Guaranteeing a future

Through its trade facilitation programme, the European Bank for Reconstruction and Development provides guarantees to international confirming banks doing business in Central and Eastern Europe and the Commonwealth of Independent States. In doing so, it takes the political and commercial payment risk of transactions undertaken by issuing banks in those regions. Courtney Fingar spoke with Rudolf Putz, senior banker, financial institutions, about the programme.

Q: In which countries is the trade facilitation programme offered?

A: The purpose of the programme is to support trade finance in Eastern Europe and the Commonwealth of Independent States (CIS). That means we can guarantee payments of trade-finance instruments issued by banks in our 27 countries of operation.

But, of course, not all the countries need our support to the same extent. In Central Europe and the more advanced countries in south-east Europe, most banks are already established, many of them have been taken over by western banks, they are quite well known and they don’t need our help anymore. But when we started the programme in 1999, it covered all the Baltic countries – Estonia, Lithuania, Latvia – it also coveredsouth-east Europe, including more advanced countries like Croatia. It was also active in Romania and Bulgaria.

Now, these countries have already achieved our targets so many local banks are already introduced and are already accepted by western commercial banks and export credit agencies. So we concentrate on less advanced countries and smaller, less experienced banks, where western banks are not yet ready to take risk.

Q: Which countries have the highest risk?

A: These would include the CIS and the Balkan countries. There are two groups of countries in which the EBRD is needed most: There are countries in which western banks are already ready to take risk, but in most cases only for shorter tenors or for smaller amounts and if they need to finance more transactions and have more clients’ business than their own limits allow, then they use the trade facilitation programme. These countries, for example, are Russia, Kazakhstan, also Uzbekistan, where western banks lend on short-term tenors of six months, perhaps even 18 months. We guarantee transactions of up to two or even three years.

Then there are smaller countries – typical examples are Moldova, Macedonia, Bosnia – where western banks have not yet established limits, where the banks are very small, the risk is perceived to be very high and where we cover up to 100% of risk.

Q: What are some of the specific challenges of trade finance in Central and Eastern Europe?

A: In all these countries there are only a few larger banks that are quite experienced, but in order to develop a market economy it’s necessary also to support smaller, less experienced banks. The big challenge is to bring these smaller banks to the market – that means developing them, training them and offering business advisory services so that they have sufficient staff with sufficient knowledge to provide trade finance.

On the other side, what we have to do is not only train the banks but help the banks train their clients because the most common payment method in our countries of operation is still cash payment. That means importers and exporters bear the payment risk in the trade transaction. Either an Eastern European importer pays in advance and has to wait and see if he really gets the merchandise delivered, or the foreign exporter takes the payment risk and waits to see if he will get paid by the importer

Q: Are you seeing positive effects of the programme yet?

A: Yes, we are seeing very positive effects. Let us take the most advanced countries originally covered by the programme, like the Baltic countries – Estonia, Lithuania, Latvia – and Croatia. They used the programme at the beginning but now they have been accepted by western banks and now act as confirming banks themselves. So you see there a good transformation from an issuing bank to a confirming bank.

We see the same effect in countries like Romania, where the programme is still active but mostly utilised by small and medium-sized banks. Large banks don’t need our support anymore and the programme is mostly used for either larger transactions or longer tenors than western banks can supply. We see positive effects especially in countries like Russia and Kazahstan, where we started with 100% risk cover and now western banks already share risk with us.

We promote and support import transactions for machinery and equipment, which will be paid in half-yearly installments, for example, over a tenor of two or three years. And western banks take the risk and share with us the risk for perhaps the first two installments and we guarantee 100% of the payments for the second or the third year.

Q: Which western banks are serving trade-finance needs in that region?

A: There is no specific pattern behind it. Of course, you have to look at trade flows; the most active trade flows are with Germany, Austria, Switzerland, Netherlands and France. But there is not so much trade, for example, between the UK and Eastern Europe probably because in the UK they don’t export the machinery and equipment needed in Eastern Europe or it’s too expensive, while the UK is still very active in commodity financing. There are quite a few commodity traders based in the UK and Switzerland who are buying raw materials and other commodities for which Eastern European producers or exporters need advance payment. So I would say these are the countries that most actively use the programme.

In all these countries, you have banks that have to serve the clients – that means German, Austrian, Dutch, Swiss, French, Italian and UK banks – they are the most active participants.

What we really want to promote under this programme is intra-regional trade, or trade between the 27 countries of EBRD’s operation. And we have been successful in developing it but, of course, it takes some time because, especially in these intra-regional transactions, importers and exporters are not very familiar with trade finance instruments and they still prefer to make cash payments. It’s lack of knowledge.

Q: Is intra-regional trade growing?

A: Actually, we see positive effects of the programme to the extent that the banks we supported at the time still had not even built up trade-finance departments and had no trade-finance expertise, and we have trained them and helped them to set up the departments and given them guarantees for trade-finance instruments. Then they go out to their clients and explain the product to them, and we see that documentary payment becomes more and more common in Eastern Europe, and also in intra-regional business.

It’s a small process, but you always need somebody who drives the process. In most cases, it’s the western exporter who wants to sell only against a letter of credit or a payment guarantee. So the Eastern European exporter is confronted with a claim from his western counterpart to open a letter of credit and he asks: “What is it? I have to look for a bank.” So the driving force in east-west trade finance is the western exporter or western importer who wants the security.

In trade between our countries of operation, sometimes you have two trade partners who always deal on a cash basis and they have never heard about, or they don’t know how to produce, documents that meet the requirements of a letter of credit. They have no banks, which means they just work with cash and have never thought of looking for a bank trade-finance facility.

Q: Which countries are the most advanced in trade finance?

A: The most advanced are in Central Europe, like Poland, Hungary, Czech Republic, Slovak Republic, Slovenia – their banks already have western knowledge, partly because most of the banks there are western subsidiary banks. They are quite advanced and they know very well how trade finance works. Then you have banks in countries that are also very experienced but where country risk is high, so you may find experienced banks even in countries like Belarus, in smaller CIS republics and in Kazakhstan and Russia. They are quite experienced but nobody wants to take the risk yet, either because the commercial risk is too high for the western banks or because of political risk

Q: What effect do you expect EU accession to have on trade finance in the region?

A: I think it will have a strong impact because, I would say, documentary trade finance is something that is common between trade partners who do not know each other very well, do not carry out many transactions a year or do business over a large distance. The smaller the distance and the more frequent the importers and exporters have contact with each other, the less favourable they are to payment on a documentary basis.

I think what will happen is documentary business in the European Union will become less necessary because sellers have other instruments to cover payment risk, such as credit insurance. In our less advanced countries of operation, the only credit insurers that will take significant risk are export credit agencies; commercial credit insurers will not yet insure a payment risk in less advanced countries, like for example, Central Asian countries.

Courtney Fingar is editor of Trade & Forfaiting Review.