Notes from  Moscow -  Commercial Banking from a Trade Consultant's viewpoint

In July I received a call from an ex-colleague asking me if I would be interested in participating in a project, working with a bank in Moscow. Now Moscow has always seemed like a huge, slightly forbidding city with dark, sinister, thick set KGB officers and all those other similar stereotypical images which appear to someone like me, who grew up in the 1960s. However, on speaking with the main contractor, who was seeking someone with international trade finance and some knowledge of foreign exchange management experience, I started to gradually warm to the idea. It would be an experience, perhaps not an overwhelmingly pleasant one, but an experience all the same.

I travelled out in the final week of August at a time of the year the Russians call "Grandma's summer" - because late August to early September is their last of the summer wine time or as someone put it "a bittersweet lick of velvety warmth that used to arrive after the peasant women had brought in their harvests, but which now equates to the last gasp outdoor drinking sessions for the Muscovites, around the menacing  Kremlin perimeter walls".  

The first thing that hits you, if you take a taxi from Sheremetyevo airport into the vastness that is the city, is that Moscow has a traffic problem that makes travelling on the M25 at rush hour seem like a reasonably joyful experience. The second realisation was  that my Russian phrase book was a complete waste of money - I managed three words of recognition with the taxi driver. Futbol, and Spartak Moscow. Even the much despised (as a lifelong Ipswich Town season ticket holder), but what I had assumed was a universally known "Manchester United" feel on deaf ears.

If you travel to Moscow, nothing will prepare you for the scale of it, with an official population of 11.5 million but with an unchartered migration from former Soviet republics and other areas of the Russian federation, estimates are now suggesting there may be up to 17 million inhabitants. I am sure there are a similar number of cars on the roads, and these are not Ladas or Trabants, but in the main the same car brands as you would see in the UK.

The project   

My brief in terms of the project was to meet with around 10 commercial clients of a small, privately owned bank, in order to establish their international trade finance and foreign exchange requirements, to investigate whether the bank was willing and able to meet those needs, i.e. did it have the product solution capabilities, and if not, what were the product gaps?

I had taken some advice from an ex-colleague who had headed up a major bank's Moscow operation around five years ago, and he had given me some resolute advice. "Don't in any event smile at the clients during the meetings. It is a sign to Russians of weakness and indeed foolishness". So contrary to my usual affable approach to client meetings, I was prepared to effect a similar countenance to Arsene Wenger on a bad day, but in reality all clients were extremely cordial and prepared to share details about their business activities with me.     

The Client Meetings

I met with clients from a diverse range of sectors, from traditional oil and gas, children's clothes importers, specialist fuel injector designers for heavy industrial trucks, wine and spirit importers, automotive part importers (lots of potential customers with all those cars!), distributors of high tech medical equipment, importers and distributors of gardening and snow blowing equipment and a mining company.

In terms of these company's trade cycles, unsurprisingly, as clients of a small privately owned Russian bank they were having to pay their overseas suppliers either with order or on shipment. There were a couple of clients who had managed to negotiate a reasonable period of supplier credit, but up-front payment is usual. Again, it is pretty obvious that this creates a long funding gap with  60 days transit time if goods are purchased from China and the vessel lands at a Baltic port, and then trucked to Moscow. So the clients are hungry for as much support from a bank as they can get in terms of assisting with working capital financing. Factoring is possible to help finance their debtor periods but as with all form of trade finance it appears to be in its infancy compared to working capital financing solutions in the UK.

Fixed loans (not structured to the client's individual funding requirements!) are very common in Russian. One the most important points to remember is that there are dozens, in facts hundreds of banks in Russia. It is not uncommon for a company to juggle their financing facilities, paying one loan off, by taking out another one, at another bank - sounds like some irresponsible credit card practices in the UK?.

I drew up trade cycle analysis reports for each client on flip charts during the meetings, and the bank's business managers were taking photographs of these graphic representations of funding gaps and FX exposure periods which was a new experience for me.

Letters of Credits are issued by this bank on behalf of some of their importing clients, but owing to the perceived weakness of a small issuing bank and natural concerns about Russian political and economic risks, the Letters of Credit are advised and confirmed by strong correspondent banks and the Russian bank is not even named on the L/C received by the beneficiary, so the beneficiary has in their favour a Letter of Credit which has a (in their opinion) strong bank underwriting payment. The Russian applicant will have to pay for this confirmation and in addition to this the correspondent bank will offer "post finance" which can run for 180 days before they will debit the Russian issuing bank, but the interest charges (reflecting the risk) are very high. In addition to this the post finance may not reflect the importer's actual funding gap requirement, so this process is hardly tailored to their needs.

There are literally hundreds of trade finance products offered by banks in Russia, and the list is very extensive, however in reality they are all slight variations on a theme. If you drilled down to what they really are, the list would be considerably shortened.

The clients I met had a much better understanding of Incoterms rules that companies in the UK. Why is this? I am not sure, but I wish I had the answer, My take on it, is that UK companies are rather complacent and rely on habitual "we have always shipped exworks" rather than take advice and realise they are actually at risk by using inappropriate terms.

Foreign Exchange and in particular hedging is an area where banks in the UK are decades ahead of the smaller Russian banks. Most of the clients that I met have very long exposures to exchange rate risk as everyone I met purchased their required Euros/US Dollars or Sterling at spot. No one even covered any of their exposure using simple forward contracts, despite the fact that there is a valid forward market for the Rouble, which looking back to my time as a junior and it has to be said very small time foreign exchange dealer, seemed like an impossibility. So the opportunities for the clients to manage this exchange rate exposure are vast.

I can't begin to say that I have any  knowledge of the huge amount of regulations and literally red tape that surrounds the Russian banking sector nor the wider implications of importing and exporting in the region ( I only met one client who exported, but looking at the size of the Russian Federation and neighbouring states, importers have a bit to aim at in their own territory). I do know that a company needs a passport to import and/or export and they also need a currency passport to transact foreign exchange deals which involves a typically bureaucratic audit trail which is very time  consuming.

Conclusions

Moscow taxi drivers are insane. Don't bother with a Russian phrase book. The people are in the main friendly, but will have no English at all. Russian companys know their Incoterms rules. Bank facilities don't appear to reflect their client's needs in terms of funding gaps. Letters of Credits are very very expensive compared to those issued by major banks in the UK. Bribery and corruption is endemic right through every strata of society and business in Russia. Beware a policeman approaching your car with a black and white stick, he will require a bribe or if that is not forthcoming he will find a "problem" with your car. If you are a huge multinational company wishing to set up in Russia you will need to pay certain entities - need I say more? However......................Vodka shots are fun. There are some great restaurants in Moscow. The winter has not yet arrived but it will be upon the Muscovites before they know it. I hope to return with a decent warm coat. 

 

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Written on 12th September  2013 by Richard Casburn Associate at MJ Hayward & Associates- www.mjhayward.co.uk

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