Speech

John A. McAdams

Senior Vice President, Credit and Risk Management
Export-Import Bank of the United States

5th Annual Russian Banking Forum
Milan, Italy September 16-17, 2004

Supporting U.S. Exports to Russia, Ukraine and Kazakhstan

Introduction SLIDE 1 

Thank you, Mr. Kandruev (First Vice President, Russian Regional Banking Association, and former First Deputy Chairman, Russian Central Bank). I'm delighted to be here to talk about Ex-Im Bank's involvement in Russia, Ukraine and Kazakhstan. Ex-Im Bank currently is active in these markets. And we stand ready to increase our support of U.S. exports to the region.

Trade will play a key role in integrating Russia, Ukraine and Kazakhstan fully into the world of stable, free-market economies. We want to do our part to facilitate that trade.

In the past, Ex-Im Bank worked mostly with sovereign governments to support projects. However in recent years, as part of their debt management policies, countries in the region are doing less sovereign financing. Therefore our relationships with local banks have become more crucial. 

Ex-Im Bank's guarantee enables local banks to expand their range of services by offering more term financing. We are able to work with these banks because they provide to us solid financial information. We also are open to work with private sector companies that provide solid financials.

Let me start by telling you a little about Ex-Im Bank and what we do. Then I'll discuss what we've done in Russia, Ukraine and Kazakhstan and the prospects for expanded future activity.

Ex-Im Bank SLIDE 2 

First, Ex-Im Bank. We are the official export credit agency of the United States. We're mandated by Congress to carry out one mission - to finance U.S. exports. In the process we create and sustain U.S. jobs. We must have reasonable assurance of repayment on every transaction we approve.

We fill a critical trade finance gap by supporting exports to markets where commercial bank financing is unavailable or insufficient. That means the bulk of our transactions support exports to emerging markets. This is important because emerging markets represent nearly 90 percent of the world's people, and they are likely to be a major source of economic growth in the 21st century. 

Ex-Im Bank also levels the playing field to keep U.S. companies competitive in the global marketplace by matching the government support provided to foreign competitors.

In fiscal year 2003 Ex-Im Bank supported $14.3 billion of U.S. export sales. And nearly 90% of our transactions were done with small businesses. 

We finance every type of export, from commercial aircraft, machinery, and power projects to school textbooks, food products, and engineering and other services. I should explain what I mean when I say "Ex-Im Bank finances." The vast majority of what Ex-Im Bank does is the support of trade. We do very little in the way of direct loans. The bulk of our business is loan guarantees and insurance.

Our export credit insurance protects U.S. exporters and banks against the political and commercial risks of a foreign buyer defaulting on payment. This program is especially helpful to small businesses. It can enable them to offer competitive credit terms to foreign buyers.
Our commercial loan guarantees and direct loans provide foreign buyers with competitive financing to buy U.S. goods and services. Medium-term loans and guarantees typically have a tenor of five years, but can extend as long as seven years. Long-term financing is over seven years.

For U.S. companies competing for contracts for large infrastructure projects in countries seeking to limit their government debt, we have a solution -- limited recourse project finance.
With this type of financing, no government guarantee is needed. Repayment is based on revenues from the project itself.

We have a number of special initiatives, too.

Ex-Im Bank's environmental exports program provides enhanced support for a broad range of environmentally beneficial U.S. exports. Those would include water treatment plants and renewable energy such as wind turbines.

We also have a program of enhanced support for U.S. exports of medical equipment and services to emerging markets. We have financed a wide range of equipment including large MRI systems, mammography equipment and hospital beds. Our new transportation security exports program can help U.S. exporters provide state-of-the-art equipment, technology and services to countries seeking to improve the security of their cross-border transportation systems.

This includes such equipment as baggage scanners and ID systems for secure entries.

Ex-Im Bank in Russia SLIDE 3 

Now let me turn my attention to specific countries -- first, Russia.

SLIDE 4 

Major indicators show robust economic activity in Russia. During 2000 to 2003, Russia's GDP grew 6.8% annually, investment grew 10.9% annually, and the current account surplus was 9.7%. 

Foreign exchange reserves grew from $8.5 billion (2 months' import cover) at the beginning of 2000 to $73.2 billion (8.7 months' import cover) at the end of 2003.

Regarding its economic relations with the US, Russian exports to the United States rose 26 percent during 2003 to $8.6 billion, while U.S. exports to Russia increased 2.2 percent to $2.5 billion.

Russia's trade also is likely to be enhanced by the fact that the OECD upgraded Russia last year from risk category 5 to category 4. This upgrade has lowered the minimum premium for Russian transactions charged by export credit agencies. It is a sign of increased confidence in Russia's economy.

SLIDE 5 

Ex-Im Bank's current portfolio in Russia stands at approximately $1.4 billion, and Russia is the 10th largest market for the bank. More than half of the portfolio is in the energy sector. This is not surprising given the sector's dominant role in Russia's economy.

There has been a significant shift in Ex-Im Bank's Russia business since the 1990s, when we authorized mostly large transactions supported by sovereign guarantees, or large oil projects. Since 2000, the absolute number of transactions has increased dramatically but the average size of each has fallen. The majority of our projects today are under $5 million, and none have a sovereign guarantee.

SLIDE 6 

Ex-Im Bank has strengthened its ties with a number of Russian financial institutions to help Russian companies purchase more U.S. goods and services. Currently we are working with over 20 Russian banks, including national banks such as Sberbank and Vneshtorgbank (VTB), as well as regional banks. Our exposure to the sector is now approximately $300 million.

