RUSSIA: COUNTRY COMMERCIAL GUIDE

VIII. TRADE AND PROJECT FINANCING

Brief Description of Banking System

The Russian commercial banking system is only five years old, but it has advanced rapidly since its inception. There are currently over 2500 banks making up the banking system, with the majority concentrated disproportionately in Moscow, St. Petersburg and other large cities. About one-third of the banks in Russia derive from the old state banking system, while the rest were newly created, most as late as 1991. The 20-30 largest banks are approaching Western standards and offering more sophisticated banking services. However, the vast majority of banks are small and only 10 percent has a capital base exceeding $1 million. Many banks were founded in 1991-92 by enterprises as an expedient way to funnel directed government credits and still have the enterprise or person which founded them as the main depositor and borrower.

More than 1000 Russian banks are authorized to deal with foreign currency accounts, and close to 300 of these banks have general licenses allowing them to conduct an entire range of banking transactions with foreign currency in both domestic and foreign markets. Foreign exchange operations account for a large part of the business of these banks. The official Central Bank payments, settlements and clearance system is still in the process of development, although transactions in Moscow can now clear in as short as several days.

Cross-border, international financial transactions are now feasible as well. More than 150 Russian banks are members of the Society for Worldwide Interbank Financial Telecommunication (SWIFT), and others have correspondent relationships with U.S. and other foreign banks that allow for electronic fund transfers between Russia and other countries.

In October 1993, Citibank and Chase Manhattan Bank became the first U.S. banks to receive general licenses to open subsidiaries in Russia. Other Western banks operating in Russia include Credit Lyonnais (St. Petersburg), BNP/Dresdner (St. Petersburg), and Bank of Austria (Moscow). A November 1993 Presidential decree imposed a two-year moratorium on the operations of foreign banks in Russia, but further decrees issued in June 1994 and April 1995 have now confirmed that the originally-licensed foreign banks have full banking powers. A commercial banking bill currently awaiting approval in the Duma will introduce a reciprocity requirement prohibiting a new foreign bank from receiving a license until a Russian bank is allowed to enter the country from which the foreign bank originates.

Currency inconvertibility, which used to be a major concern for Western traders and investors, has largely been overcome by the opening of a number of currency exchanges and direct interbank trading throughout Russia. The largest of these is the Moscow Interbank Currency Exchange (MICEX), which operates daily. The introduction of a Moscow City turnover tax on MICEX operations has driven away at least one-third of MICEX business operations, primarily to the off-exchange currency market. U.S. companies are reporting that currency convertibility can be easily arranged through commercial banks in Russia.

Nonresidents, including foreign individuals and foreign companies that do not have a local subsidiary or joint venture, can open foreign currency accounts with authorized banks in Russia. Funds in these accounts can be transferred abroad without restriction or exchanged for rubles on the Moscow Interbank Currency Exchange (MICEX) or through interbank mechanisms. Foreign currency held in these accounts may be obtained from various sources, including resources transferred from abroad; payments from residents and non-residents for goods and services sold in Russia; repayment of liabilities to account holder; interest paid by authorized banks; return on investment on Russian territory; and income from other nonresident accounts with authorized banks. In a new development, nonresidents can also now open ruble accounts for maintenance of domestic operations and servicing of export-import activities and for investment activities, including purchasing of privatization vouchers or shares of stock. However, rubles deposited in the current operations accounts (so-called "T" accounts) may not be converted back into dollars.

The main Russian Government bank involved in trade and investment issues is the Bank for Foreign Trade (Vneshtorgbank, or VTB). Although VTB is 97 percent owned by the Russian government, the bank does have commercial functions. VTB is the agent of the Russian Government for drawing foreign credits for fulfillment of investment projects. In addition, another foreign trade bank, Vneshekonombank (VEB), which was declared legally bankrupt at end-1991, still acts as an agent for the Russian Government in international banking and to service the foreign debt of the former Soviet Union.

