exporting to Central Asia: Financing Options for u.s. companies

July 2006

Prepared by Mr. Jahangir Kakharov,
BISNIS Representative, Tashkent, Uzbekistan

INTERNATIONAL COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE, 2006. ALL RIGHTS RESERVED FOR USE OUTSIDE OF THE UNITED STATES.

Summary

Before doing any business in Central Asia, U.S. companies must take into account the region’s characteristics and peculiarities. Central Asia is a region with rich natural resources, such as, oil, gas, coal, uranium, gold, etc, and relatively inexpensive and skilled labor force. Most countries in the region expressed genuine commitment to attracting foreign investment and most countries are beset by clan-based political structures, corruption and weak the rule of law environment. Russian influence is very strong and growing in the region.

Knowledge of trade finance instruments is very important for U.S. companies that seek to trade in the region and would need to optimally structure deals with their Central Asian business partners. This report provides brief review of main trade finance sources available in Central Asia.

Overview

It must be noted that Central Asian region is very diverse in terms of development and availability of trade finance. EBRD notes that while Kazakh private banks, exporters and importers have access to trade finance from foreign exporters, foreign commercial banks, foreign private credit risk insurers, Export Credit Agencies (ECA), and EBRD, in all other countries of the region most of the above mentioned financing sources are not available. For instance, for Uzbek and Turkmen private banks, exporters and importers EBRD remains one of the few external financing options. The situation is not much different in the case of Kyrgyz Republic and Tajikistan, where some Kazakh and Russian banks may explore the possibility of financing the deals. As of lately, the Kazakh ECA KECIC has been active in neighboring countries and, according to EBRD, it is open for some Tajik private sector trade transactions.

Major Developments in Trade Finance in Central Asia

One of the most notable phenomena in the development of trade finance in Central Asia has been extension of tenors and narrowing down of margins, especially in Kazakhstan. For instance, the longest tenor of trade finance facility for Bank Turan Alem and Kazkommerzbank in Kazakhstan is currently stands at 5 years. Pricing for trade finance instruments fluctuates between 1.5%-3.5% p.a. in Kazakhstan.

However, other Central Asian countries cannot boast with such a record. Tenors for Kyrgyz, Uzbek, and Tajik banks usually do not exceed one year, while for Turkmen banks’ the maximum tenor is half a year only. As to pricing in Central Asian countries other than Kazakhstan, depending on country, banks, tenor, import/export nature of transaction in Uzbekistan and Kyrgyzstan the price range would be 3.25%-4.25% p.a., Tajikistan pricing would be around 4%-4.5%, and Turkmenistan pricing would fluctuate at 5%-6% p.a.

Major Players/Sources of Financing and Risk Mitigation.

Export-Import Bank of the United States (Ex-Im Bank). Ex-Im Bank is the official ECA of the US government that supports US exports to promote US jobs. Ex-Im Bank specifically provides financing support for the purchase of US goods and services and assumes credit and country risks the private sector unable or unwilling to accept without support. The recent phenomenon is that Ex-Im bank is taking greater exposure to private sector in importing countries. For instance, a decade ago only 30% of the portfolio of the bank was in the private sector, whereas in 2005 this figure constituted 52%. The size of the transactions that Ex-Im Bank finances may range from less than $100 thousand to $5 billion. Below is the country exposure of Ex-Im Bank in Central Asia as of the end of 2005:

Country	Exposure
Uzbekistan	$460 mln
Kazakhstan	$376 mln

Note: Uzbekistan exposure mainly consists of the price of two Boeing aircrafts.

Ex-Im Bank’s average authorizations in Central Asia have been approximately $300 million per year since FY’02. Authorizations have been concentrated in the transportation, medical, agricultural, manufacturing and mining sectors. Among Central Asian countries, Ex-Im Bank is open to transactions in both the public and private sectors at any tenure for Kazakhstan. In Uzbekistan Ex-Im Bank can consider certain types of transactions.

