Overview of the credit risk and the credit insurance market in Russia

1- Can you give us an overview of the economic situation in Russia ?

It is not surprising to note that due to the international sanctions on trade with Russia the biggest country in the world is slipping into a recession. GDP growth in 2013 was down to 1.3% (3.4% in 2012) and is expected to end at ca. 0% for this year.

Another key problem is the strong dependence on the oil and gas sector and the decrease of the oil price recently. A strongly devaluated Ruble helps added to the problems so that the government has to tap into its extensive currency reserves in order to increase investments and to offset liquidity shortages due to sanctions.

Private consumption is only slowly declining as the unemployment rate in June 2014 was only 5%. Retail sales increased during the first half of 2014 for 2.7%.

However, businesses are facing increasing difficulties to raise bank financing. Thus liquidity shortages are showing their effects on payment behavior.

All in all Russia has the possibilities to come out of the current crisis even more strengthened than before.

2- How is Russia different from other Eastern European markets in terms of risk (especially credit risk) ?

Transparency is surely one of the major differences. Even though a lot of information about companies can be obtained – some even on-line – due to tax evading efforts the legal structures of companies can be fairly complex: most of the companies have established dedicated group companies for different purposes like production, purchasing, asset holding etc. Due to this an evaluation of the credit worthiness is often quite difficult and time consuming if adequate credit decisions are targeted. Another aspect is the very formalistic legal system. As opposed to common prejudices one can obtain correct verdicts at the different courts and corruption is not that prevailing anymore. However, the high bureaucracy and formalism is not to be underestimated and local experienced lawyers and an accountant are a must.

3- What is the situation of your main customers located in Russia? What are their main risks on this market and their needs in terms of risk coverage?

Due to increasing liquidity problems of Russian companies and the higher exchange rate foreign companies are asking for higher Ruble prices and are facing thus increasing competition especially from Chinese companies. It also leads to an increasing demand for longer payment terms and higher credit limits. Clients facing therefore a combination of the existing challenges for adequate risk evaluation of Russian companies, an increasing demand on the credit risk side and a more restrictive approach from insurers these days. Solutions? Our clients appreciate a lot our efforts as specialized broker with an own information agency supporting to obtain and keep adequate credit limits for them.

4- What are the different solutions available in Russia for credit insurance and financing compared to the rest of Europe?

The three global insurers Atradius, Coface and EulerHermes are in good competition with the Russian players Ingo-ONDD (a joint venture with the Belgian Credimundi), Soglasie and Exiar, the Russian state owned export credit agency. Together they offer in general the same types of coverage one would find in other parts of Europe.

Each of the private insurers has a lot of experience in different sectors and products that a local specialized credit insurance broker could point out and find the best match for his clients needs. A challenge is the special legal environment in Russia that needs to be respected: there are restrictions for example on frame contracts, bonus schemes or the legal obligation to insure risks that are generated in Russia through a Russian insurer.

However, Russian insurers are developing their range of products and clauses constantly, mainly driven by demands of international clients and their specialized brokers.

Factoring is compared to trade credit insurance well developed in Russia. More than 50 banks and specialized companies are offering their wide range of solutions. The main business is still recourse factoring – a mirror of the shortage of liquidity through banks. But non-recourse solutions are increasingly popular, including special offers for taking over the non-payment/insolvency risk without the financing function. There is an increasing competition between factoring and trade credit insurance – not the worst situation for clients.

While most factoring companies are bank owned smaller operations, a few of them have lately developed very smart new schemes that might be especially interesting for foreign groups in Russia. These factors also dispose of a fast network all over Russia and good know how.

5- What is your advice for a company that wants to start its operation in Russia?

Go for it – this market can be still interesting for western companies!

Our main advice would be: be prepared! Bureaucracy, the legal environment and the special cultural background are certainly challenges in Russia – but they can be managed with the right preparation and patience. Make use of service providers who know their way around the numerous authorities regarding setting up an operation/infrastructure, applying for licenses, hiring staff, opening bank accounts and last but not least: attracting clients. Adapting western credit management to Russian standards/requirements helps to find the right ones – concerning their ability and willingness to pay. For managing the risk – especially these days – credit insurance is essential. But also here one needs to look out, so ask the local specialists.