BANKING: High time for Ukrainian exporters to discover trade finance opportunities

Ukraine has the banking tools to fuel further export expansion but they remain underutilized

BANKING: High time for Ukrainian exporters to discover trade finance opportunities
About the author: Vladislav Berezhny is Director of the Correspondent Banking and Structured Finance Department at Credit Agricole in Ukraine
Vladislav Berezhny
Sunday, 15 October 2017 17:52

Ukraine’s banking sector currently offers a wide range of sophisticated contemporary services but in some areas, the available banking tools remain underutilized. One of the most striking examples is the lack of awareness regarding the advantages of trade finance services. Given Ukraine’s growing global reach and a strong economic emphasis on international trade, trade finance could play a major role. However, it remains largely overlooked. 

Ukraine’s agricultural sector offers insight into the potential for further export growth. The sector is currently experiencing steady increases in production. For every category of agricultural produce, Ukraine is seeking to expand yields, improve quality, and boost export volumes. The foreign currency revenues generated by increasing exports of grains, oils and meats are having a positive impact on the Ukrainian economy as a whole, driving growth and creating much-needed stability.

This success reflects the relative openness of the Ukrainian economy and the country’s large international trade turnover. Ukrainian imports and exports actually exceed GDP. In other words, more than half of the products produced in Ukraine are bound for export. Similarly, over 50% of the goods required on the domestic market come from international markets.

Ukraine’s agribusiness sector is at the forefront of the country’s export efforts and at first glance appears to be a major beneficiary of globalization processes. The high quality agricultural products Ukraine is able to produce at competitively low prices have found enthusiastic markets all over the world. Nevertheless, Ukraine’s foreign trade remains inefficient and this applies just as much to the relatively buoyant agribusiness sector as to other areas of the economy.

The key stumbling block hampering Ukraine’s international trade is financing. As any importer or exporter will tell you, the key to the successful development of the business is access to finance. This is not just a matter of loan availability. Traders seek regular access to affordable financing during the trading process. In addition to this crucial financial role, banks can also help to reduce the risks inherent in any transaction with regard to non-delivery, non-payment or product quality issues. This is the essence of trade finance. Such banking services are ideal for the Ukrainian market but Ukrainian companies have yet to appreciate the advantages they offer.

This shortcoming is evident in the current interaction between Ukrainian businesses and the banking sector. At present, Ukrainian banks are simply not sufficiently involved in business financing. Total loan volumes barely amount to 30% of GDP, whereas the global norm is parity. Indeed, in many of the world’s most developed economies, loan volumes are far greater than GDP.

This is not down to any fundamental flaws. Ukraine’s international traders have all the prerequisites to serve as the ideal clients for the country’s banks, which in turn could create the conditions for growth. The life cycle of transactions tends to be short, while contracts revolve around finished goods or products produced on a regular basis and with demonstrable market demand. Due to these favorable factors, the risks involved are much lower than those associated with investment projects. Banks also gain from the fact that international trade uses common documentation standards and delivery conditions, with the nature of financial communications dictated by the practicalities of the SWIFT system.

What specific benefits can Ukrainian banks offer to Ukrainian businesses engaged in international trade? Exports are the obvious place to start. Loans in Ukraine are much more expensive than in developed and stable economies. It therefore makes sense for the bank and the client to seek ways of transferring the financing of international trade transactions to a more convenient jurisdiction. This can also help to secure stability and enable companies to expand into new markets effectively.

In order to achieve these goals, it is important to analyze all the details of the export transaction in question: what is the country of delivery, where is the buyer company registered, what is its financial status, and which banks does it cooperate with? Based on the answers to these questions, you will be able to plan financing options and ask a new set of specific questions tailored to meet the specifics of the transaction. Does the buyer have an existing credit line with a bank? Is the buyer’s bank ready to issue payment guarantees or letters of credit? Is there a suitable bank ready to finance the transaction given the presence of a guarantee or letter of credit?

Likewise, banks are able to work with clients to reduce the cost of imports. In order to achieve this goal, it is important to consult with the bank prior to signing any contractual agreements. This is worth emphasizing because once documentation has been signed clients often find themselves constrained by contractual obligations and no longer have the time or opportunity to seek out the best possible commercial apparatus.

Importers should analyze which bank or banks the seller uses and explore the possibilities of deferred payment with the help of a letter of credit, guarantee or bill. The importer’s Ukrainian bank should be able to offer a competent assessment of whether its partner banks abroad can provide such instruments. It is also well worth investigating whether there are export insurance programs available in the country of origin, and exploring whether these are applicable.

Other things being equal, any transaction using trade finance should be significantly cheaper than the price of a standard credit. Based on international experience, the savings compared to direct borrowing could range from 20% to 50%. This makes trade finance a potential game changer for the Ukrainian market. It remains a relatively unknown quantity, but as Ukrainian companies continue to broaden their global horizons, trade finance might have a much more prominent role to play.

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