Ex-Im Bank’s basic performance criteria include:

- Net income of last fiscal year is at least 1% of average of total assets at end of last 2 fiscal years;

- Liquid assets are at least 10% of total assets at end of last fiscal year;

- Loan loss reserves are at least 80% of non-performing loans at end of last fiscal year

- Borrowed funds are less than 100% of net loans at end of last fiscal year;

- Shareholders equity is at least 5% of total assets at end of last fiscal year;

- Ex-Im bank exposure does not exceed 40% of shareholders’ equity at end of last fiscal year.

European Bank for Reconstruction and Development (EBRD) is one of the major players in trade finance in the region. EBRD is the international financial institution that promotes transition to market economies in 27 countries from Central Europe to Central Asia, owned by 60 countries (US is one of the major shareholders in the bank) and two inter-governmental institutions, with a capital base of €20 billion. EBRD supports trade in the region by providing training in the area of trade finance and advisory service to local banks. EBRD also allocates guarantees that cover risks arising from trade finance transactions and short term loans to banks for trade finance purposes. The most significant role of EBRD in the area of trade finance is that the EBRD covers transactions, which cannot yet be covered by other financial institutions or ECA’s. As such, EBRD creates markets in the region.

EBRD’s trade facilitation program (TFP) is one of the tools specifically aimed to facilitate trade. Through the TFP, the EBRD provides a guarantee to international commercial banks (confirming banks) and takes the political and commercial risk of transactions undertaken by local (issuing) banks. TFP can guarantee any genuine trade transaction and cover the payment of broad range of instruments:

- Letters of credit (LCs); including trade-related stand-by LCs, deferred payment LCs, “red clause” LCs etc.;

- Advance payment bonds and payment guarantees;

- Bid and performance bonds and other guarantees;

- Trade-related promissory notes or bills of exchange;

TFP could offer guarantees of up to 100% of the face value of the underlying trade finance instruments, unconditional guarantees payable on first demand, fast and simple approval procedure, and short-term loans to selected local banks for on-lending to local exporters and importers.

In 2005, EBRD financed 198 transactions in Central Asia worth €123 million. Below is the table with the breakdown of these transactions per country:

Central Asia	Transactions	EUR mln	Average Amount in EUR mln
Kazakhstan	19	103	5.4
Uzbekistan	5	0.6	0.1
Kyrgyz Republic	18	3	0.1
Tajikistan	155	17	0.1
Turkmenistan	1	0.1	0.1
Total	198	123

Private Market Political and Export Credit Risk Insurance. Gradually some of the Central Asia’s leading banks, traders, manufacturers, and banks are becoming eligible for private political and export credit risk insurance. 10 years ago of all insurance sold 90% was bought by exporters or importers and only 10% by banks. Today this breakdown is roughly 50-50, which is the testimony of deeper intermediation in insurance market. Advantages of private market vis-à-vis ECA’s include:

- No country limits/excluded countries;

- No necessity to support exports from own country/no foreign content rules;

- No terms of payment rules;

- Coverage for military/environmentally sensitive contracts;

- Flexibility and speed of response.

Disadvantages include:

- Capacity, particularly for coverage on private entities could be limited;

- Period of cover could be shorter;

- Cost could be high;

- Insurance tax

Local Banks and Leasing Companies in Central Asia are playing extensively greater role as sources of trade financing. Leading banks in the area of trade finance in Central Asia include in Kazakhstan - Bank Turan Alem, Halyk Savings Bank, ATFBank, Kazkommerzbank, Bank Center Credit, Alliance Bank; ABN AMRO Bank, Kazakhstan, in Kyrgyz Republic – Demir Kyrgyz International Bank, Inexim Bank, Kyrgyz Investment and Credit Bank, OJSC Kazkommertsbank Kyrgyzstan, in Tajikistan – Agroinvestbank, Eskhata Bank, TSOB, Tajprombank, in Turkmenistan- National Bank of Pakistan, Senegat Bank, in Uzbekistan – NBU, Asaka, ABN AMRO Bank, Uzbekistan NB AO.

