How do companies in Eurasia finance their trade/investment deals?

 

2004

 

Roman Vvedensky

BISNIS representative in Nizhny Novgorod

U.S. Department of Commerce

 

NOTE: For the purpose of this report, Eurasia encompasses the countries of the former Soviet Union except the Baltic States and countries where BISNIS does not presently have representatives (Belarus and Turkmenistan).

 

1. Is Business Financing Obtained Through Banks?

 

Yes, it is.

 

1.1 If yes, what are the 5 top banks in your country (by assets AND by equity/net worth)?/ (1.1.2) What are the 5 top banks in your region? 

 

The list of five top banks, provided below, includes two national and three regional banking institutions. The composition of the charts may be rearranged by mid-2004, when two national banks – Avtobank-Nikoil and UralSib Bank – finalize their deal of merging. Both of the banks have pro-active branches in Nizhny Novgorod with a network of bank offices across the city. The total assets of the local branch of Avtobank-Nikoil are estimated at approx. US$ 31 million, and the assets of the local branch of UralSib Bank exceed US$ 52 million. The Nizhny Novgorod branch of a new merged national bank is likely to become one of the Top Five in the regional banking market, probably, under the name of Avtobank-UralSib. Another dynamic banking institution is the Nizhny Novgorod branch of KMB-Bank, co-owned by foreign shareholders: the European Bank for Reconstruction and Development (EBRD), Soros Economic Development Fund, DEG (Deutsche Investitions und Entwicklungsgesellschaft), Triodos Bank NV (the Netherlands). According to the Russian magazine Dengi (Money), KMB-bank was ranked # 77 according to its net assets (US$ 279.26 mln), and it was ranked # 170 according to its capital (US$ 25.18 mln) as if for 1 January 2004. Parameters of the Nizhny Novgorod branch of KMB-Bank are non-assessed.

 

 

 

Total assets

Capital

Profit before Tax

1.

Volgo-Vyatsky Bank of  Sberbank *

 

$5,518.35 mln

$249.19 mln

$97.65 mln

2.

NizhegorodPromStroyBank (NPSB)

 

$219.49 mln

$54.27 mln

$9.35 mln

3.

Nizhny Novgorod branch of Alfa Bank **

 

$179.33 mln

NA 

$9.13 mln

4.

SarovBusinessBank

 

$135.49 mln

$39.82 mln

$5.92 mln

5.

NBD-Bank

 

$67.08 mln

$9.40 mln

$2.10 mln

 

The exchange rate of USD to Ruble is approximated at 1:28.5

 

Note 1:  Volgo-Vyatsky Bank of Sberbank (VVB – Sberbank) is a subsidiary bank of Sberbank of Russian Federation, which is the largest commercial bank in Russia (where the Bank of Russia owns a control stake). Unlike other banks in the charts, VVB – Sberbank covers 7 regions in the Upper Volga area, but not only the Nizhny Novgorod region, which takes approx. 30-40% of VVB – Sberbank’s business products and activities. VVB – Sberbank has 16 branches with hundreds of offices in Nizhny Novgorod and the region.

 

Note 2: Nizhny Novgorod branch of Alfa Bank represents Alfa Bank in the Nizhny Novgorod region. Alfa bank is the 4th largest bank in Russia in total assets, and the 5th – in capital. Parameters on Alfa bank’s branch in Nizhny Novgorod are dated 18 December 2003, while other banks’ parameters are dated 1 January 2004 as they have been provided by the banks’ PR departments (VVB-Sberbank, and NBD-Bank) or referred to by the national magazine Expert #11 (414) dated 22 March 2004.

 

Contact info on Top Five of the Nizhny Novgorod region:

 

 

Banks

Contact information

1.

Volgo-Vyatsky Bank of Sberbank

35 Oktyabrskaya street, Nizhny Novgorod 603005 Russia

tel: +7 8312 17 17 17, tel: +7 8312 17 98 00  (secretariat);

fax: +7 8312 17 98 68;

e-mail: valuta@sbrf.nnov.ru; info@sbrf.nnov.ru;

http://www.sbrf.nnov.ru/

 

Regional branch offices of Volgo-Vyatsky Bank of Sberbank

 

Nizhny Novgorod region branch

35 Oktyabrskaya street, Nizhny Novgorod 603005 Russia

tel: +7 8312 19 61 12

 

Vladimir region branch

36 Prospect Lenina street, Vladimir, Russia

tel: +7 0922 32 30 31, +7 0922 24 06 26

 

Mari El branch

30 Pushkina street, Yoshkar-Ola, Republic of Mari El, Russia

tel: +7 8362 11 70 81, +7 8362 68 42 25

 

Mordovia branch

86 Prospect 70 let Oktyabrya street, Saransk, Republic of Mordovia, Russia, tel: +7 83422 56 45 91, tel: +7 83422 55 12 11

 

Kirov region branch

25 Derendyaeva street, Kirov, Russia

tel: +7 8332 65 33 66, +7 8332 65 13 22

 

Chuvashia branch

3 Prospect Moskovsky street, Cheboksary, Chuvash Republic, Russia, tel: +7 8352 42 07 30, +7 8352 23 34 14

 

Tatarstan branch

44 Butlerova street, Kazan, Republic of Tatarstan, Russia,

tel: +7 8432 64 56 10, +7 8432 64 64 10

 

2.

NizhegorodPromStroybank

21 Gruzinskaya street, Nizhny Novgorod 603600 Russia

tel: +7 8312 33 95 44; fax: +7 8312 33 37 47,  +7 8312 33 43 11;

e-mail: klad@npsb.ru

 

3.

Nizhny Novgorod branch of Alfa Bank

45 Piskunova street, Nizhny Novgorod 603005 Russia

tel: +7 8312 30 09 55; fax: +7 8312 30 09 81

e-mail: nizhny_novgorod@alfabank.ru; www.alfabank.ru , http://www.alfabank.ru/branches/nizhni/

 

4.

