
USD mm
Russia: top 15 loan providers in 2004
1,600
1,200
800
400
0
Debt & Equity Capital Markets

Growing DCM market of ca. $9.5bn in 2004.

Market appetite for equity and bond limited to larger players

Dependant on market conditions at time of issue

Extended maturities for large issuers

International bonds are still expensive (except for top borrowers)

Rouble bond market developing but short–term and speculative

Public disclosure requirements and difficult to amend bond documentation
Rapid growth as source of financing to
major companies
Conclusions & Outlook

Global banking market liquidity is likely to remain high and oil prices set to remain
high

Still an uneven market with over 60% for Oil & Gas and other near-commodities,
such as steel, aluminium, mining

Covenants have loosened and unsecured lending has begun (top borrowers)

Pricing has (on average) continued to fall

Many corporates are managing self financing to a degree or raising short-term
funds, but . . .

Corporate lending has barely scratched the surface of the manufacturing economy

Normal instrument migration is occurring: structured trade finance is giving way
to corporate finance and capital markets, but . . .

Project financing expected to grow to meet expansion and modernizing needs of
more sophisticated customers
Strong appetite in the market is likely to continue,
but is partly conditional on continued stable commodities prices
How Does EBRD Assist
Growing Presence in Russia
€ billion
Cumulative
Business Volume
7
6

Since 1991 the EBRD financed
projects with a Cumulative
Business Volume of €5.9
billion (23% of total)

At the end of February 2004
the Portfolio Stock was at
€3.75 billion (22%) and
Operating Assets at €2.3 billion
(21%)

Private/ State: 76% / 24%

Debt/ Equity/ Guarantee:
81% / 14% / 5%
5
4
3
2
1
0
1991-1994
1997
2000
2003
Annual Business Volume (cumulative '91-'94)
Net Cumulative Business Volume
Major Presence in Russia
Moscow
St Petersburg
Yekaterinburg
Vladivostok
Russia Becoming the Biggest Focus
Net cumulative commitments €25.6 billion
of which €5.9 billion in Russia
Central Europe
40%
SEEC
30%
Central Asia
7%
Russia
23%
Russia Portfolio Stock by Sector
Portfolio Volume
€3.75 billion
Equity Funds
8%
Transport
15%
Small
Business
3%
General
Industry
20%
Agribusiness
9%
Financial
Institutions
14%
Property &
Shipping
3%
Telecoms &
Media 3%
Power &
Energy
5%
Natural
Resources
9%
Infrastructure
11%
A Diverse Range of Financial Products
Guarantees



Specific risk guarantees
(i.e. political, commercial
risk participations)
Commodity-backed
instruments (i.e.
warehouse receipts)
Trade facilitation program
(with participation of local
banks)
Equity
Debt


Corporate or Project
specific

Non or limited recourse
to sponsors





Syndicated loans (w.
underwriting)

Parallel with ECA’s,
other IFI’s or Banks

Hard / local currency

Tenors between 5 to 15 years
Venture Capital
Privatizations
New Equity
Quasi-equity
‘Portage’
Syndicated lending under EBRD’s A/B
structure

Plans for 3-4 new syndicated loans in 2005

Focus on existing partners among top 20
Russian banks

Seeking to extend maturities well beyond
typical 12 months

Plans to consider second tier Moscow-based
banks and strong regional banks in 2006
23
EBRD’s Preferred Creditor Status
EBRD has Preferred
Creditor Status in respect
of transfer and
convertibility risk (Art. 21 of
the
Agreement establishing the
EBRD)
Tested! Russia, August 1998
Payments to EBRD exempted
from the transfer and convertibility
moratoria
International Moscow Bank
IMB Syndicated Loan
Signed on 06 May 2004

Provision of a US$ 200m
syndicated loan (EBRD
portion US$ 30m) earmarked
for IMB on-lending to
Russian small and mediumsized enterprises, particularly
in less-developed regions

First of a string of deals the
Bank is working on to
provide Russian banks with
long-term funds so they can
give Russian businesses
much needed access to
longer-maturity credit
Leasing in Russia – Market History


Leasing has existed in Russia for some time but not a
widely accepted financial product, owing to legal
problems with the civil code and conflicts of laws
Russian leasing companies such as Sberbank’s
subsidiary RG Leasing active domestically

Proliferation of leasing companies post 1998 crisis,
with major growth witnessed in 2000-2004

Legal environment for leasing in Russia vastly
improved with legislative changes in 2002
26
Leasing in Russia - Opportunities

Leasing sector growing rapidly – among the highest in the
Russian economy: estimated at 50-70% for 2004

Despite growth in the market since improvements in
legislation leasing penetration still at low levels: 0.9% of
GDP and less than 5% of capital investment in the
economy