Currency Control & Regulation Issues

In the fall of 1993, the Russian Central Bank issued regulations that went into effect on January 1, 1994 banning the use of hard currency in cash transactions. Under these regulations, businesses in Russia are no longer permitted to accept cash payments in dollars or other hard currency, a practice which had become widespread in major cities as consumers and storekeepers sought the convenience and security offered by a more stable and trusted currency. Non-cash transactions (e.g. credit and debit cards and checks) are not affected by the new regulations, so establishments that previously accepted payment via credit cards can continue to do so. Stores that sell imported goods are still allowed to mark prices in dollars. At the time of purchase clerks convert the dollar price into rubles. Through the exchange rate they employ, merchants pass on the additional costs they will incur when they convert the rubles back into hard currency to restock inventories.

Russian resident entities are still required to convert 50 percent of their foreign-currency revenues from exports of goods and services. The foreign currency must be sold through MICEX or any authorized foreign exchange dealer. There has long been discussion in Russian government circles of increasing the mandatory exchange obligation from 50 to 100 percent to further strengthen the ruble, but no such measures have been enacted.

The Moscow City Government enacted a 0.1 percent tax on all foreign exchange transactions on the Moscow Interbank Currency Exchange (MICEX) effective March 1, 1994. The result has been that a number of banks have shifted their exchange activity from MICEX to the off exchange market. Currently, the entire exchange-based market in Russia accounts for anywhere from ten to 30 percent of the average daily exchange volumes, depending on volatility. Just as on the MICEX, the CBR now intervenes in the off-exchange market to narrow the spread between the two markets exchange rates. In an effort to limit the outflow of capital, the Central Bank introduced a computerized export control system to monitor the flow of goods out of the country and the flow of hard currency bank in. The system, which unites for the first time banking and export controls, requires exporters to obtain a special "passport" from a commercial bank, which enters the trade in a computer database. Customs agents register the actual export of the goods in the database and the commercial bank completes the cycle by entering receipt of the payment. Strategic exports, including energy and several types of metals, were subject to the new regime as of January 1, 1994. The system took effect for all other types of goods on March 1, 1994.

Availability of Financing

The financing environment in Russia remains problematic as the economy continues to experience great difficulties, and the Russian government and banking system are able to provide little trade and investment financing either to Russian companies or foreign firms. However, a number of bilateral and multilateral financing programs, outlined below, are open for Russia which could provide more opportunities for traders and investors.

How to Finance Exports/Methods of Payment

The fact that the Russian Government has been unable to date to resolve the issue of outstanding commercial arrears to western companies continues to have a negative impact on the environment for trade financing. Beginning in 1989, Soviet foreign trade organizations began have difficulty making payments for goods they had purchased under contract from U.S. and other Western companies. These cases all involved imports under open accounts, which had been the standard way of doing business in the Soviet Union for decades. When pressed for explanation, the foreign trade organizations claimed sufficient hard currency had been deposited in their accounts at the Bank for Foreign Economic Relations (Vneshekonombank, or VEB, then the only Soviet bank authorized to deal in hard currency), while VEB claimed the FTOs did not have sufficient funds to cover the contracts. The U.S. Government began advising U.S. companies only to sign contracts in the Soviet Union, and then Russia, on the basis of letters of credit or prepayment.

Since 1990 when U.S. companies first began reporting payments delays, the Department of Commerce and other U.S. Government agencies have interceded on behalf of more than 70 companies collectively owed more than $350 million. At the end of 1991 the situation grew worse with the effective collapse of Vneshekonombank. In addition to the arrears problem, VEB stopped payment on its letters of credit and froze all hard currency accounts. Currently, according to VEB officials, commercial arrears stand at $5 billion, frozen accounts at $10 billion, and unpaid letters of credit at over $1 billion.

In December 1992 President Yeltsin signed a decree announcing that hard currency-denominated bonds with a maturity of three to 15 years and an interest rate of three percent would be issued to account holders. The Russian Government began issuing bonds in 1993, and the first tranche came due in mid-May 1994 and were paid according to schedule. Joint ventures whose funds were frozen will receive payment in three tranches over six years from the date of issuance, and foreign trade organizations (who owe U.S. and other Western companies) will receive their bond payouts in two tranches over fifteen years. Estimates are that bonds have been issued for sixty percent of the accounts.