SarovBusinessBank

13 Silkina street, Sarov, Nizhny Novgorod region 607190

tel: +7 83130 407 78; fax: +7 83130 433 95

e-mail: bank@sbb.sar.ru; www.sbbank.ru

 

5.

NBD-Bank

6 Gorky square, Nizhny Novgorod 603950 Russia

tel: +7 8312 30 80 61; fax: +7 8312 34 39 48

http://www.nbdbank.ru

 

 

Nizhny Novgorod branch of KMB-Bank

27 Piskunova street, Nizhny Novgorod 603005 Russia

tel: +7 8312 34 45 42 ; tel/fax: +7 8312 30 49 13,

tel/fax: +7 8312 31 73 11

e-mail: kmbnn@kmb.ru; http://www.kmb.ru , http://www.kmb.ru/regions/nn.html

 

 

Nizhny Novgorod branch of UralSib Bank

13 Varvarskaya street, Nizhny Novgorod 603006 Russia

tel: +7 8312 78 40 00, fax: +7 8312 78 44 11;

e-mail: nnovgorod@uralsibbank.ru; http://www.uralsibbank.ru, http://www.uralsibbank.ru/network/nnovgorod/

 

 

Nizhny Novgorod branch of Avtobank-Nikoil

55 Studenaya street, Nizhny Novgorod 603000 Russia

tel/fax: +7 8312 34 03 82

e-mail: green@ab.nn.ru

www.ab.nn.ru

 

 

1.1.1. Which banks have their financial statements audited per International Accounting Standards or International Financial Standards on Accounting and since what year?

 

Three banks out of the Top Five have been audited by international auditing firms since the early and mid-1990s. Sberbank of Russian Federation – Ernst & Young (before 2002 – PricewaterhouseCoopers), Alfa bank - PricewaterhouseCoopers, NBD-Bank - PricewaterhouseCoopers. Two other banks - SarovBusinessBank and NizhegorodPromStroyBank – have been audited by Russian companies.

 

Other three banks have been audited by the following international firms: UralSib Bank – PricewaterhouseCoopers (till 2002); Avtobank-Nikoil - Ernst & Young; KMB-bank – PricewaterhouseCoopers (till 2002). 

 

Starting in 2005, all Russian banks will run books in compliance with general standards of International Accounting System, which would contribute to their greater transparency for foreign business community, and shareholders. 

 

1.1.3. Are any “captive” and do they lend preferentially to the group they belong to?

 

SarovBusinessBank is a clear example of a ‘captive’ regional bank, which primarily services interests of its regional industrial and financial group. The bank enters the capital/buy out portfolio of shares of enterprises, which are of a business interest for the regional industrial and financial group, lends short- and mid-term to the group’s companies, and propose a variety of financial services to the group’s affiliated companies and their staff. The bank generates loans to affiliated companies both with its own funds and with the funds, raised on the Moscow financial market. SarovBusinessBank runs an aggressive policy under the strategy of its industrial and financial group, and it has recently acquired a stake (approx. 20-25%) in NizhegorodPromStroyBank (NPSB), the largest local bank of the Nizhny Novgorod region.

 

NPSB also has some features of a ‘captive’ bank, which is, mainly, reflected in favorable terms of corporate lending (lower interest rate, milder terms of revolving loans) for its major shareholders, which include many large industrial enterprises of Nizhny Novgorod and the region.

 

VVB-Sberbank and Nizhny Novgorod branch of Alfa bank do not reveal clear signs of ‘captive’ banking institutions although the latter is part of the national industrial and financial Alfa Group. Both banks offer favorable terms of loans and financial services to major local companies with a sound credit history. Also, Nizhny Novgorod branch of Alfa bank holds clearing accounts of affiliated companies of Alfa Group in the Nizhny Novgorod region, and it provides them with principal financial services, including short- and mid-term loans. Alfa Group’s affiliated companies usually negotiate major financial deals directly with the head office of Alfa bank in Moscow.

 

Currently, NBD-Bank has demonstrated no features, attributed to a ‘captive’ financial institution, as the bank promotes itself in the regional market as a bank to small and middle businesses. The bank’s policy matches the proclaimed goals of its foreign shareholders – the European Bank for Reconstruction and Development (EBRD), and the International Finance Corporation (IFC), which hold blocking portfolio of the bank’s shares.

 

1.2 What are their major lines of lending (e.g., agribusiness; manufacturing equipment; else)?

 

 

Banks

Major lines of lending

 

1.

Volgo-Vyatsky Bank of Sberbank

Corporate banking: Agribusiness, major manufacturing industries, service sector (i.e. telecom, wholesale & retail trade, construction, transportation);

Retail banking: small businesses, households, and individuals.

2.

NizhegorodPromStroybank (NPSB)

Corporate banking: major manufacturing industries & service sector (i.e. telecom, trade);

(Developing) retail banking: individuals.

3.

Nizhny Novgorod branch of Alfa Bank

Corporate banking: major manufacturing industries, agribusiness (focus on food processing), service sector (i.e. trade, telecom, construction);

Retail banking: small businesses, households, and individuals.

4.

SarovBusinessBank

Corporate banking: affiliated companies of the industrial and financial group;

(Developing) retail banking: individuals.

5.

NBD-Bank

Corporate banking: middle businesses in industries, and service sector (i.e. trade);

Retail banking: small businesses, households, and individuals.

 

1.3 What type of experience do they have with Foreign Export Credit Agencies?

 

 

Banks

Export Credit Agencies

1.

Sberbank of Russian Federation

US Ex-Im Bank, EBRD, SACE (Italy), COFACE (France), EDC (Canada), Hermes (Germany), CESCE (Spain), EKN (Sweden), NCM (Netherlands), NEXI (Japan), EFK (Denmark), KUKE C.A. (Poland), EGAP (Czech republic)

2.

NizhegorodPromStroybank

NA

3.

