“Our cooperation delivery goods necessary credit insurance. Wait confirmation. Please can quick decision”, – this is nearly how translates in broken English reply of one big Ukrainian company to its foreign supplier. Unfortunately, language barrier is not the only one foreign partners have to cope with while dealing with Ukrainian companies.

“Our cooperation delivery goods necessary credit insurance. Wait confirmation. Please can quick decision”, – this is nearly how translates in broken English reply of one big Ukrainian company to its foreign supplier. Unfortunately, language barrier is not the only one foreign partners have to cope with while dealing with Ukrainian companies. And as long as majority of local companies are rigid in doing business in accordance with Ukrainian “rules”, they may just drop their hopes for advantageous finance conditions, saying nothing about financing of their commercial deals in principle.

To understand is to attract

Clear understanding of requirements that foreign partners suggest is vital for international finance attraction. And it’s no getting away from that. It’s even more vital today, when direct lending of commercial deals and projects through Ukrainian banks had become far less accessible. On the other hand, instrument of export finance gets more and more popular in the country as cheap, long-term and unsecured.

Obstacles, that company faces while involving international finance, can be relatively divided into three groups – state-level, company-level and entrepreneur-level. “More and more often IBcontacts experts receive requests from top-management of Ukrainian companies concerning finance involvements for new projects. For market players from such spheres as food industry, agriculture, livestock sector and renewable energy it arises most frequently”, – says Ms. Anna Pobedymska, Head of Project Department, IBcontacts.

Even foreign suppliers themselves estimate barriers on the way of international finance involvement as a main source of problems while cooperating with Ukrainian trade and industrial companies. “The absolute majority of issues, addressed to us by Dutch exporters working with Ukraine, are ones regarding different types of difficulties that arise while involvement of investment for bilateral commercial deals”, – Ms. Rihonda Berens, European markets advisor at Ministry of Economic Affairs, Agriculture and Innovation of the Kingdom of the Netherlands shares her experience.

Moreover, today foreign exporters fight hard for opportunity to provide their customers favorable conditions of commercial deals finance. “Before it used to be production quality to compete for, but now it’s opportunity to provide the most advantageous finance conditions that impacts trade volumes drastically”, – confirms Ms. Kateryna Barabash, Managing Director, IBcontacts.

For above mentioned question is highly urgent, on November 8, 2011, IBcontacts organized Second International Seminar: Trade and Project Finance for top-managers of trading and industrial companies (Kyiv, Ukraine). Among speakers during the event were specialists of worlds second biggest Export Credit Agency (ECA) Atradius; financing bank of the Netherlands Rabobank; experts of IBcontacts; representatives of Ukrainian confectionary factory ZhL and Mriya Agro Holding.

State – control

Sad to say so, but when entering international market of capital local companies can not avoid taking into consideration Ukraine’s low ratings. Ukraine’s position on international market directly impacts prices, timing, and other terms negotiated with foreign finance and insurance institutions (foreign banks and ECA). It is known that nowadays Ukraine is on seventh, the lowest, level according to OECD classification of countries, that all the foreign export credit agencies have to take into consideration.

“First of all, Ukraine occupies this position due to high political risks including frequent change of authorities, corruption, etc. For economic indicators of Ukraine allows it to take fifth place in pursuance to OECD gradation at least, which is where Kazakhstan is, by the way. Let me also note that Russia is on third place, which means more advantageous conditions of export finance for Russian trade companies”, – explains Ms. Barabash.

Bearing in mind such a low rating of the country, international finance costs Ukrainian companies 7-11% (ECA one-time premium) and 3-4% of annual interest rate of financing bank in case of direct financing of Ukrainian borrower company. In order to be fair it’s worth mentioning that even with such costs Ukrainian companies shall find it less expensive and more favorable (better timing, unsecured loans) to attract international financing then to take direct credit in Ukrainian banks.

The perfect scenario would be lobbying the improvement of country’s position on international arena by the state itself, represented by the Ministry of Economic Development and Trade of Ukraine, but de facto government just won’t do it. And it’s Ukrainian companies who pay double price. To go further, in Ukraine there is a whole range of projects deserving state guarantees because of social significance. But they never get any, and the reason is absence in our country of mechanism to achieve and, moreover, implement such guarantees. In this case we are talking not only about letter of support. The state has to undertake financial obligations of credit payment to foreign bank in case anything goes wrong.

