Leasing on Sakhalin Island, Russia
October 2006
Author:
Elena Sabirova, BISNIS
Representative in Yuzhno-Sakhalinsk, Russia
Summary
Leasing as a financing mechanism is still a
relatively new type of business for the Sakhalin region market, but it is
becoming increasingly popular. On Sakhalin, leasing is used by companies that
need financing to acquire new assets, most often vessels or production lines.
This report will give a general overview of the leasing situation on Sakhalin,
and also a brief description of local leasing company activities and their
various approaches on issues such as leasing procedures and market strategies,
which are influenced by experience and ownership.
A
report about Russian Far East leasing can be found at http://bisnis.doc.gov/bisnis/bisdoc/0502leasingrfe.htm
OVERALL ADVANTAGES OF LEASING FOR SAKHALIN COMPANIES
Some advantages of leasing for local companies
are:
·
Local banks do not offer long-term loans, especially
to small businesses. Leasing can be sometimes the only option to acquire
equipment.
·
Accelerated
depreciation of equipment. If a Russian enterprise holds equipment on its
balance sheet, it pays taxes on the property.
If the equipment is leased, it might be registered on the balance of
leasing company, which can carry out accelerated depreciation on that
equipment, reducing its cost to the customer.Leasing allows companies
to write-off the leased equipment from the company’s
balance sheet
three times fasterquicker
in order to have equipment free from property tax.
·
Since
leased equipment is not considered the property of a client, it cannot be an
object of third party claims. It is also easier to repossess the equipment in
case payments go into arrears. Often the object of leasing itself becomes the
collateral needed to get a loan, important for Russian companies that have few
assets with collateral value.
·
Taxable
profit of the customer is reduced by the amount of leasing payments. Leasing payments, in turn, differ in each
specific case, depending on how the parties agree upon the deal.
·
Leasing
provides a useful mechanism to gradually transfer assets from a U.S. parent
company to a joint venture.
General Facts About Leasing
on Sakhalin
Leasing can be still described as a relatively new
type of business for Sakhalin (despite the fact that it has a long history on
the local market) and companies are still learning about how to use leasing as
a mechanism to the advantage of their business. Several of the region’s leasing
companies were organized only recently, in response to demand. Over the past 5
years, the amount of leasing companies doubled, although old-timers (like SALCO
or DeltaLeasing) on this market have strong positions and the newly established
companies cannot yet be viewed as a serious competitors to the experienced
market players.
Leasing
companies on Sakhalin prioritize potential clients by focusing on promising
regional industries and on companies that have prospects for future
development.
Most Sakhalin leasing companies report that they do not
source equipment, but leave it up to the client to find the equipment they wish
to lease.
LOCAL LEASING
COMPANIES
Among all the companies interviewed, only SALCO
presented a detailed structure of deals accomplished. Briefly, however, the
following statistics give a good overview of the volume of lease transactions
for the companies listed:
SALCO (100% private company)
Included
in the list of top 50 leasing companies in Russia. Certified in accordance with
ISO 9001:2000.
Authorized capital – RUR 42.2 million (about $1.5 million). In 1997-2005 SALCO carried out more that 320 leasing transactions. SALCO’s main activities are financial leasing, lease-back, international leasing, real estate leasing, and vehicle leasing. SALCO has a subsidiary in Khabarovsk, which was opened in 1998.
Industry structure of major deals (at present):
fishing vessels – 35%, transportation vessels – 15%, fish-processing equipment
– 13%, construction machinery – 7%, food-processing equipment – 6%, printing
equipment – 4%, scientific equipment – 2%, other – 4%.
Active on the market – 810 years
Number of leasing transactions - 90340
Number of customer companies – 40more then 125
Portfolio – US $10 35 million and RUR 91877
million
Web site - http://www.salco.ru/english/index.php
http://www.salco.ru/english/investor.php
Leasing contracts are usually concluded for a period of 1 to 3 years (basic term), and the client is expected to provide from 15 to 30% of the equipment price.