Bankers in Russia and the West are actively trading billions of dollars of VEB bonds. Reports indicate that of the sixty percent of VEB bonds which have been issued, about $1 billion have been sold on the market. If the market for VEB bonds does grow, it may provide a mechanism for Western suppliers pursuing repayment of their commercial arrears. However, many suppliers are reluctant to accept the VEB bonds as repayment for outstanding commercial debt.

In November 1993 then-Deputy Prime Minister Shokhin announced that the Ministry of Foreign Economic Relations had been given the authority to negotiate the rescheduling of private commercial debts on a country-by-country basis. Negotiations would cover unpaid transactions, but not frozen accounts or unpaid VEB letters of credit. More recent reports suggest that the Ministry of Finance may be taking the lead on repayment of private trade debts with plans to negotiate a single arrangement for all foreign companies.

The result of this payments quagmire is that foreign companies now generally trade with Russian companies only on the basis of prepayment. Letters of credit are issued by Russian banks only in those cases where the Russian customer can deposit the requisite funds in its account ahead of time, andWestern banks generally will only confirm letters of credit on that basis as well.

The financing opportunities that do exist primarily are through Western government trade and investment programs or new programs under international financial institutions.

Types of Available Export Financing and Insurance

U.S. Export-Import Bank

There are several U.S. Government trade financing programs in place which can be of assistance to U.S. companies exporting to and investment in Russia. The U.S. Export-Import Bank provides short- and medium-term insurance, loan and guarantee support for transactions involving VTB and VEB, acting on behalf of the Russian Federation. Before processing applications for sovereign risk transactions, Eximbank requires clearance from one of these banks. A confirmation from the Ministry of Finance is needed for medium-term transactions. As of June 1995, Eximbank's overall sovereign risk exposure was approximately $700 million. In addition to sovereign risk transactions, Eximbank has extended guarantees on a $15 million credit line to Tokobank.

OPIC

In an agreement ratified at the June 1992 Summit, the U.S. Overseas Private Investment Corporation (OPIC) is authorized to provide loans, loan guarantees, and investment insurance against political risk to American companies investing in Russia. OPIC generally insures against three political risks: expropriation, political violence and currency inconvertibility. In June 1995 OPIC announced that it would begin offering currency inconvertibility insurance on a limited basis.

In 1994, to meet the demands of larger projects in Russia (and worldwide), OPIC doubled the amount of insurance and quadrupled the amount of finance support -- to $200 million in each case -- it can commit to an individual project. Through the midpoint of fiscal year 1995 (March, 1995), OPIC had committed over $2.2 billion in finance and insurance to 41 projects in Russia. Total investment into these projects should reach $3.4 billion. In December 1994, OPIC also committed to provide up to $500 million to support defense conversion projects.

In addition to its support for 36 individual projects, OPIC is providing support for 5 investment funds, 4 of which can invest throughout the NIS as well as in Russia. In Russia itself, OPIC has committed to providing loan guarantees for more than 70 percent of the $155 million capitalization of the Russia Partners Fund, a direct investment fund for Russia organized and managed by a subsidiary of PaineWebber. The State Investment Corporation of Russia also contributed $5 million of the total capitalization. The fund will be able to invest between $2 and 15 million in Russian companies that are hard-currency generators or involved in export production businesses across a broad spectrum of industries. The fund will also provide capital for expansions of successful projects.

For more information on OPIC programs, call 1-800-424-OPIC or (202) 336-8799, or fax (202) 408-9859.

MIGA

The Multilateral Investment Guarantee Agency, which is part of the World Bank group, seeks to promote international private investment by providing political risk insurance for eligible foreign investors. Its guarantee program insures investors against losses from currency transfer, expropriation, war and civil disturbance and investment-related breach of contract by host governments of developing countries. MIGA cooperates closely with OPIC and other national investment insurance agencies as well as with private insurers to coinsure or reinsure eligible foreign investments.