Alfa Bank

US Ex-Im Bank, Hermes (Germany), NEXI (Japan), EID/MITI (Japan), SACE (Italy), COFACE (France), EGAP (Czech republic), KUKE (Poland), HBOR (Croatia), and some others.

4.

SarovBusinessBank

NA

5.

NBD-Bank

Hermes (Germany), IFC, EBRD, US Ex-Im Bank

 

 

 

 

UralSib Bank

Hermes (Germany), US Ex-Im Bank, CESCE (Spain), EBRD, EKN (Sweden), SACE (Italy).

 

Avtobank-Nikoil

Hermes (Germany), CESCE (Spain), EKN (Sweden), and some others 

 

KMB Bank

US Ex-Im Bank, EBRD, IFC

 

Note: Regional banks, non-assessed (NA) in the diagram, provided no information about lending agreements with Foreign Export Credit Agencies.

 

1.4 If any, what type: short term?  Medium term?  Long term?  All? What are the terms of the lending agreement?

 

Lending agreements with foreign Export Credit Agencies (ECA) are opened for maximum a 5-year period (short-, and mid-term). The only exception is Sberbank of Russian Federation, which opens long-term credit lines with ECAs (the deals should be coordinated with the parent bank – Sberbank of Russian Federation - in Moscow). Credits from ECAs may cover maximum 90% of an import contract with a Russian company. Depending on the contract terms, credit history, pledge, and country of origin for goods, imported to Russia, an annual interest rate varies from 7% to 12% in USD and Euro.

 

1.5 Have they been rated by (i) a foreign rating agency or (ii) a domestic agency? 

 

See 1.5.1. and 1.5.2.

 

1.5.1 If yes, by whom and what was the rating (and the date of the rating)?

 

1.5.2 How does the above domestic rating translate into that of a western agency?

 

 

 

 

Banks

Standard & Poor’s

Fitch

Moody’s

RUS-RATING

 

 

Long-term

Short-term

Long-term

Short-term

Long-term

Short-term

 

1

Sberbank of Russian Federation

 

 

BB+

B

 

 

 

2

NizhegorodProm-Stroybank

 

 

 

 

 

 

CCC

3

Alfa Bank

B

B

B+

B

B1

 

 

4

SarovBusinessBank

 

 

 

 

 

 

 

CCC+

5

NBD-Bank

 

 

 

 

 

 

 

B

6

KMB-Bank

 

 

 

 

A1(rus)

RUS-1

 

7

UralSib Bank

B-

B-

B

B

 

 

BB+

8

Avtobank-Nikoil

 

 

B

B

 

 

CCC-

 

Note 1: The ratings are provided by 1 January 2004.

 

Note 2: Rus-Rating is a domestic rating agency (www.rusrating.ru), which describes its methodology as follows:

 

The company profile of a Russian bank is compiled from both financial and non-financial information. The short-term rating assigned to each bank is based on a scoring model originally developed for risk management in a Russian bank. The scale AAA, AA, A, BBB, etc is well known, but the definitions (see below) have been adapted to the Russian environment. Given the gap between the Russian and Western economies, and the focus of Rus-Rating on the Russian interbank market, no attempt has been made to benchmark these ratings against international ratings. Systemic country risk (but not country-related transfer risk) is explicitly a part of the rating scale. The aim is to define a scale that has some absolute meaning, irrespective of the conditions in Russia. Banks cannot therefore be rated better then A- at this time. The top rating currently anticipated for a Russian bank will be is BBB+.

 

RATINGS

DEFINITION

AAA+-

Very high degree of creditworthiness. Financial condition is considered strong and stable in the long term. Country systemic risk is low.

AA+-

High degree of creditworthiness. Financial condition is considered strong and stable in the long term. Country systemic risk is low.

A+-

High degree of creditworthiness. Financial condition is considered strong and stable in the long term. Country systemic risk is high

BBB+-

Relatively high degree of creditworthiness. Financial condition is considered satisfactory and stable in the medium term.

BB+-

Average degree of creditworthiness. Financial condition is considered satisfactory and stable in the short term.

B+-

Creditworthiness is slightly lower than average. The main indicators of financial condition are considered satisfactory and stable in the short term.

CCC+-

Creditworthiness is lower than average. The main indicators of financial condition are considered satisfactory but stability is uncertain in the short term.

CC+-

Creditworthiness is slightly low. The main indicators of financial condition are close to being satisfactory but stability is uncertain in the short term.

C+-

Creditworthiness is unacceptably low. The financial condition may be either unsatisfactory or close to satisfactory, but unstable.

D

Low level of creditworthiness. The financial condition is unsatisfactory.

 

 

1.6. Are there any foreign banks in your country/region?

 

There are no foreign banks in the Nizhny Novgorod region, but there is a branch and five representative offices of the banks, either owned or controlled by foreign banks and investment funds:

 

-         KMB-Bank (Nizhny Novgorod branch)

-         West LB (representative office)

-         Delta-Credit (representative office)

-         Home-Credit (representative office)

-         Moscow International Bank (representative office)

-         Moscow Narodny Bank (representative office)

 

Note: Moscow Narodny Bank is going to merge with Eurofinance Bank in 2004. Both of the banks are controlled by foreign affiliated structures of the Bank of Russia.

 

1.6.1  Are they willing to lend money to domestic firms and under what terms?

 

The banks may be divided in three categories according to their target groups of customers. West LB, Moscow International Bank, and Moscow Narodny Bank are focused on major corporate customers of the region. The list of local customers includes large domestic, national and international companies, which operate in the Nizhny Novgorod region. The banks do not disclose information on their customers and interest rates on loans, but usually the annual interest rate varies from 8% to 12% in USD/Euro or 12% to 16% in Rubles, depending on the terms for a loan provision. The loans are usually provided short-, and mid-term. There have been few exceptions, when investment loans were provided for a period over 5 years.

