Historic news this August, as Russia officially became a member of the World Trade Organisation (WTO) after 20 years of negotiations and debates over preferential treatment for domestic manufacturers. A spate of major deals involving its oil, petrochemical and metals industries no doubt greased its path to WTO accession.
Putin has since done something of a diplomatic U-turn and is selling himself as a free-trade pioneer. In advance of hosting an Asia-Pacific Economic Cooperation (APEC) summit in Russia’s east coast city of Vladivostok, he told The Wall Street Journal Asian edition: “The very principle of free trade is undergoing a crisis. We regularly observe recurrences of protectionism and veiled trade wars instead of lifting barriers. It is imperative that we develop common approaches.” Presumably this signifies his intention to start dismantling some of the 55 border barriers, five import restrictions and 23 other protectionist measures Russia initiated in the 2011-12 period. He continued: “Membership in the WTO gives us the ability to participate more broadly in setting the global trade rules – an issue that has been a focus of attention for APEC in the past.” His inclusive vision includes a greater role for regional groupings: in Eastern Europe, a Customs Union and Common Economic Space between the former Soviet republics of Russia, Belarus and Kazakhstan; in return, the US is pushing hard for a Trans-Pacific Partnership.
State role in credit insurance
Europe is also looking to liberalise trade restrictions, specifically those regarding short-term credit insurance. Currently, EU governments are prohibited from intervening in ‘marketable’ regions – those where the risk level and premium is not high enough to deter private insurance companies. However, in the current economic conditions, many argue that there is little distinction between ‘marketable’ and ‘non-marketable’ regions. The EU has initiated a second round of consultations on freeing up the legislation, which triggered a range of responses from member states and corporations.
The European Banking Federation, which with 5,000 members represents 80 percent of the total assets and deposits in the EU and EFTA, also supported the initiative because it felt that “seismic shifts in market conditions” had made many short-term risks “un-marketable”.
A statement from the Federation of German Industries (BDI) acknowledged the primacy of competition between private insurers, “as the market solution is always the best one for the consumer.” But it asserted that in cases of market failure “we need a predictable and reliable state-backed export credit insurance, also in the short-term sector.”
Credit insurance expert Peter Solomon, who represents export credit agency Aon, spoke exclusively to The New Economy: “From a UK perspective it’s not really necessary. The private market is meeting the needs of policyholders. In other markets where the credit levels are not as satisfactory, it would certainly be of assistance.” Italy was definitively in favour of the change. It wanted to reduce restrictions based on arbitrary categorisation – ST vs. MLT, domestic business vs. exports – and for ECA intervention to be considered whenever it is “complementary to the market.” Though the state would not be allowed to monopolise the insurance market. For each transaction, ECAs would provide terms and pricing “in line with the market”, as well as a transparent accountancy process. The prospect of state authorities being accused of subsidising transactions was marked as something to be avoided at all costs.
A guarantee system is already installed in France, by which the government offers a service of ‘assurance’ that commercial banks’ medium- and long-term credit financing arrangements are concordant with market rates. It would not be too big a step for authorities to extend this scrutiny inwards to their own insurance arrangements. The European Banking Federation, which with 5,000 members represents 80 percent of the total assets and deposits in the EU and EFTA, also supported the initiative because it felt that “seismic shifts in market conditions” had made many short-term risks “un-marketable”.
Russian companies were prolific in negotiating contracts in the first half of 2012, with 11 outstanding deals in March alone. The European Bank for Reconstruction and Development (EBRD) collaborated with Sberbank on a $994m deal for petrochemical company RusVinyl, showing institutional European interest in funding development in the region. In March 2012, Trade Finance magazine applauded aluminium producer Rusal for forging a new Russian pre-export finance record, (Power Shares in Developed Markets). After building on the debt restructuring agreed in December 2001, the company recovered sufficiently to attract major global interest. While international financiers footed the $3.75bn ‘Tranche A’ component, Russian lenders funded Tranche B for $1bn.