Ex-Im Bank is willing to accept the risk of any eligible Russian bank, and we review applications on a case-by-case basis to determine such eligibility. It is essential that we have good financial information to evaluate a bank's creditworthiness. We also require three years of English-language financial statements audited in accordance with International Accounting Standards. 

It also is critical for us to understand a bank's ownership structure and business model.
We are certainly committed to continuing our support in this sector. Ex-Im Bank remained open for cover for Russian banks during the turbulent months of June and July. However, we do recognize that the system remains vulnerable to crises in confidence and macroeconomic shocks.

We view positively the tightening of banking sector supervision, and the implementation of deposit insurance. The long-term risk profile of the sector will be improved with continued banking sector consolidation and competition, higher transparency in terms of financial reporting and ownership, increased protection of creditor rights, and improvements in the overall operating environment.

In addition to cooperation with the banking sector, Ex-Im Bank has been trying to expand its role in Russia through sub-sovereign lending - meaning municipal or provincial lending - through leasing, and through corporate lending.

The sub-sovereign lending program has faced challenges in Russia because of current legal restrictions on municipality borrowing in U.S. dollars. Ex-Im Bank currently is working on a program to provide loan guarantees in local currency, but there is much work to be done.
Ex-Im Bank will consider loans to eligible, creditworthy corporations without bank guarantees, sovereign guarantees, or security.

However, for Ex-Im Bank to consider corporate risk in Russia, we must have at a minimum sufficient financial information, statements audited in accordance with International Accounting Standards, and an understanding of the company's ownership structure and business activities. To date, a minority of corporate entities meet this standard.

I want to say a word about Vnesheconombank. Our cooperation began in 1992 when we signed a sovereign framework agreement. Since then, Ex-Im Bank has financed over $1 billion in projects in many sectors, including aerospace (satellites and commercial aircraft), medical, and telecommunications.

A year ago, Ex-Im Bank and VEB signed a Parallel Financing Cooperation Agreement during President Putin's visit to the United States. This agreement provides a framework to facilitate cooperation on projects in third countries involving procurement of U.S. and Russian goods and services. The goal is to increase Russian and U.S. capital goods exports. 

For Russia to continue on the path of economic growth, major investments will be needed to further expand and modernize Russia's energy and other sectors. Private financing alone cannot do it. Indeed, the Russian banking sector finances only 5% of domestic investment.

It will take a cooperative effort by export credit agencies such as Ex-Im Bank, international financial institutions including global and regional development banks, and private lenders. We must all work together to make this happen - for the benefit of Russia and all of its main trading partners.

Ex-Im Bank in Ukraine SLIDE 7 

Now I'd like to turn to an economy closely tied with Russia. When we look at Ukraine, it's clear that Ukraine has been a more difficult market in which to develop business. Ex-Im Bank's exposure in Ukraine is comparatively small in relation to the country's size and importance in the region. However there are positive signs that this may be changing. Ex-Im Bank did reopen in Ukraine in 2001. Moreover, the OECD's upgrade of Ukraine last January from fee level 7 to fee level 6 recognizes positive economic performance and growth.

SLIDE 8 

In the past two years, we've done three deals with two banks: Nadra Bank and Privat Bank. These transactions have supported Ukraine's purchase of U.S. exports of agricultural equipment, and radio and TV communications equipment. I believe that Ukraine's large population (approximately 48 million) and strategic location in the heart of Europe offer enormous potential for growth. There is opportunity to support transactions in the agriculture, transportation and energy sectors. However Ex-Im Bank's ability to help realize this potential is inhibited by the country's weak judicial system, inadequate bankruptcy laws, and transparency and corporate governance issues. We hope that Ukraine's continued integration into the global financial community will address some of these issues.

Kazakhstan SLIDE 9 

In Kazakhstan, I see tremendous potential. Kazakhstan is one of Ex-Im Bank's faster-growing markets.

SLIDE 10 

During the last fiscal year, we authorized just one transaction; it was less than $1 million.

This year, we have approved 13 deals totaling nearly $100 million. They have supported exports in the transportation, agricultural and communications sectors. An Ex-Im Bank $33 million guarantee is supporting the export by General Electric Co. (Erie, Penn.) of 54 locomotive modernization kits to Kazakhstan's state-owned national railway - KTZ. It was the first time that Ex-Im Bank provided financing for a non-bank, government-owned company in Kazakhstan without a sovereign guarantee. KTZ is the primary source of repayment. (ABN Amro Bank N.V., Chicago, Ill., is the guaranteed lender.)

Another transaction for $9.4 million also is based on KTZ's guarantee. In this deal, Transtelecom - a KTZ-owned company - will build a 1,200-kilometer fiber optic backbone along the rail bed. 

There also have been a few transactions directly with Kazakh banks. Most of the transactions in Kazakhkstan have been with banks serving as the borrowers or guarantors. Ex-Im Bank has exposure to six banks in this market, including Kazcommertsbank, Bank Turan Alem, and Halyk Savings Bank. Ex-Im Bank has been able to expedite the analysis for most of the banks we have looked at in this market due to their strong credit ratings. I'm talking about ratings by firms such as Standard & Poor's, Moody's, and Fitch.

We are optimistic about the prospects for additional transactions with the banking sector in Kazakhstan. We consider this sector the most modern and stable in the region as a result of the successful reforms implemented over the past decade.

Conclusion SLIDE 11 

In summary, Russia, Ukraine and Kazakhstan all offer enormous opportunities for U.S. exporters. Their economies continue to grow. However, continued efforts to improve transparency and corporate governance, fight corruption, and strengthen regulatory and legal systems are needed to help them realize their potential in the global marketplace.

Trade is the key to integrating them into the world of stable, free-market economies.

Ex-Im Bank will do its part to facilitate this trade, to the benefit of all our countries.

Thank you.