 

KMB-Bank renders credit services to domestic small and middle enterprises (SMEs), and individuals. Loans vary from US$ 100 to US$ 500,000 (or their equivalent in Rubles). Micro-loans are provided for maximum 2 years with an annual interest rate of 18%-19% in USD/Euro (or 20%-33% in Rubles). Small loans, which in KMB-Bank’s grading vary from US$ 20,000 to US$ 100,000, are provided for maximum 3 years with an annual interest rate of 13%-17% in USD/Euro (or 20%-24% in Rubles). Medium loans, limited to US$ 500,000 due to the bank owners’ requirements, are provided for maximum 3 years with an annual rate of 13%-17% in USD/Euro (or 19%-22% in Rubles). Upon a customer’s request, small and medium loans can be extended for the period of 5 years.

 

Delta-Credit and Home-Credit provide loans to individuals and family households for acquisition of consumer goods (electronics, computers, furniture, etc.) at local shopping malls. The annual interest rate on consumer goods usually reaches 34% in Rubles, and it is not disclosed to a customer as the banks publicize another mechanism of charging fees for provision of funds to its customers.  

 

1.6.2 Are there any examples of deals they have helped financed in your country/region?

 

The range of corporate customers, benefited from loans, letters of credit, and guarantees of the banks with foreign capital in the Nizhny Novgorod region, includes most of domestic industrial leaders: GAZ (automotive sector), Volga-Telecom (telecommunications), Nizhny Novgorod Oil & Margarine Company (food industry), Normal (mechanical engineering), Bor Glassworks, Vyksa Metallurgical Plant (steel-making), Lukoil-NizhegorodNefteProduct (petrochemical industry), Volga paper mill, etc.

 

2. Is Financing Obtained Through Investment/Venture Capital Funds?

 

Yes, it is.

 

2.1 If yes, which one are the most active in your country (and region for Russia)?

 

Quadriga Capital Russia GmbH

Branch Office Nizhny Novgorod

Kendrick D. White, Director

52 Osharskaya street, Nizhny Novgorod 603006 Russia

tel:  +7 8312 783 255

fax: +7 8312 783 252

e-mail: k.white@quadriga-capital.ru

 

2.2 What is each fund’s industry specialty(ies) and/or geographical focus?

 

Quadriga Capital Russia GmbH is the fund manager of two of the EBRD’s Regional Venture Funds (RVF), including the St-Petersburg RVF and the Central Russia RVF, and it has got offices both in St-Pete and Nizhny Novgorod. Quadriga’s principal shareholders include both the EBRD, contributing US$ 60 million, and Kreditanstalt für Wiederaufbau (KfW) (on behalf of the German Government), contributing US$ 40 million. The venture fund considers sound investment and business development proposals from both medium and larger private businesses of most industries and service sectors, and it does not invest into the weapon, alcohol and tobacco sectors. The annual turnover of an applicant company should exceed USD 3-5 million, and the applicant should meet a set of technical due diligence standards, demanded by Quadriga Capital Russia GmbH.

 

2.3 What are their terms?

 

Participation in capital – 25%-49% (to ensure financial control over the company);

Proposed investment – US$ 3–6 million; investment may be increased thru syndication with other financial institutions;

Period of investment – 5 years.

 

The Fund requires forecasts of 3-5 financial projections from a company, and it expects, minimum, a 35% internal rate of return (IRR) on the fund’s investment, based on IAS/GAAP book-keeping. To assist invested companies with strategic goals and business plans, the Fund maintains direct contacts with the company’s senior management through all the investment period.

e-mail: k.white@quadriga-capital.ru

 

3. Is Financing Obtained Through Other Public Funded Programs (like SME support institutions, co-sponsored by local governments/associations);

 

Yes, it is.

 

3.1 If yes, which ones? What are their terms and instruments?

 

(i) Fund for Support of Micro Entrepreneurship FORA, Opportunity International Network.

The Fund provides loans under US$ 1,000 to start-ups and entrepreneurs.

 

52 Osharskaya street Nizhny Novgorod 603006 Russia

tel/fax: +7 8312 78 43 10 / 20/ 30

e-mail: stacieschrader@cs.com; www.forafund.ru 

 

(ii) The Nizhny Novgorod Region’s Government.

The government compensates 50% of an interest rate on commercial loans, raised by local companies on the projects in agribusiness, small business, and textile industry, provided by the local banks, authorized by the government. The authorized banks are defined at annual open tenders. To win the tender, a bank should have a network of branches in the region, and it should provide favorable terms of commercial credits (lower interest rate, zero commission for a loan provision).

 

Building 2, Kreml, Nizhny Novgorod 603082 Russia

Ministry of Economics and Entrepreneurship Support

Tel: +7 8312 39 06 62;

e-mail: root@dep.kreml.nnov.ru

 

(iii) Small Business Support Fund of the Nizhny Novgorod region

The Fund provides loans to small businesses via SME associations of the Nizhny Novgorod region.

 

28, Gagarin avenue, Nizhny Novgorod 603098 Russia

tel/fax: +7 8312 65 95 90

tel/fax: +78 312 65 95 50

www.drpt.nnov.ru/cfp.htm

 

4. Is Self-Financing an Important Factor in Business Financing?

 

Yes, it is.

 

4.1 If yes, are there any trends regarding the industries and the types of firms that are able to self-finance?

According to official statistics, the enterprises of the region invested over US$ 1.1 billion in their fixed capital in 2003, where investment of large and middle enterprises totaled US$ 796 million. Self-financing made over 70% of investment in fixed capital of corporate businesses in the Nizhny Novgorod region. Two thirds of self-investment was pooled in the industrial sector, transport and telecommunications. Self-financing is common for large industrial companies, which are often parts of national holdings, active in the following industries: automotive, aerospace, engineering, metallurgy, petrochemical, ship-building, telecommunications, and some others.

 

Small businesses and companies from retail trade sector are less bound with self financing, and they more rely on short-, and mid-term bank loans.

 

5. Is Leasing a Significant Vehicle for Business Finance?

 

Yes, it is.

