Analytical Export Support Headquarters

Expert,
Moscow
22.08.2011 6:00:00
PHOTO ALEXEI MAISHEV
Author: ALEXANDR IVANTER

One of proponents of an emerging Export Credit and Investment Insurance Agency, Vnesheconombank Deputy Chairman Petr Fradkov views a new institution as a brain trust responsible for supporting Russian exporters and investors abroad.

-Petr Mikhailovich, what stage is the project to set up an export agency going through?

-The project to set up an export credit and investment insurance agency is now at a pretty advanced stage, it consists of two parts. The first stage is to prepare legislative framework for a particular type of insurance, that is, insurance of export credits and investments against business and political risks. This type of insurance has been nonexistent in our legislation so far. We had to introduce a great deal of amendments in applicable regulations and above all in banking legislation. All these amendments were included in a federal law that was published and came into force a month ago.

The second part of the project is comprised of corporate decisions that VEB takes as a one-hundred percent shareholder of the agency being set up.

-Why was a decision made to set up the said agency as VEB’s subsidiary?

-Originally, and this results from the Law “On the Bank for Development” VEB was to be responsible for insuring export credits. Although the practice showed that it was not possible for one and the same institution to be a creditor and an insurer at the same time. It was a very difficult process in terms of internal documents, reserves and balance sheet. So, a decision was made to delegate an export credit insurance function to VEB’s subsidiary in the form of an open joint stock company.

-Is the agency supposed to be a commercial entity?

-It is a commercial entity on a pro forma basis. But all profits to be generated by an agency are to be used to form a reserve fund for insurance transactions. Initially, such reserve fund is to be set up by VEB and then it is to be replenished through using the agency’s capitalized profits. In the case that these reserve funds are not sufficient the law stipulates that federal funds can be requested.

-How is the agency’s institutional structure going to be formed? Will some of VEB’s departments become a separate entity?

-No, they won’t. The more so, this company’s shareholder’s rights are to be exercised by VEB’s Supervisory Board rather by VEB, this means that this entity’s management has been raised to a higher level. And this was done intentionally to underline the agency’s state rather than commercial function. The agency’s core personnel consist of insurers who are working outside VEB.

-Are there such specialists in Russia?

-Yes, there are, but not many. These types of insurance were developing in embryo in two three largest private insurance companies. They tend to develop insurance of short-term (up to six months) trade credits inside Russia. There are almost no specialists dealing with insuring exports and political risks. The agency plans to insure both business and political risks. A list of all risks is to be clearly stated in a governmental resolution to be specially worked out and approved to build up on the law. The resolution is also to state requirements for the agency’s financial sustainability as well requirements for insurance rules and control to be exercised by the government directly.

-So, the Russian Insurance Supervision Agency’ functions will not be applicable to the agency?

-No, they won’t. This is a very serious exception from the law on insurance business. But this exception is justified and is in line with such insurance agencies’ international practice. In fact, the agency is not going to operate in a competitive insurance sector because it fills a niche where commercial insurance companies are not represented now.

-Why wasn’t possible it possible to perform an export support function through VEB’s subsidiary – Roseximbank?

-Roseximbank’s agent’s function is to extend sovereign guarantees on behalf of the Russian Finance Ministry to Russian exporters. This is somewhat a different instrument. Such an instrument is used when Russian exporters are obliged by a contract or law to extend a guarantee to its foreign purchaser, that its, Russian products to be sold will be delivered timely, construction will be completed timely and etc. As far as complicated and long-term contracts are concerned, this sort of guarantee is not easily available to our exporters of high technology products and services. Roseximbank’s special guarantee mechanism was established to support exports.

So, sovereign guarantees and insurance of exporters are two complementary instruments. In some countries the situation is similar to ours. For example, in Japan the Japan Bank for International Cooperation (JBIC) extends guarantees to exporters and Nippon Export and Investment Insurance deals with insuring exports.

-Will the Agency be able to insure a foreign purchaser of our products rather than a Russian exporter?

-The law on the agency provides for the opportunity to insure both the seller and purchaser as well as banks funding supplies on the part of the exporter and importer. Later on, we might deal with insuring investment, for example, when a Russian company builds an enterprise abroad. These risks are more complicated, in fact, the agency will monitor a project at all stages of its life cycle.

-Given an initial capitalization of 30 billion rubles, what will be an approximate amount of total insurance coverage?

-We made a preliminary estimate with specialists from the Russian Economic Development Ministry acting on a presumption that at the first stage the agency will be able to insure 15 percent of Russian mechanical engineering exports. As a result we expect a total amount of insurance coverage for the first three years of the agency’s operation to be no less than 10 billion dollars.

