Granting of credit and payment behaviour in Russia

Transcription

1 Granting of credit and payment behaviour in Russia Credit check is more important than ever / Russian importers struggle with their existing contracts / Exporters are ready to provide discounts / written by Bernd Hones Moscow More and more Russian importers are not able to meet their payment obligations not as punctual as it was before in Russian business life. That is why letter of credit and bank guarantee become more important. Also the risk of exchange rate comes into focus. Many German companies only provide their services in case of advance payment. International credit offices provide reports taking sanctions and relevant regulations into account. Granting of credit At the beginning of the year 2015 business in Russia was unfavourable for many German export companies. The weakening of ruble, Ukrainian conflict, sanctions, disadvantageous ratings, economic slowdown due to low oil prices it seems a lot of things came together. It is significant that Russian concerns only can give credits at very high interest rates. The base rate has been at 15,0% since However we can get a more accurate picture of the current interest rate level by Mosprime (analog EURIBOR) which was at 18,55 % on But private enterprises even pay interests between 25 and 38 % - criticized by Denis Manturow Minister of Industry and Trade. He vehemently requires the decrease of the interest rate and preferential credit programs for specific industries like agriculture and food processing industry, medical device manufacturers as well as mechanical and plant engineering. So the government will support 15 percentage point interest rate reduction in the field of investments credits for agriculture, the actual cost of credit for agricultural enterprises does not exceed 10 and 11%. The Russian government decided at the beginning of February 2015, they will support the interest rates of mortgage loans with 20 billion rubles from the state budget to support home-building. This makes possible to credit 400 billion rubles mortgage loan at 13 % interest rate. In Russia in the present situation, German and Russian enterprises should carefully examine whether they borrow money directly from Russian banks. Although the high

2 interest rates are against it, some of the Russian banks got into difficult position due to the decreasing loans. Luckily many German banks are represented by own subsidiary in Russian Federation, furthermore they offer wide range of export insurances from letters of credit to guarantees. Euler Hermes offers export credit-insurances to Russia (Hermes-reserves). However the Russian risk elements, bank issuing letter of credit and export credit insurances should move within acceptable limits said Deutsche Bank in Moscow on request of Germany Trade & Invest. Situation is similar at Commerzbank: they also offer letters of credit and bank guarantees to their customers, if the risk is manageable. Today if somebody would like to supply equipment, chemicals, automotive and medical technology to Russia, can not avoid to give concessions to his Russian business partners. In case of machines the discount is about 5 %. More than 12 % discount is not typical. Who gives larger discount, reduces the quality of the delivered goods. The larger the advance money, the higher the discount is, which can be up to 3 %. In Russia the common practice in machine trade is to give deposit between 15 and 40 % immediately after signing the contract. It is general to give the remaining payment between 5 and 10 % after installing the machine or after setting up the structure on site. The principal amount is usually established upon shipment. Particuraly good, solvent and long-time customers even pay after the delivery of the shipping documents. Three or four weeks after the delivery of documents from the exporter to the importer. These payment terms are kept by only those clients to whom we have already delivered for 15 and 20 years told by a German mechanical engineer. In case of special equipment, the advanced payment can be as high as 100% around 60 % when signing the contract and 40% upon ready to deliver. Again: if it is a long-standing, good customer payment terms can be changed. As German exporters assert, even today many Russian customers agree to give advance payment. They prefer to pay in advance and preferential terms (discount), rather than paying expensive insurances. It is important to speak about export credit and transport insurances during the negotiations. And also about risk of currency exchange. The exchange risk insurance is the most important issue for German banks in Moscow and Saint Petersburg since December There are two common security models.