 

5.1 If yes, who are the key players in your country/region?

 

- Delta Leasing, Nizhny Novgorod branch

36 Rozhdestvenskaya street, Nizhny Novgorod 603001 Russia

tel/fax: +7 8312 31 31 22; tel/fax: +7 8312 78 03 82;

e-mail: bvl@deltaleasing.ru

www.deltaleasing.ru

 

- Volga Leasing Company

13 Silkina street, Sarov 607190 Nizhny Novgorod region

tel/fax: +7 83130 3 90 38

e-mail: leasing@sbb.sar.ru

www.volga-leasing.ru

 

- Volgo-Vyatsky Mezhregionalny Leasing Center

28 Gagarin avenue, Nizhny Novgorod, 603098 Russia

tel: +7 8312 64 54 44; fax: +7 8312 64 06 70

e-mail: leascom@dmb.mts-nn.ru

 

- KMB-Leasing, Nizhny Novgorod representative office

27 Piskunova street, Nizhny Novgorod 603005 Russia

tel: +7 8312 31 73 10; fax: +7 8312 31 73 11

e-mail: aptyushev_a@kmb.ru 

www.kmbleasing.ru

 

- Mortgage Company of Sberbank

35 Oktyabrskaya street, Nizhny Novgorod 603005 Russia

tel/fax: +7 8312 17 86 61

tel/fax: +7 8312 77 38 65

e-mail: info@sbrf.nnov.ru

 

5.1.1 What is their type of experience (type of industry and size of deals)?

 

The Nizhny Novgorod branch of Delta Leasing is a leader of the regional market. In 2003, it concluded 83 agreements on provision of leasing services in the amount of approx. US$ 5 million to local customers from SME sector. The average value of a deal totals US$ 120,000 in the Nizhny Novgorod region. The company leased various types of productive, store and trade equipment (approx. 45% of all the deals) as well as cargo and passenger vehicles (50%). Approximately 80% of all equipment and vehicles is of a foreign make (after the Customs clearance). Delta Leasing signed agreements with Ford Motor Company, Volkswagen, and Renault for provision of leasing services on their vehicles in Russia. Last year, the Nizhny Novgorod branch of Delta Leasing started negotiations with all major car trading companies of Nizhny Novgorod to provide leasing services to their customers. Delta Leasing provides favorable terms of leasing for local customers, which are as follows:

 

(Leasing of equipment)

Leasing period – 18-48 months (with a possibility of extension to 60 months)

Funding for leasing – US$ 20,000 – US$ 1,000,000 (which should cover maximum 70%-75% of the contract value)

Advance payment – 25%-30% of the contract value

Annual consolidated fee (premium of Delta Leasing) – 7.5% - 10.5% from a price of equipment

Schedule of payments – monthly, in regular installments

Insurance – mandatory, covered by Delta Leasing

Deferred payment – provided for maximum 6 months for installation and setting works

 

(Leasing of vehicles)

Price of a vehicle/several vehicles – US$ 13,000 – US$ 700,000

Leasing period – 18-36 months

Funding for leasing – US$ 10,000 – US$ 500,000

Advance payment – 25% of the vehicle price

Annual consolidated fee (premium of Delta Leasing) – 7.5% - 11% from a price of vehicle

Schedule of payments – monthly, in regular installments

Insurance – mandatory (Auto Casco), covered by a customer

 

(Leasing of real estate)

Leasing period – maximum 60 months

Funding for leasing – US$ 20,000 – US$ 1,000,000

Advance payment – 25%-30% of the contract value

Annual consolidated fee (premium of Delta Leasing) – 7.5% - 10.5% from a real estate price

Schedule of payments – monthly, in regular installments

Insurance – mandatory, covered by Delta Leasing

Deferred payment – provided for maximum 6 months.

 

Delta-Leasing was purchased by the investment fund Baring Vostok Capital Partners from Delta Capital in 2003. Formally, the leasing company has become independent, although it maintains financial relations with Delta Capital.

 

Other three leasing companies - Volga Leasing Company, KMB-Leasing (Nizhny Novgorod office), and Mortgage Company of Sberbank – are captive, as they are owned, respectively, by SarovBusinessBank, KMB-Bank, and Volgo-Vyatsky Bank of Sberbank. Technically, the leasing terms of KMB-Leasing, and Mortgage Company of Sberbank are close to the terms of Delta-Leasing, although their fees are slightly higher, especially with KMB-Leasing. KMB-Leasing provides leasing services for acquisition of equipment and vehicles to its target group of customers – local SMEs, so that funding per one deal does not exceed US$ 500,000. Mortgage Company of Sberbank provides leasing services to its corporate customers and SMEs for acquisition of real estate objects, productive equipment, machinery and vehicles without special restrictions on the size of a deal.

 

Volga Leasing Company, owned by SarovBusinessBank, has 5 offices in the Nizhny Novgorod region, and three offices in Moscow, Vologda, and the Krasnoyarsk region. In January-September 2003, the company funded leasing deals in the amount of US$ 8.5 million in Russia. The company provides leasing services to medium and few large companies/organizations for acquisition of productive equipment, machinery and vehicles. In 2003, the list of its customers included the Nizhny Novgorod region’s government (US$ 1.43 million for acquisition of vehicles), the Russian Nuclear Center at Sarov (US$ 0.63 million for machinery and vehicles), a local mineral water company, and some others. The company has been developing leasing services for acquisition of cargo and passenger vehicles for SMEs thru a network of the local bank Garantia, which is part of the financial and industrial group of SarovBusinessBank. The minimum amount of a deal with Volga Leasing Company is US$ 5,000, the leasing period is 24-36 months (depending on the contact terms), the advance payment is 30% from the contract value, and the minimum rate of funding is 15% in USD (25% in Rubles) annually, excluding commission of the leasing company.

 

Volgo-Vyatsky Mezhregionalny Leasing Center, associated with the Nizhny Novgorod region’s fund for small business support and some other official institutions of the region, claimed that it funded leasing deals with local companies in the amount of US$ 815,000 in January – September 2003. The company provides SMEs of the Nizhny Novgorod region with leasing services on acquisition of various productive equipment, machinery, and vehicles.