There is one more remarkable tendency in international trade market concerning Ukrainian companies: problem of non-transparent and non-reliable financial reporting of our companies has now reached such scale that number of foreign experts regard it among country exposures. And it’s hard to dispute. Foreign partners are used to fact that financial information from our country differs and it makes Ukrainian side less trustworthy. For ECA and foreign financing banks this circumstance usually becomes a reason to reject financing of Ukrainian customers. 

Complex Therapy

Barriers on company and entrepreneur level are tangled inconceivably. The first thing to mention under this context is Ukrainian companies’ unawareness of procedure for export financing attraction. Top-management and financial directors often do not realize all the possible consequences of such unawareness for their companies. The most vivid example is the fact that it’s really uncommon when companies are ready and willing to expose necessary information about their activity requested by foreign ECA for credit check of Ukrainian commercial partner.

“When carrying out such checks for foreign ECA in Ukraine, our company accumulated remarkable information: only 10 local companies of 100, requested by ECA are aware of export financing; 40 companies of 100 are ready to provide necessary information for credit check after detailed description of procedure, possibilities and consequences of inaction. The rest 60 companies remain inaccessible and usually get low credit ratings which leads to rejection in export financing”, – says Mr. Andriy Leshkovych, Head of Credit Department, IBcontacts.

But why Ukrainian companies refuse to provide necessary data concerning their business even after explanation of the whole procedure and all the advantages? The answer is simple: a lot of local companies, while being aware about the necessity of such information exposure still can not share it due to its low quality or irrelevance. That’s why companies interested in participating in international capital market should think over preparation to this process immediately.

The high quality documentation for entering international market is vital for those companies in Ukraine participating in so-called “group of companies”. It’s not rare when company of a type provides financial information that is obviously not sufficient to attract financing of requested amount, but its participating in group changes situation to the opposite.

One more obstacle on the way to involve financing is inappropriate approach to international deals closure. This condition is so important, that the very realization of a deal depends on it. When registering and concluding a treaty all the demands of Ukrainian legislation for form of international contract must be taken into consideration. These demands are fixed in the Order of the Ministry of Economic Development and Trade of Ukraine # 201. “Taking into consideration specific features of Ukrainian legislation it is recommended to work out the legal side of the deal involving an expert on legal issues. For only such kind of specialist will help to avoid problems while implementation of a deal or get round difficulties in Ukrainian legislation and international law”, – says Mr. Oleg Dorofeev, Head of Legal Department, IBcontacts.

Here comes understanding

Regardless of above mentioned difficulties a lot of Ukrainian importing companies nowadays are successfully implementing their projects with the help of export financing instrument.

“As of 2008 “Mriya Agro Holding” involves funds through international financing schemes using services of ECA. Besides, while working with foreign ECA and financing bank directly, Ukrainian company has a set of clear, accurate, structured and predictable requirements from these market players”, – Ms. Olga Rybachuk, Head of Foreign Finance Division of “Mriya Agro Holding”, shares experience of foreign capital attraction during the Second International Seminar: Trade and Project Finance in Kyiv.

“Attraction of international financing by our company, while cooperation with foreign ECA and financing banks directly, i.e. without local bank involved, clearly demonstrates that this instrument is available not only for big market players in Ukraine, but to non top-100 companies as well,– commented Mr. Yevgen Gamov, General Director of “ZhL” confectionary factory. – Though we faced some kind of difficulties, independent implementation of the project had become a huge success for us and improved our international reputation significantly. Due to novelty of export financing instrument in Ukraine, our projects are being implemented under supervision of experts from the Ukrainian advising company – IBcontacts”.

International trade market players note fairly enough that addressing to ECA is not a problem for an importing company, more important is to trust one’s commercial partner and here main role belongs to reputation. It is not an overstatement to affirm that today Ukrainian companies, first of all, have to work for their reputation. Thereby, in future they will have their reputation working for them and only for them, but for international position of Ukraine in general.

Author: Iryna Vasylenko, Head of Communications Department, IBcontacts

Full article is available in IBobserver (December 2011- February 2012)