Portfolio as of January 2002:
The majority of leased equipment was
- Office & banking related – 26%
- Vehicles, road construction equipment and machinery – 25%
- Food processing equipment – 19%
- The rest was leased to the following industries
- Printing - 6%
- Fishing (vessels) – 4%
- Oil and Gas (oilfield equipment and machinery) – 3%
- Real estate – 2%
- Other equipment, misc. - 15%
As on January 2006, the focus shifted to fishing
industry, transportation sector (both marine and on-land) and less on
construction and food processing. Printing equipment still holds its niche of
4% (2% drop compared to 2002):
- Fishing vessels – 35%
- Transportation vessels – 15%
- Fish-processing equipment – 13%
- Vehicles – 14%
- Construction machinery – 7%
- Food-processing equipment – 6%
- Printing equipment – 4%
- Scientific equipment – 2%
- Other – 4%
Salco company told BISNIS that it was influenced by exemptions provided by Russia’s PSA law in its practice of providing services to PSA-related project operators. Specific for Sakhalin may be paragraph 7 of Clause 13 of the PSA Law, stating that “Operators of the agreement, <…> as well as legal entities (contractors, suppliers, transportation companies and other entities) participating in the activities carried out according to the contracts (agreements) with an investor, are exempt from VAT and excise duties while bringing goods and services related to these contracts to the customs territory of the Russian Federation in accordance with the project documentation, as well as while exporting mineral resources and products of their processing from the Russian Federation, which are the property of an investor according to this Law.”
The new and popular type of leasing offered by SALCO
is vehicle leasing. SALCO is purchasing cars by the client’s choice from
official dealers, who may offer spare parts and maintenance (on Sakhalin this
usually refers to Tunaycha Motors, and official dealer of Toyota). The customer
should be either legal entity or a private entrepreneur, be in business for not
less that 6 months, be solvent, and have a stable business. Financing is provided
for a term of 1 to 3 years with 20-30% advance payment from the customer.
Payments are made on a monthly basis, leasing company is the owner of a vehicle
for the whole period of leasing contract. At the end of the contract the
vehicle is sold to the customer at 0.5% of the balance sheet property cost.
Approximate vehicle leasing payment calculations
(with the advance payment of 30%).
|
Price, USD |
46900 |
64900 |
77900 |
|
Monthly payment (no VAT included), 1 year
leasing |
2555 |
3535 |
4245 |
|
Monthly payment (no VAT included), 2 year
leasing |
1555 |
2150 |
2585 |
|
Monthly payment (no VAT included), 3 year
leasing |
1160 |
1605 |
1930 |
Sakhalinleasingflot
Leases vessels (new) and fish-processing equipment
Active on the market – 8 years
Number of leasing transactions – 24 (17 for vessels
and 7 for equipment)
(5 vessels out of 17 already sold)
Currently in process – deals for about US $ 5
million
Sakhalinleasingflot was established in 1997 by the State Committee for Property, and reports directly to the Sakhalin Region Department of Fishing. The company was specially established in order to implement the regional development program “Development of Fishing Industry of the Sakhalin Region For the Period Up to the Year 2010.” The main purpose of this company was to construct new vessels and renew the fleet (construction of vessels and supplying them on financial leasing terms).
As
of January 2006, the company has leased 16 new vessels and different fishing
equipment. Leased objects are ensured for the term of transaction, as well as
are placed into the State property registry. The average period for leasing
contacts is from 3 to 5 years. Sakhalinleasingflot works only with companies
that have positive accounting records (pay all taxes), can provide
recommendations either from city or regional administration or, for fishing
companies, recommendations from the fishery associations to which they belong.
Sakhalinleasingflot does not deal in used vessels,
it builds and leases only new ones. Partners for building vessels are Blagoveschenski
Shipyard, Gaidamakski Shipyard (Primorye), Amurski Shipyard
(Komsomolsk-on-Amur), and Leninskaya Kuznitsa Shipyard (Ukraine).
Sakhalinleasingflot works with equipment suggested by the customer.
Landlease
Landlease
company was established in 2000 and has been able to complete about 150 leasing
transaction since that time.
Current
portfolio of the company includes:
Vehicles
37%
Computers 7%
Real
estate 6%
Printing
equipment 2%
Banking
equipment 46%
Other
2%
Active on the market – 6 years
Number of leasing transactions – 150
The company was established in the beginning of
2000, initially by the local bank, Sakhalin-West, which was founded by the
Sakhalin Administration. Sakhalin-West decided to form a leasing company of its
own after successfully leasing from another company itself. JSC Landlease is
considered to be an independent company, with Sakhalin-West being the major
partner on financing. The most promising clients, according to the company,
work in transportation, construction, and the energy sector. Landlease requires
10 to 20% of funds to be available from the customer, plus 4-5% of the initial
equipment cost is to be paid as a leasing fee (the fee also covers bank loan
payment). Type of services – leasing and lease back.