Top law firm Clifford Chance negotiated for the lenders, while Cleary Gottlieb and Hamilton stood for the borrowers Rusal. With a wealth of other deals by companies including Taneco, Ferrexpo, VEB/Aommoni, Acron, Metalloinvest and Kaluzhskiy/VEB, Russia has earned its place in the trade establishment. A project notable for the range of national interests represented by the backing export credit agencies (ECAs) is the $37.4m in finance for Ales Enerji’s Turkish power project. Danish and French ECAs provided 40 percent of the budget for the purchase of aero-derivative gas turbine generators to be installed in a new Turkish power plant on the Aegean coast. The remaining 60 percent was backed by the US-owned Ex-Im Bank, largely because there was residual benefit on the export side to GE Packaged Power, guaranteeing employment for the American manufacturers’ 525 employees in Ohio and Texas. JP Morgan’s global trade unit, who provided much of the finance, pointed out that other US producers also benefited from the deal it negotiated: Wahlcometroflex, a GE supplier based in Maine, provided
an exhaust bypass.
Unsurprisingly, Germany remained a big hitter in the trade finance arena, forging new links with South Korea. Shipping company Hapag Lloyd gained assistance from five banks to arrange a $925m loan underwritten by Korean export credit agency K-sure, to finance future payments on 10 vessels built by Hyundai Heavy Industries, which is also based in Korea. These financial bonds will endure long into the future. The Ukrainian company Naftogaz muscled in on Russian gas reserves, securing a jumbo credit line of $2bn from Russia’s Gazprombank to purchase supplies.
Innovating in administration
Deutsche Bank helped solve the administrative glitches in Sri Lanka’s massive conglomerate John Keells Holdings (JKH), the largest listing on Colombo’s stock exchange. Previously, the process flow for supply-side payments was run separately from other payment workflows, through JKH’s subsidiary Infomate. Considering the range of services and sectors the company incorporates, this was just not efficient. By linking its existing processing system to Deutsche Bank’s enterprise resource planning platform, JKH can oversee all its transactions: in food and beverages; transport and leisure; plantation and investment services; business process outsourcing; financial services; and property developments.
Global financial messaging service Swift has selected its 2012 partner for best practice in corporate trade and supply chain finance, awarding it the coveted SwiftReady label. Surecomp’s multi-bank corporate finance solution COR-TF has won recognition for its provision of automated handling of import and export letters of credit. The COR-TF platform reportedly reduces business risk through removing potential for human error. It also allows for automated handling of outward and inward collections and guarantees. Real-time information management is included in the package, presumably through use of front-line technology.
Sector to watch
Iron ore reached a high price in 2011, meaning that this year it presented an attractive investment prospect. Compare the two deals recently negotiated by Swiss iron ore mining company Ferrexpo, which saw a record-breaking 65 percent revenue increase in the first half of 2011. In 2010, Deutsche Bank secured a $350m loan with a margin of 550bps, with an 18-month grace period amortised over 24 months, for Ferrexpo’s Ukrainian subsidiary. This year, a coalition of ING, Société Générale CIB and UniCredit negotiated a Pre-Export Financing deal priced at just 225 bps, sealed in September just before the market entered a downturn.
A report by Ernst and Young on projected changes in the period 2012-20, Trading Places: The Emergence of New Patterns of International Trade, did foresee the expansion of manufactured goods, specifically the machinery and transport sector, as making the largest contribution to trade over the next 10 years. It said: “This reflects both the strong growth in demand for consumption and investment goods expected from the rapid-growth markets and the potential to fragment the supply chain as companies increasingly produce components in different locations.”
Geographically shifting, it predicted that Europe’s exports to Africa and the Middle East would, by 2020, be almost twice as large as Europe’s exports to the US. The report foresaw that the fastest-growing trade route would be between India and China, with Indian exports of goods to China “growing at an average annual rate of almost 22 percent through to 2020, while flows in the opposite direction expand by 18.5 percent per year.” Its advice was that “companies will need to gain footholds in rapid growth markets at an early stage, while they still have the opportunities to establish a significant market presence and gain market share.” It makes sense for European countries to remove remaining obstacles to financing trade with these regions, even for their sovereign governments with their seemingly endless credit lines.