According to Bank Turan Alem, the import trade finance instruments that are highly demanding in Kazakhstan include:

- Confirmed/unconfirmed letters of credit;

- Post-financing;

- Discounting of deferred payment;

- Pre-import financing;

- Stand by letter of credit;

- ECA covered financing;

- Letters of guarantee;

Opportunities for US Companies

Loan guarantees of the Ex-Im Bank cover commercial lenders against repayment risks on foreign buyer’s debt obligation and protect 100% of principal and interest on 85% of commercial contract (foreign buyer required to make 15% down payment). Prior to Ex-Im Bank involvement in financing process foreign buyer and US seller sign commercial contract (may be subject to Ex-Im support), foreign buyer asks US seller for financing, and US seller/foreign buyer locate commercial bank with Ex-Im Bank Master Guarantee Agreement (MGA) to seek financing. In the next stage, it is expected that MGA Lender offers financing terms to foreign buyer and buyer accepts terms and conditions. MGA lender is responsible for collection of credit documents and all necessary materials and evaluates the transaction. The next step to take would be for foreign buyer to send to MGA Bank:

- Three years of audited financial statements on the borrower or guarantor, as required, by an internationally-recognized firm (in English, with auditor’s notes and statements);

- Trade and Bank References;

- The Export Contract, or signed commercial invoice;

MGA Bank files final application with Ex-Im Bank.

EBRD works with 575 confirming banks in 67 countries. US exporters interested in this program should check under www.ebrd.com/tfp , for which issuing banks and which tenors EBRD may guarantee the payment. The next step would be to ask the buyer (s) to check if an issuing bank under the TFP would be ready to issue the required trade finance instrument. Finally, the US exporter should ask a confirming bank that they choose to work with to confirm the payment instrument under the guarantee of EBRD.

The list of TFP issuing banks in Central Asia include in Kazakhstan – Bank Turan Alem, Halyk Savings Bank, ATFBank, Kazkommerzbank, Bank Caspian, Bank Center Credit, Alliance Bank; in Kyrgyz Republic – Demir Kyrgyz International Bank, Inexim Bank, Kyrgyz Investment and Credit Bank, JS Commercial Bank Kyrgyzstan, OJSC Kazkommertsbank Kyrgyzstan, in Tajikistan – Agroinvestbank, Eskhata Bank, TSOB, Tajprombank, in Turkmenistan- National Bank of Pakistan, Senegat Bank, in Uzbekistan – NBU, Asaka, Ipoteka Bank, UzKDBank, (former UzDaewoo Bank).

Major international players in private insurance in Central Asia include Lloyd’s, AIG, and Arthur J. Gallagher.

Useful Contacts

Export-Import Bank of the United States

Margaret Kostic,

Director, Russia, CIS, Turkey, & the Baltics,

International Business Development,

Export-Import Bank of the United States

Financial Institutions – Trade Facilitation Program (TFP)

European Bank for Reconstruction and Development

One Exchange Square

London EC2A 2JN

United Kingdom

Tel: +44 207 338 68 13 (Yelena Tonna)

+44 207 338 64 76 (Rebecca Suknenko)

Fax: +44 207 338 6119/7029

E-mail: tonnay@ebrd.com

Arthur J Gallagher

David Maule,

Director

Political Project & Credit Risks Division

Arthur J. Gallagher (UK) Ltd.

9 Alie Street

London E1 8DE

Tel: +44 207 204 61 57

E-mail: david_maule@ajg.com

Bank Turan Alem

Mira Syzdykova

Head

Trade Finance Development

97, Zholdasbekov Street, Samal -2,

Almaty, 050051, Kazakhstan

Tel: +7 3272 500 586

Fax: +7 3272 500 224

E-mail: msyzdikova@bta.kz

Kazkommerzbank

Raushan Mussabekova

Senior Manager

Structured Finance Financial Institutions

135-zh Gagarin Ave.,

Almaty, 050060, Kazakhstan

Tel: +7 3272 585 605

Fax: +7 3272 585 242

E-mail: rmussabekova@kkb.kz

For more information on Uzbekistan, visit BISNIS online at: http://www.bisnis.doc.gov/bisnis/country/Uzbekistan.cfm

BISNIS (www.bisnis.doc.gov) is part of the U.S. Commercial Service (www.export.gov).