3 The first one: German exporter secures a fixed ruble exchange rate at its bank for a specific time and receives ruble payments from the business. The second security model: German exporter buys an exchange option. If the exchange rate remains in a certain band, shall be forfeited. If the exchange rate of ruble falls below a predetermined band then the option can be taken out and the bank compensate the losses. There is also a possibility to minimize exchange risks by swaps for example on the Russian Stock exchange. Commonly used payment method without banks and stock exchange: at once several payment steps are determined by German suppliers and Russian customers. The advance payment is instantly currency risk-free after conclusion of the contract, while all other intermediate and final payment in rubles are risky. The larger the advance payment and first payment steps, the lower the overall risk is. Payment behaviour Russian payment behaviour is basically good considered by German contractors but the present situation is an exception. Almost all companies having long-term business connections with Russian companies report that their clients cannot easily comply with their euro-based contracts. Russian clients try to renegotiate the conditions, requesting postponement of payments or totally would ignore the contracts. No wonder. Since the exchange rate drop of ruble in December 2014 the euro based stocks are more expensive by third to Russian customers. Money is missing from the current crisis situation. At the moment we have so much discussions with our clients, giving many discounts to them and help wherever possible says a German manager in Russia. Especially with long-term partners we take costs into account. Who can afford it, tries to bond the customers to itself. This is confirmed by a machine merchant: Currently payment delays are frequent. But I never had such feeling this would be intentional says the businessman. If their situation will be better, Russian customers will pay their outstanding invoices, it is sure. Statistics of Euler Hermes are expressive. Number of defaults has increased by 200 % in Euler Hermes expects 10 % increase by 2015 in the field of credit falls and insolvencies of companies this is the second highest value all over the world. The situation drastically became critical in the past months. Russian enterprises are increasingly reluctant to comply with the payment obligations.

4 At the end of October in 2014 loans amounted to 1,9 billion rubles were overdue. It was a quarter more than a year ago. This is not a question, the situation has not improved at the end of 2014 and at the beginning of 2015 but rather worsened. It would be difficult to estimate with how many weeks the payment deadlines are exceeded due to the recent dramatic developments. It is clear with more and more. Twice as much outstanding credits were handed over to Russian debt collection companies by Russian banks as they have capacity now. This is true for consumer credits provided to private persons as well as to loans given to legal persons. German exporters should insist on higher deposits for new transactions than ever, and should agree closer payment deadlines for the remaining amounts or the remaining amounts should be required immediately when they ready to deliver. Creditworthiness of business partner According to experts, German businessmen should gather exact information about new partners at negotiation of a contract. It is important to get the full company name in Russian in each case. Tax number (INN), registration number (OGRN) and an extract from the trade register, even the articles of association are needed for this. It shows whether the manager should even allow to sign contracts. German companies are putting more and more emphasis on a detailed examination of their business partners says Viktor Spakow, lawyer of German-Russian Chamber of Commerce in Moscow. Especially now, during the economic crisis more and more entrepreneurs turn to the organization. No wonder: more and more Russian companies are not able to meet their obligations towards German creditors, says the lawyer. The fact that a company really exists, can be revealed by the tax authority ( Through this site addresses, establishers and general managers also can be checked. The German-Russian Foreign Chamber of Commerce use other legally available databases, just like Spark-Interfaxdienstet (( All information of the company register can be looked after here: share capital, financial statements, information about economical activity of the company, personal or firm interests of the owners. I can even find out if there is a litigation procedure against a certain Russian company or not says Spakow. According to this information the risk assessment is simple. International credit agencies make even more. The actual research begins after the identification and a check in the database. Our colleagues call the partner company

5 or talk to the chief accountant says Swetlana Simkina, managing director of Russian OOO Creditreform. In addition, other customers of the company will be asked about the payment behaviour. Analysts search newspaper archives for news: about scandals and employees being on strike because wages were not paid. This could be evidence of insolvency or awkwardness in the company. Currently there is high demand at German companies for such actual and individual credit reports not only for potential but also for existing customers. Research of agencies is not limited to financial situation only but also covers compliance related aspects. The trust has gone. Today German companies would like to insure themselves and the results of investigations are considered important says Swetlana Simkina. The latest trend: German companies check with international credit agencies whether their customers are not covered by sanctions. They rather apply to renowned and real Russian credit agencies, also to Russian branches of international credit rating companies such as Creditreform and Dun & Bradstreet/Interfax. These agencies use legally reliable sources. Registry court, tax office and statistical office of Russian Federation are belong here. Credit agencies offer their risk assessments based on this data. There are also numerous credit agencies in Russia which originally were small detective offices. Previously many of these employees worked for secret service, they were custom or police officers. These companies offer partly the information of other companies, such as export- or import statistics. But this is punishable in Russia. Who was convinced of the identity of his business partner and knows the credit rating risk, can look after the credit history as well. Russian Central Bank has published a list where the official protecting communities of credit insurance are specified: If the customer does not pay, it is possible to choose from hundreds of debt collection companies. The business is getting more serious. Export financing Commercial banks and specialised financial institutions offer various financing options for foreign businesses. The most important German creditors in the export line of business are Ausfuhrkredit-Gesellschaft (AKA) and Kreditanstalt für Wiederaufbau (KfW).