 

There are also several national leasing companies, operating in the region, e.g. Alfa-Leasing (www.alfaleasing.ru), SiAl-Leasing (www.ulh.ru; leasing@ulh.ru), which are specialized in large leasing deals for corporate customers; Carcade-Leasing, which render leasing services to SMEs (mainly, on leasing of vehicles), PromsvyazLeasing, and some others.

5.1.2 Which leasing companies are independent and which ones are captive to a particular bank/industrial group

 

See under question 5.1.1.

 

5.2 What are the prerequisites to qualify for a leasing arrangement and what are the terms?

 

The company, which applies for a service from a leasing company, should meet a set of criteria, typical for the regional financial market (business plan, approved by a leasing expert; no old debts on tax payments, and overdue payments to third parties). Leasing company would also demand additional pledge or guarantees of third parties/personal guarantees of the company’s owners to secure financial risk, associated with a lessee. No additional pledge is required for leasing of vehicles. Usually, a lessee is required to be in business for minimum one year (with no bad records).

 

A leasing company, owned by a bank, usually requires opening of a clearing account with the bank for repayments under the leasing agreement. Since submission of a full set of documents, a leasing company considers an application within 1-5 days for leasing of vehicles, within 14 days for leasing of machinery and real estate. Larger deals may be considered for a longer period. A leasing contract is nominated either in US$/Euro or Rubles, depending on a contract for supply of equipment, and a customer’s preferences.

 

A regular set of documents, submitted to a leasing company, includes:

 

-         Charter documents of a lessee company, including a registration certificate;

-         Registration document from a local office of the Internal Revenue Service;

-         Information from a lessee’s bank (confirmation of a clearing account, opened with the bank; confirmation of no claims from the bank to the lessee; authorized copy of the company’s seal and signatures);

-         Registered (audited) company’s balance sheet with mandatory attachments/forms for the last two reported periods (quarterly, yearly);

-         Authorization of responsibilities of a person, who signs a leasing agreement;

-         Copy of a passport of the person;

-         Certificate from a local office of the Internal Revenue Service that a lessee has no debts/overdue payments to the federal/regional/local budgets.

 

The set of documents is shortened by some leasing companies for leasing of vehicles.

 

5.3 Has any legislation been adopted in your region/country regulating leasing activities and if yes, when? Is any related legislation pending?

 

No special laws on leasing were adopted by the regional legislature. The principal legal documents are as follows:

 

-         Federal Law “On financial lease (leasing)” N 164-FZ dated 29 October 1998 with amendments made in accordance with Federal Law N 10-FZ dated 29 January 2002;

-         Decree of the Government of the Russian Federation N 1 dated 1 January 2002 “On classification of assets, included into depreciation categories”.

 

6. Is Financing Obtained Through Other Sources (savings; black market loans; offshore investment, barter; countertrade; etc.)

 

Savings and black market loans are still a considerable source of funding for start-ups and small businesses, although their share in overall funding vehicles has been decreasing compared to 2002.

 

The share of barter in a segment of medium and big businesses is insignificant, although it has slightly increased compared to 2002.

 

Offshore investment is an important tool of funding for large industrial projects carried out by national industrial and financial groups, which have affiliated companies in the Nizhny Novgorod region (telecom, metallurgy, engineering, food processing, etc.). Offshore investment is a reasonable source of funding for the projects in the construction and trade sector of Nizhny Novgorod.

 

7. Could you make a rough estimate (in %) about which of the above mentioned finance options (question 1 to 6) are the most frequently used to finance the following:

 

Micro-deals: Banks – 25%; local SME support funds – 10%; Self-financing – 40%; Black market loans – 25%.

Small deals: Banks – 40%; Self-financing – 50%; Black market loans – 10%.

Medium deals: Banks – 70%; Self-financing – 30%;

Large deals: Banks – 45%; Self-financing – 20%; Cross financing – 20%; Offshore financing – 10%; Investment funds – 5%.

 

8. What Is the Standard Procedure to be Followed by a Company in Your Country/Region When Applying for Financing? How Long Does It Take? 

 

The procedure when applying for financing at banks and leasing companies is similar, although leasing takes more time because of technical issues, related to the transfer of funds, insuring of equipment, charging of commissions, and producing necessary payments. Regarding leasing procedures and time constraints, see above articles 5.1.1 and 5.1.2 of the present report.

 

A bank loan provision, traditionally, goes thru the following stages:

 

(a)    A borrower first approaches a bank either personally or by phone for a consultation (basic information, including calculation of an interest rate is available at web-sites of some banks).

(b)   The borrower receives a pack of documents for further submission to the bank. It usually includes an application, describing the purpose of a loan and its duration; copy of the company’s charter documents; passport copies of a CEO, chief accountant, and the company’s owners; the company’s balance sheet with mandatory attachments for the last 6 months with a verification stamp of a local IRS office; the company’s cash flow for the last 6 months, verified by the company’s bank/s; letter/s from other banks, which provided loans to the company; a list of fixed assets of the company and certificates of the company’s ownership on the assets; a list of the company’s inventories; description of a pledge; copies of the company’s leasing contracts on real estate and vehicles (if any); one/two bank cards with the company’s CEO and chief accountant signatures, verified by a notary; a loan agreement; a collateral agreement; a business plan or a summary for the project; other documents, which may be required by a loan officer.

(c)    The bank’s loan officer studies the submitted pack of documents, produces necessary calculations, and evaluates potential risk with the borrower. The documents are also verified by the bank’s legal department. Depending on the situation, an economic security officer/a loan officer may pay a visit to the borrower to check the collateral. Usually, bank representatives are reluctant to take real estate as a collateral as it demands additional time and charges from a customer for the real estate insurance. Banks prefer liquid securities, inventory in stock, operating equipment and some other categories of liquid assets as a pledge as they usually demand no additional paperwork to be registered as collateral. Considerable financial turnover of the borrower with the bank also contributes to the borrower’s credibility.