Russia became a member of MIGA in December 1992. MIGA cooperates with the IFC and IBRD in supporting the World Bank Group's Foreign Investment Advisory Service, which has been providing assistance to the Russian Agency for International Cooperation and Development.

TDA

In addition, the U.S. Trade and Development Agency (TDA) offers funding for Russia. TDA provides funding for U.S. firms to carry out feasibility studies, consultancies and other planning services related to major projects. While historically TDA projects have been public sector projects, planned by government ministries or agencies, increasingly TDA now considers both public and private sector projects. Where appropriate, TDA may provide funding for training programs, technical seminars, conferences, or orientation visits to the United States. Since it began operating in Russia in early 1992, TDA has funded about 85 feasibility studies and other activities totaling more than $28 million. For more information on TDA programs, please contact Daniel Stein, Regional Director, at (703) 875-4357 or by fax at (703) 875-4009.

USDA

The U.S. Department of Agriculture specializes in financing agricultural exports and has nearly $6 billion in annual authorizations, the bulk of which is provided through the Commodity Credit Corporation (CCC). Historically, the CCC has financed large amounts of wheat and other agricultural commodities to the NIS. CCC operates an export credit guarantee programs known as GSM-102 which guarantees market-rate financing based on irrevocable letters of credit from an eligible foreign bank. USDAa lso operates a number of food aid programs including the Food for Progress Program that comprises mostly medium-term concessional credit sales of agricultural commodities. Since 1991, the CCC has guaranteed over $5 billion in private U.S. bank loans to the NIS, which have helped facilitate purchases of over 33 million tons of agricultural commodities.

Project Financing

EXIMBANK

In addition to its export financing activities, Eximbank will also consider transactions with security based on production payments or hard currency export sales by Russian industries, as well as applications involving limited recourse project financing in the Russian Federation. Integral to Eximbank's project finance is a Project Incentive Agreement (PIA) signed in December 1993 which calls for the Russian Government to recognize Eximbank's interests in specific projects and to pledge non-interference with project operations.

In July 1993 Eximbank signed an Oil and Gas Framework Agreement under which Eximbank may provide financing for $2 billion or more for U.S. exports of oil and gas production equipment and services to rehabilitate and revitalize the Russian energy sector. Under the Framework Agreement, Eximbank will finance equipment and services for Russian oil and gas production facilities which are now closed or producing below capacity; no new facilities will be eligible. Repayment security will be provided by hard currency receipts from oil export contracts deposited in escrow accounts outside Russia and dedicated to service debt owed to Eximbank. Repayment terms are five years (or possibly longer if appropriate) and the minimum amount of financing for each transaction is $25 million. As of June 1995 Eximbank's exposure under the Oil and Gas Framework Agreement was $1.3 billion. For more information on Eximbank programs please contact (202) 566-8990.

USAID

The U.S. Agency for International Development (USAID) receives funding for assistance activities in the Newly Independent States (NIS) under the Freedom Support Act. Working in conjunction with other U.S. Government agencies, USAID provides financial and human resources to Russia in support of three strategic goals: o Economic Restructuring -- Fostering the emergence of a competitive, market-oriented economy in which the majority of economic resources are privately owned and managed; o Democracy -- Supporting the transition to transparent and accountable governance and the empowerment of citizens through democratic political processes; and o Social sector restructuring -- Strengthening the capacity to manage the human dimension of the transition to democracy and a market economy and helping to sustain the neediest sectors of the population during the transition period.

By the end of 1994, USAID had contributed nearly $1.3 billion in technical and project assistance overall, with more than half targeted on the first goal, the emergence of a market economy. An additional $250 million is being programmed in 1995 to continue key activities. Economic restructuring support seeks: the transfer of state-owned assets to the private sector; the establishment of a policy, legal and regulatory framework conducive to competitive, private sector growth; the development of private sector enterprises; the establishment of a fiscal regime appropriate to a market economy; a competitive, efficient private financial sector; and the sustainable use of natural resources, a principle source of Russia's wealth. Mass privatization of more than 14,000 medium to large scale enterprises has opened the door for new investment in businesses with some experience and track records. Business service centers and other business service firms established in several cities under USAID auspices have catalyzed the start-up of hundreds of new businesses as well, provided training, consulting services and support in the form of business incubators, leasing programs, etc. A Commodity Import Program, intended to familiarize Russian industries with technology for energy and environmental conservatism, is just getting rolling in mid-1995 but should open up new opportunities for U.S. exporters.