An important line of the agency’s activity not directly related to insurance is to set up a sort of credit bureau to accumulate basic data on Russian exporters’ credit histories. This, together with a constructive dialogue between foreign export credit agencies and our agency, would help to engage foreign export-import banks and export insurance agencies in cooperation with Russian counter agents.

-From what you said it follows that it is standard practice to exchange such data bases between countries?

-You are right, we are involved in an active exchange of information. Generally speaking, the agency is a serious brain trust and its customer service is not limited to insurance business alone. Both the customer and an insured project continue to be monitored constantly in order to forecast and if possible avoid an occurrence of insurance event. This differs a lot from a normal creditor-bank’s activity.

-Do you mean a remote control monitoring?

-No, I don’t. Under an agreement the agency’s representatives are to be in constant contact with their customer. They tend to interact actively with their country’s government authorities. These people have in-depth knowledge of their customer’s country of residence, specific industry and enterprise.

-Is the agency going to reinsure accepted risks abroad?

-Yes, it is. But the choice of reinsurers will be regulated. Specifically, these companies must have a rating not lower than the agency’s rating, that is, not lower than a sovereign one. One of our future Russian agency’s objectives is to receive a sovereign rating in the shortest term.

-When will the agency be able to start working?

-Three documents are required to launch a new institution. First, it’s a governmental resolution that specifies main requirements for the agency. Second, - rules of insurance, a main operational document, detailed procedures and regulations. And thirdly, - the agency’s strategy to set forth the agency’s operational financial parameters, its insurance capacities with regard to various countries and regions and etc. I hope that the agency will be able to start operating in early 2012.

Today, export credit agencies (ECAs) are operating in more than 80 countries. More than the 50 largest ECAs and insurance companies both private and state-run ones, involved in insuring and guaranteeing export transactions are united in the International Union of Credit & Investment Insurers also known as The Berne Union. The Union’s members account for 10 % of the world’s financial insurance and guarantee support.

A policy of export financial support is regulated by such authoritative international organizations as the OECD and the WTO. A special agreement on official export credits was worked out and is being successfully applied within the OECD. This document is a gentleman’s agreement and is not the OECD’s legislative measure. Its main objective is to regularize the export credit market and prevent dumping in the sector. The agreement regulates, in particular, minimum rates on insurance and funding of export credits. Adherence to OECD standards is recognized by WTO rules as not subsidizing exports.

The world’s functioning export insurance credit agencies can be subdivided into three groups in terms of a business model being applied.

An export insurance agency in the so called first traditional model operates directly by way of using the state’ budget and might be both a state-run entity, for example Eximbank (US), ECGD (Great Britain) and a private insurance company which is authorized to support national exports, for example, Euler Hermes (Germany), Coface (France),Atradius (The Netherlands) and others. ECAs operating on this model are responsible for supporting national component as part of export contracts.

Financial products offered in this case are highly standardized. This is above all export financing (a supplier and buyer credit, a documentary letter of credit) insurance of political risks, extending performance guarantees.

A high level of transactions’ standardization and the model’s insufficient flexibility make it almost impossible to diversify risks, customers, sectors and markets. Each transaction requires a high level of capital reservation and this in its turn might result in such activity’s reduced profitability.

ECAs’ operation on the basis of the second model (it is this model that Russia’s emerging agency is focusing on) is to provide support for national companies to implement their global development strategies as opposed to a concept of national component implemented as part of the first model.

The second model makes it possible to introduce innovations and new financial products, support national companies’ internationalization as well transactions classified as strategic ones from the point of view of the state. A range of financial products is notable for great flexibility and readily adapts to new programs such as untied financing in combination with direct lending.

And finally, the third highest type of ECAs operation when an export credit agency evolves into a global market player with a very wide range of services offered and in effect is a holding company consolidating various companies each of which specializes in a specific product, line of business (for example SACE in Italy). Under international practice ECAs do not give top priority to short-term business, it’s not their core activity. It is private insurers that are most active on this market. ECAs tend to expand their transactions on the marker for insuring short-term export credits in unfavorable economic situations as it was demonstrated by the recent financial crisis. Specifically, under a special resolution by the Euro Commission in May of 2008, ECAs were allowed to step up their activity on temporary basis on the market for insuring short-term export credits in a period of crisis for the most part to fully meet European exporters’ needs (largely small and medium-sized enterprises) for insuring their export credits.

On the basis of VEB’s materials