May 1999

by Philip H. de Leon

Since the August 1998 Russian banking crisis, trade transactions have been hampered by two interrelated factors: a lack of hard currency on the part of Russian banks and an unwillingness on the part of U.S. banks to confirm letters of credit originating from the NIS. The collapse of the GKO market and subsequent decisions on the part of the Central Bank of Russia to (1) not invest more hard currency into the banking system, (2) repudiate outstanding trade credit, and (3) issue a 90-day debt moratorium which was interpreted by some Russian private banks as tacit permission to default on foreign debt all resulted in the Russian banking system becoming a virtual pariah in the international trade finance community.

The most common method of payment for export transactions is the letter of credit (L/C). An L/C is a document issued by a bank on behalf of a buyer, whereby the bank commits itself to honor payments to the seller. This normally valuable and extremely common payment method becomes less available as the Russian banking system is facing a severe crisis and a loss of credibility. As a result, U.S. banks now are unwilling to accept L/Cs and other forms of trade credit or guarantees issued by Russian and NIS banks. Unfortunately, the other countries of the NIS have inherited the reputation of their neighbor, Russia. The crisis has essentially left one option open to U.S. exporters shipping to the NIS asking for cash in advance.

The EBRD Program
In January 1999, the European Bank for Reconstruction and Development (EBRD) took steps to improve the trade situation by launching the Extended Trade Facilitation Program (ETFP), which restructures the EBRD's existing trade facilitation projects for local banks in Russia, Belarus, Kazakhstan, Ukraine, and Uzbekistan into a single, streamlined program. The goal of the program is to stimulate international and interregional trade among all 26 EBRD countries of operations by providing a safe intermediary between banks. The EBRD will issue guarantees up to 100 percent of the nominal value of the underlying trade finance instrument on behalf of banks in the NIS for eligible trade finance transactions.

Essentially, the EBRD is filling a major gap in export transactions by strengthening the acceptability of the NIS L/C by substituting its own creditworthiness for that of the NIS bank. This creates a safe, fiscally sound intermediary between an exporter's U.S. bank and the NIS importer's local bank. The ETFP program, while not directly intended for use by a company exporting to the NIS, will assist export transactions by providing the guarantees desired by the exporter's U.S. bank before it will work with an NIS bank. The EBRD's ETFP was described as "an innovative step by a multilateral bank to reestablish trading lines between nations" by Deborah Conrad, a Small Business Administration (SBA) representative at the U.S. Export Assistance Center in Baltimore.

Can Your Bank Qualify?
The ETFP is open to banks registered in all countries of operations, including banks with majority foreign ownership and subsidiaries of foreign banks. All U.S. or foreign banks with an established record of trade finance operations with banks in the NIS are eligible to join the program as confirming banks. Generally, confirming banks must have a demonstrated track record of trade finance transactions or have demonstrated the capability to process confirmations of trade finance instruments with banks in the NIS. The participation of issuing and confirming banks is subject to EBRD approval and the signing of appropriate legal documentation. ETFP transactions are subject to various terms and conditions and a fee does apply.

For detailed information on the ETFP, please contact Stephanie Crossley, tel: + 44 (171) 338- 6524, Fax: +44 (171) 338-7380, or email: crossles@ebrd.com, or visit the EBRD website at www.ebrd.com.

Philip H. de Leon covers finance for BISNIS in Washington, D.C.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)