Stark contrast to European levels of 5% of GDP and 1530% of capital investment

Market forecast to grow 40% over next 3-5 years

Large number of market players, but still few providing
true financial intermediation, as is true with the banking
sector
27
Leasing in Russia – Constraints and
Concerns

Access to financing - an issue for those without the
strong support of a parent

Tenors in the market for financing need to match
those of the underlying assets

Market risk linked to that of the banking sector

Foreign currency risk very high – a future credit risk

Need for the development of rouble financing in the
sector
28
Raiffeisen Leasing Russia

Started operations in 2000, as a department of the local
bank in Moscow

Balance sheet has grown from USD 10 million to
approximately USD 100 million

Competition mainly from foreign owned leasing companies:
BSGV Leasing, CitiLeasing, Deutsche Leasing Vostok,


Some domestic leasing company competition – Sberbank’s
leasing company RG Leasing and IMB Leasing
Focus on financing a wide variety of equipment for Russian
companies and also subsidiaries of Western companies
29
Raiffeisen Leasing Russia

Started operations in 2000, as a department of the local
bank in Moscow

Balance sheet has grown from USD 10 million to
approximately USD 100 million

Competition mainly from foreign owned leasing companies:
BSGV Leasing, CitiLeasing, Deutsche Leasing Vostok,


Some domestic leasing company competition – Sberbank’s
leasing company RG Leasing and IMB Leasing
Focus on financing a wide variety of equipment for Russian
companies and also subsidiaries of Western companies
30
Raiffeisen Leasing Russia




Raiffeisen Leasing Russia – 5 year tenor from EBRD,
with 3 year tenor from our B lenders
EBRD political risk umbrella extended to the
syndicate
Transaction sold well even during the “mini” banking
crisis of summer 2004
Strong commitment from EBRD – demonstrated
belief in the Russian markets
31
Consumer Finance in Russia –
Market History

Virtually non-existent in Russia before 2000, now one of
the fastest growing markets in Russia’s financial
services sector

Modern, fast and uncomplicated approach to credit
approvals
Growth in the main metropolitan areas, such as Moscow
and St. Petersburg


Significant potential for growth (household loans as a %
of GDP just 1% in Russia, - over 6% in Czech Republic
and 18% in Croatia).

Consumer loan penetration in Russia still low: 80% of
households have never taken any form of loan.
32
Consumer Finance in Russia –
Market History

Consumer finance sector in Russia has demonstrated
exceptional growth and profitability opportunities, with
strategic investment from both domestic banks and
foreign players

The sector in Russia is still predominantly
unregulated

However, first initiatives to introduce changes to the
legislation requiring greater consumer protection and
disclosure

Further legislation initiative are expected to emerge
before too long
33
Russian Standard Bank (RSB)

RSB established in 1999 by a successful
Russian entrepreneur to become the first
commercial bank in Russia with a strategic
focus on consumer finance

By end 2004, RSB ranked 20th among
Russian banks by total assets

RSB has a long-term counterparty credit
rating of B from S & P, and a long-term foreign
currency deposit rating of Ba3 from Moody’s
34
Russian Standard Bank (RSB)

RSB’s primarily focused on consumer finance loans
and credit card services with over 6,000 points-ofsale with retailers countrywide

4 million consumer loans disbursed since inception,
totalling USD 2 billion with currently 2 million
individual borrowers. Estimated market share (points
of sale) of 40%; and number of credit cards at 70%

Competitors include Home Credit, OVK Group, Alfa
Bank Express, Citibank, Sberbank, Uralsib, RZB and
MDM-Bank.
35
RBS Syndication – Key Terms

A/B Loan of USD 90 million, with A Loan of USD 30
million and B Loan of USD 60 million

3 year tenor for A Loan and 18 months tenor for B
Loan

BNP Paribas and RZB jointly underwrote and
arranged the B loan

13 banks from 10 countries participated in B Loan
36
Annual Meeting & Business Forum
2005
Good opportunity to:

find out more about the EBRD
and its countries of operations

network with bankers,
business people and
government officials

22-23 May 2005 in Belgrade

Parallel forum of debate and discussion on the
investment climate in the region
How to contact us

Moscow Resident Office
Victor Pastor, Director, Russia Team
Eric Rasmussen, Deputy Head of the Moscow Resident Office
Nick Tesseyman, Senior Banker, Financial Institutions
Tel: +7-095-787-1111 / fax: 787-1122

London HQ
Istvan Ipper, Deputy Director, Russia Team
M. Luisa Cicognani, Director, Bank Equity, Financial Institutions
Tel: +44-20-7338-6207 / fax: +44-20-7338-7470

Procurement Opportunities and General Information
via web site: www.ebrd.com

Publications
Tel: +44-20-7338-7553 / fax: +44-20-7338-6102