For general information on the NIS programs and other USAID initiatives, contact USAID's Program Office at (202) 647-8094 or USAID's Center for Trade and Investment Service at 1-800-USAID-4-U or (202) 663-2660, by fax at (202) 663-2670. USAID also has a fully staffed office in Moscow and can be reached at by phone at 7-095-956-4281 or 956-7092 or by fax at 7-095-956-7093.

EBRD

The European Bank for Reconstruction and Development is a multilateral financial institution that lends and invests exclusively in the countries of central and Eastern Europe and the NIS. EBRD supports projects that help develop the private sector, foster privatization, increase direct foreign investment, create and strengthen financial institutions, restructure the industrial base, build a modern infrastructure, promote small and medium-sized businesses, and improve the environment. EBRD's charter mandates at least sixty percent of its lending for the private sector and for privatization of state-owned enterprises. The remaining resources will fund public infrastructure and environmental projects that promote private sector development.

The EBRD began its operations in the Russian Federation in September 1991. Within the rapidly growing private sector of the country, the Bank's strategy concentrates on key areas where it can have the greatest impact using limited resources. The total cost of a typical project is more than $15 million, with the EBRD funding up to 35 percent. As of May 31, 1995 the Bank had approved $1.4 billion of financing for 43 projects in Russia. Nearly 40 percent of these funds were for oil and gas projects. The remaining projects were spread out over a variety of sectors, including energy, agribusiness, telecommunications, banks, aerospace and transport.

A key component of the EBRD's strategy is to help develop local banking and financial institutions. By channeling financing through Russian banks, small and medium-sized enterprises (SMEs) are able to obtain financing at rates and maturities not available before. Together with the World Bank, the EBRD is developing the Financial Institutions Development Program, which will involve up to 40 Russian on-lending to recently privatized enterprises.

Strengthening private sector development has meant increasing post-privatization efforts, continuing support for the implementation of privatization and expanding the support of SMEs. To implement this strategy, the Bank has developed indirect financing methods, using local financial institutions as intermediaries for Bank financing. For example, 5 Regional Venture Funds are in place (with 6 more in the planning stages) to provide new capital to help restructure privatized enterprises, with parallel technical assistance for project preparation, implementation and monitoring.

Firms seeking involvement in EBRD-funded projects may contact Sarah Shackelton in the U.S. Executive Director's Office in London at 44-171-338-7532 or by fax at 44-171-338-6487.

U.S.-Russia Investment Fund

(formed as a merger of the Russian-American Enterprise Fund and the Fund for Large Enterprises)

The U.S.-Russia Investment Fund is a merger of the Russian-American Enterprise Fund and the Fund for Large Enterprises, which were both funded by the U.S. Agency for International Development. As a result of the merger, there are two separate functions of the Fund: (1) to assist small and medium-sized privatized or privatizing Russian enterprises (up to 2,500 employees) by providing equity investments and loans, technical assistance in limited circumstances, and trade financing through short-term loans; and (2) to offer financing packages including equity investments, loans and technical assistance and training to medium and large sized enterprises (from 1,000 to 10,000 employees). For more information contact the Fund's New York office at (212) 668-8391 or the Moscow office at 7-095-929-9888 or fax 7-095-929-9828.

Defense Enterprise Fund

The 1994 Defense Appropriations Bill authorizes the Department of Defense to establish a $40 million Demilitarization Enterprise Fund (DEF). DEF will promote private sector investment and restructuring in the Russian defense industry. The DEF has been set up as a private nonprofit corporation with a board of directors appointed by the President.