(d)   The loan officer submits the file of loan documents with his/her recommendation to the bank’s loan committee, which approves or disapproves the loan’s provision.

(e)    In case of approval, the bank’s authorized official signs the agreements and submits them to the loan officer, who, then, passes one set of documents to the company. The loan officer also ensures transfer of loan funds to the customer’s account.

(f)     Since then, the loan officer monitors the loan, produces necessary calculations on the interest rate, and ensures the timely redemption of the interest and the loan.

 

The total procedure of documents collection may take from one week to one month from a borrower, if the company applies for a loan from the bank for the first time. The documents collection takes less time and efforts from a borrower in case of revolving loans/credit line/overdraft opened by the bank its customer with a good financial record.

 

8.1 for a trade deal

 

Standard procedure of applying for a trade deal financing with a commercial bank coincides with the pattern, described above. Since the documents are submitted to a loan officer by a borrowing company, the deal is either approved or not within 1-5 working days.

Consideration may take longer if the application is submitted to a local branch of the national commercial bank, which is not entitled to approve loans locally in case the loan exceeds a certain limit. Then, the documents for a loan are submitted to the bank’s head office.

 

8.2 for an investment deal?

 

Application for an investment deal financing with a commercial bank will demand more documents from a corporate borrower and it will take more time for the bank to approve or disapprove provision of funding. The company should prepare a good business plan and a feasibility study on the project, to be discussed and further developed with an investment officer of the bank. The bank would give preference to the company with a good credit history with the same bank. Assuming the bank is not restricted in mid-term funds, and the required loan does not exceed 10% of the bank’s total credit portfolio, then, the company may receive financing within 1-3 months after submission of all necessary documents to the bank.

With few exceptions, most of the regional banks do not have enough mid-term funds to offer investment financing. Local branches of large national banks are in a better-off position. Still, investment financing is available only to the creams of the regional corporate community. Preference is given to large profitable companies with regular hard-currency returns on export contracts, or to other local companies, which control considerable niche in the regional/national market.

Investment financing is also available with the investment fund Quadriga Capital Russia GmbH (Nizhny Novgorod office). Still, the fund’s procedures requires from 5 to 9 months of preliminary work with a customer on the investment project, and the customer’s financial projections should meet financial criteria of the investment fund. 

 

8.3 How much time does it take to get a deal financed?

 

For a micro-deal: 1-5 working days;

For a small deal: 3-14 working days;

For a medium deal: 5-14 working days;

For a large deal: 1-9 months.

 

Note: Financing for micro-, small, and medium deals takes less time, when a customer has already got a good credit history with a bank/SME support fund. Financing for large deals varies in time limits depending on (a) duration and security of a loan; (b) source of financing, which may come from a bank, from the company’s industrial & financial group /cross financing/, and from an investment fund. 

 

9. What Are the Qualifying Conditions On the Checklist of Finance Providers When Considering a Business Proposal (List by order of importance)

 

9.1 For a domestic Lender

 

9.2 For a Foreign Lender

 

National/local banks make no special distinction between a domestic or a foreign lender, as all financial deals should comply with the regulations of the Bank of Russia.

 

1/ Company financials;

2/ Collateral/pledge to get a loan;

3/ Tenors (= terms to pay back a loan)

4/ Sound business idea/trade deal structure;

5/ Hard currencies exports/receivables;

6/ Solid market position and profit margin;

7/ Loan’s value (USD, Euro or Rubles – it is mainly decided by a borrower);

8/ Due diligence conducted by a foreign/national organization;

9/ Openness and transparency of the company;

10/ Penalties for deferred payment;

11/ Others.

 

Note 1: in late 2003, the Bank of Russia announced a decrease of the annual interest rate from 18% to 14% in Rubles. Currently, major national banks offer 12%-16% interest rate in Rubles (or 8% - 12% in USD/Euro) to reliable local borrowers on mid-term loans.

 

Note 2: Accounting Standards (IAS, U.S. GAAP standards) are important for the loans, syndicated by national/local banks jointly with international financial institutions.

 

10.  What Are the Key Obstacles for a Company to Get Trade Financing or Investment Financing and What Are the Most Common Errors Committed Resulting in not Getting Any Financing?

 

1/ Lack of collateral;

2/ Poor business proposal;

3/ Management weakness;

4/ Cost of a loan;

5/ Balance sheet weakness (e.g., lack of capital; unreliable accounting);

6/ Lack of credit lines from foreign banks;

7/ Unacceptable terms of foreign vendors.

 

11. What Are the Financing Programs Available in Your Country/Region Through:

 

11.1 U.S. Government programs (Exim, OPIC, TDA, etc.);

 

Nizhny Novgorod hosts offices/branches of a dozen of Russian banks, whose guaranties are accepted by the US Ex-Im Bank for trade finance and investment deals with US machinery and products.

 

OPIC mission ran a seminar for the regional government, local banks and companies in Nizhny Novgorod in June 2003. OPIC and the regional government agreed on cooperation on construction and infrastructure projects in the region.

 

11. 2 Multilateral institutions (World Bank, EBRD, ADB, IDB, etc.);

 

The EBRD is a principal source of funding for both KMB-Bank, and the Quadriga Capital Russia GmbH. In 2003, the EBRD and the IFC increased their stake in the capital of NBD-Bank to encourage its lending programs for industrial companies and SMEs of the Nizhny Novgorod region.

 

11.3    Country/federal/state/regional/local programs?

 

The government of the Nizhny Novgorod region has been carrying out a business support program for local companies in the sector of agribusiness, textile industry and SMEs, when it compensated 50% of an interest rate on commercial loans, raised by the companies for the projects, approved by the government. Financing has been provided within approved quotas, set in the region’s budget.

Investment projects over US$ 1,000,000 receive tax concessions from the regional and local governments.