DeltaLeasing
DeltaLeasing (JSC of closed type) was one of the first ones to operate on the local leasing market. The company was listed 52nd in the list of Top 100 Largest Market-Oriented Russian Leasing Companies (Expert Magazine, as of December 2003 – no later rating available). Potential clients of DeltaLeasing must be officially registered for not less than 1 year (be active on the market for 1 year), should demonstrate an ability to generate revenue sufficient to cover the necessary leasing payments, and have a sound business strategy. Advance payment for the equipment is 15 to 25% of its cost. The leasing company checks the equipment seller, signs the service contract, provides insurance, delivery and installation. According to Russian tax legislation, leasing can help to save up to 10% of funds compared to the bank loan for the same equipment purchase. The company also provides funds for working capital replenishment or other company needs under the same financial conditions as leasing deals (in case if the company purchased equipment and experiences shortage of capital DeltaLeasing purchases the equipment from the company and leases it back; after the leasing term is over, the ownership is transferred back to the original owner).
The company leases almost any type of equipment; major requirement – demand on the market and normal durability, adequate to the leasing term. Annual average fee is 9-11%, which would include leasing company fee, insurance and taxes. The company has been active on Sakhalin market for almost 7 years leasing construction and road construction equipment, vehicles, power generation units, construction materials manufacturing equipment, food processing and shop equipment.
Business reputation of DeltaLeasing has allowed to obtain credit lines from such foreign investors as International Finance Corporation, EBRD, WorldBusinessCapital, Inc, DEG.
Website: www.deltaleasing.ru (in Russian).
Micro-Leasing is a new company on the market established in August 2005. More that 20 leasing deals were signed from that moment. Portfolio of the company includes companies from the following spheres: transportation, advertising, dental and cosmetic clinics, food processing. The company representative stated that so far services and trade are its most promising clients. Property leasing becomes popular. The company provides leasing services for the period of 1 to 5 years, and the client must provide 15-30% of the equipment cost. The company has also dealt with imported equipment and reports that long terms of delivery and customs clearance are some of the difficulties it has experienced.
RN-Leasing company at the moment is a subdivision of Rosneft. The company is leasing movable and immovable property (including oil producing equipment), vehicles and other specialized machinery. RN-Leasing Yuzhno-Sakhalinsk refused to share information about its activities.
JSC Pervaya Lizingovaya Kompanija (FIRST LEASING
COMPANY) is
a new company to the local market. It is dealing will all types of leasing and
is also investing in prospective projects, including construction.
PROSPECTS
It is clear that the market potential for leasing on
Sakhalin is larger than the actual activity reflects. Local companies are still
somewhat unfamiliar with the process and have not taken full advantage of
leasing as a way to finance equipment. Property leasing is especially young
here and there is an economic condition for its development, as well as for the
vehicle leasing.
The figures on industries, given by some local leasing companies, show that the most successful in leasing are food-processing enterprises. They were mentioned by several leasing companies as good potential clients.
Opportunities for u.s. businesses exist because of the
following:
§
Leasing
offers an excellent finance mechanism for u.s.
equipment manufacturers selling to local companies without collateral. Allows
repossession.
§
Opportunity
sectors: fishing vessels, food processing, road and pipeline construction
equipment, according to the statistics of existing deals.
§
It
is advantageous to form special-purpose leasing companies selling only to
Sakhalin-2 oil and gas project (utilizing PSA tax and customs exemptions).
§
Leasing
provides useful mechanism to gradually transfer assets from a U.S. parent
company to a local subsidiary.
e-mail: leasing@swbank.ru
INTERNATIONAL
COPYRIGHT, U.S. & FOREIGN COMMERCIAL SERVICE AND U.S. DEPARTMENT OF STATE,
2006. ALL RIGHTS RESERVED FOR USE OUTSIDE OF THE UNITED STATES.
For more information on the Russian Far East, visit BISNIS online at http://bisnis.doc.gov/bisnis/country/fareast.cfm
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