Investments will be diversified among smaller enterprises or spinoff enterprises derived from larger defense enterprises, large enterprises that have converted or are in the process of converting, and start-ups formed by formerly defense or military personnel. For more information contact Mr. Arthur Sweeney at the Demilitarization Enterprise Fund at tel. (804) 281-2129 or at fax (804) 281-2245.

IBRD

The International Bank for Reconstruction and Development (IBRD), part of the World Bank group, makes long-term loans at market-related rates primarily to developing nations, and in recent years its scope of activity has expanded to include Eastern Europe and the NIS. The IBRD works to promote broadly based economic growth and frequently focuses on structural adjustment, sectoral reform and individual project lending. Typically the Bank does not finance the entire cost of a project. Rather, it finances the components of a project purchased with foreign exchange, which on average is about 40 percent of the total project cost. Each project may cover a wide variety of sectors and can involve anywhere from one to hundreds of separate contracts of export business opportunities for suppliers worldwide.

Russia became a member of the IBRD in June 1992. The IBRD's financial support and policy advice will continue to focus on structural and institutional reforms to promote economic stability and self-sustaining growth. Priority will be given to restoring the energy and agricultural sectors, privatizing productive enterprises, developing a functioning commercial financing system and developing a social safety net to protect the most vulnerable groups. For more information on IBRD activities in Russia please contact Tom Kelsey at (202) 482-4332 or (202) 458-0118 or by fax at (202) 477-2967.

IFC

Russia also became a member of the International Finance Corporation in April 1993. The IFC, an independent member of the World Bank Group, is the largest source of direct project financing for private investment in developing countries. IFC invests in commercial enterprises of varying industries by means of loans and equity financing in collaboration with other investors. IFC does not require government guarantees of repayment. In addition to funding, IFC also provides financial, legal and technical advice to private enterprises.

IFC has been involved in a number of projects in Russia, including two oil and gas projects, a credit line to Russia's leading commercial bank and funding to a venture capital fund to invest in privatized enterprises. The IFC has also been particularly active in assisting Russia in its privatization and economic restructuring efforts. Companies wishing to make project proposals or to obtain additional information should contact the IFC's Business Development Department at (202) 473-1950.

There are a number of other private sources of financing available for Russia. For a more complete listing please contact the BISNIS office in the U.S. Department of Commerce at (202) 482-4255.

List of Banks with Correspondent U.S. Banking Arrangements*

Moscow

Avtovazbank:

Chase Manhattan Bank
Bank of America
Credit Moscow Bank:
Republic National Bank of New York
Bank of New York
American Express Bank
Credo Bank:
Bank of America
Republic National Bank of New York
Finist Bank:
Bankers Trust
Citibank
Inkombank:
Republic National Bank of New York
Bankers Trust
Citibank
BankAmerica
Moscow Business Bank:
Bankers Trust
Republic National Bank of New York
Bank of America
Rossiyskiy Credit Bank:
Citibank
Sberbank:
Bank of New York
Stolichniy Bank:
Bank of America
Bank of New York
Republic National Bank of New York
Tokobank:
American National Bank and Trust Co. of Chicago
BankAmerica
Bank of America
Bank of New York
Chase Manhattan Bank
Republic National Bank of New York
United States National Bank of Oregon
Vserossiyskiy

Birzhevoy Bank:

BankAmerica Republic National Bank of New York
St. Petersburg

Bank St. Petersburg:

Bankers Trust
Bank of New York

Promstroybank:

Bankers Trust
Bank of New York
Baltiyskiy Bank:
Bankers Trust
Bank of New York
Petrovskiy Bank:
Bankers Trust
Bank of New York
Russian Far East

Dalnevostochny Bank:

Bank of America
U.S. Bank (Oregon)
Dalrybbank:
Riggs Bank
First Interstate Bank (Oregon) First National Bank of Anchorage
Evrobank:
Bank of America
First Interstate Bank (Oregon)
Vneshtorgbank:
U.S. National Bank of Oregon
Regiobank:
U.S. Bank (Oregon)
*This list is not exhaustive.

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