 

12. If Foreign Companies Are Extending Finance (credit), What Are the Common Terms?

 

A down payment is usually within 10%-20% of the contract value. A redemption period for most of the trade finance contracts, announced in 2003, was restricted to 6-18 months, depending on the price and terms of the contracts. Most of trade finance deals with German, Japanese, and some other companies were under US$ 10-15 million, and they provided for a supply of foreign machinery to local companies. Most of the deals were run via local financial institutions.

 

There is also a group of large trading companies in Nizhny Novgorod, which extend short-term credit lines (1-2 months) with their principal suppliers from Europe at a zero interest rate.

 

13. What Are the Most Common Instruments for Import Payment, e.g., Confirmed LCs, Off Shore Accounts, etc. and What Terms Are Applicable?

 

Partial prepayment, confirmed irrevocable letters of credit (LCs), and confirmed bank guarantees are the most common instruments for import payment. A new financial instrument – a back-to-back letter of credit was presented to the market by the local office of MMB bank in late 2003.

To open an LC or to receive a bank guarantee, a local company should either deposit an equal amount of funds with the bank, or apply for a loan (+ collateral agreement) to secure the bank’s risks, related to the deal.

 

14. What Positive Changes Can Be Expected in the Future and What Is Being Prepared at the Public/Private Level to Improve the Situation for Financing Business Development in Your Region/Country?

 

The biggest change in the regional financial market has been related to a quick start of consumer credit programs. Within a year, credit programs on acquisition of durable consumer goods and cars have become common, as they are provided, nowadays, by every third bank of the region. It is quite probable that retail banking will stay one of the most dynamic vehicles in the regional market for the next two years. According to the Russian statistics, sales of foreign cars reached the amount of sales of Russian cars, in a financial equivalent, in 2003. Wider access to retail credits may also stimulate consumption of foreign durable goods as well. Retail banking may further develop in the sectors of credit cards (where an overdraft on the balance account will stand for a short-term loan), and mortgage lending. The latter has been offered mainly by Sberbank at the regional market, but with a set of national laws, to be passed in 2004-2005, and a possible decrease of inflation and, consequently, of the interest rate of the Bank of Russia, mortgage lending may become more common thru other large commercial banks of Russia. The national bank deposit insurance policy, to be launched in mid-2004, would also stimulate development of the retail banking in Russia, and in the Nizhny Novgorod region, in particular.

 

Development of investment banking has been slow, although it is another perspective niche in the regional financial market, which may start growing after 2005 – 2006.

 

Traditional services of corporate banking have not revealed big changes in 2003, and a decrease in the interest rate of the Bank of Russia has not led to considerable improvements for, at least, two reasons: the quality of corporate borrowers is still moderate (the banks are reluctant to increase loan portfolio with corporate customers due to a growing risk of bad loans), and the banks’ premium is decreasing while the costs are not. The second problem may be partially sold for the next few years, when national and regional banks start merging to increase efficiency of operation, pool more resources, and cut costs.

 

15. Are there any Publications and Web Site in English and/or Russian that Address Finance Issues?

 

www.sbrf.nnov.ru

www.alfabank.ru/branches/nizhni

www.sbbank.ru

www.nbdbank.ru

www.kmb.ru/regions/nn.html

www.uralsibbank.ru/network/nnovgorod/

www.ab.nn.ru

www.forafund.ru

www.leasing.ru

www.volga-leasing.ru

www.kmbleasing.ru

www.alfaleasing.ru

www.ulh.ru

www.ifc.org/russianleasing/eng

 

16. Is Consumer Credit Available in Your Country/Region?

 

Yes, it is.

 

16. 1 If Yes, for what purchases the credit is mostly used for?

 

The most common goods, purchased with consumer credit, are electronics (TVs, videos, stereos, etc.), computers, printers, scanners, other durable consumer goods, DIY products, vehicles and cars. A new venue in consumer credit is holiday tours, annual fees for beauty saloons, sports & recreation centers.  The most popular consumer credits are for purchasing of cars and electronics.

 

16.2 How do banks compile and evaluate credit history information?

 

Financial institutions, which operate in the sector of consumer credit, can be divided in two major groups according to the methods of credit history evaluation: (a) traditional; (b) express.

 

Traditional banks are the most numerous, and consumer credits are a new product for them. They are mainly focused on car credits, and some of them – on durable consumer goods. They usually take the pledge of other people (third party) and of the acquired equipment as collateral. Insurance of the acquired consumer good, especially, of a car, is mandatory. The loan procedure may take from 1 to 5 days. The annual interest rate on cars is usually within 11%-14% in USD or 19%-21% in Rubles, and the bank charges 2% from a car price as its commission.

 

Express banks have come to the Nizhny Novgorod market, mainly, in 2003. They are focused only on credits for acquisitions of consumer goods (except cars), and they apply their own electronic scoring systems, which enable them to approve/disapprove a loan within 15 minutes since an application. They usually offer a relatively high interest rate – up to 34% annually in Rubles – which is often partly hidden in a price of a good under an agreement with a trading company. The list of express banks in the regional market includes Home-Credit, Delta-Credit, and Russky Standard.

 

Although express banks are quite active in the regional market, it is probable that they would be ‘squeezed’ in two-three years by the banks, which are developing credit card programs with a short-term overdraft. The period of two-three years is a necessary minimum for the banks to accumulate basic credit information on its customers, who actively apply credit cards services.

 

17. Are there other public or private resources available in your country/region that could provide assistance to potential investors and/or lenders?

 

 

The Nizhny Novgorod region Chamber of Commerce and Industry

1 Oktyabrskaya square Nizhny Novgorod 603005 Russia

tel: +7 8312 19 42 10

fax: +7 8312 19 40 09

e-mail: tpp@rda.nnov.ru

www.tpp.nnov.ru

 

The Nizhny Novgorod Regional Development Agency

1 Oktyabrskaya square Nizhny Novgorod 603005 Russia

tel/fax: +7 8312 19 47 82

tel/fax: +7 8312 31 73 37

latyshev@rda.nnov.ru