Reference no: EM133492579

Primary and intermediate commodities continue to dominate the composition of exports from the Commonwealth of Independent States (CIS): Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Russia, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. Such exports may not need elaborate long-term financial arrangements unlike the high value-added exports from countries of Central and Eastern Europe.

According to the OECD Consensus Risk Classification of June 2020, country risks for export credit are subdivided into seven levels with one signifying minimal risk and category seven indicating the highest risk. All CIS economies were categorized as very high-risk countries at Levels 5-7. Payment terms are largely based on L/Cs and cash in advance. In Russia, for example, three out of five import shipments require advance payments. For small and medium-sized imports in these countries, the use of L/Cs and cash in advance represents a significant cost, with an adverse effect on their competitiveness.

In many of these countries, the banking system is not sufficiently developed to handle foreign trade transactions. In 2020, for example, the sum of loans to the private sector was estimated at about 35-40 percent of GDP compared to that of over 100 percent for Eurozone countries (World Bank, 2020). Among CIS countries, it ranges from 12 percent for Tajikistan, 29 percent for Belarus, and 25 percent for Kazakhstan, to 52 percent for Russia.

Adequate trade finance facilities for small and medium-sized enterprises are limited in view of the banks' reluctance to service small companies due to the perception of high risk associated with such financing and the costs of evaluating the creditworthiness of small clients. Trade is often hampered by the limited availability of pre-shipment working capital financing as well as burdensome collateral requirements. In most of these countries, banks do not provide medium- and long-term trade financing. The average length of commercial credits granted in most countries varies from three to six months. The role of leasing in capital investment and trade financing remains quite limited.

Over the last few decades, some CIS economies have introduced export credit insurance and guarantee schemes, established ECAs and state-sponsored export-import banks. For many of these countries, both remain undercapitalized, lack reliable credit information, and face difficulties collecting "problem" loans.

Aggregate GDP for the region declined in 2019 due to a marked deceleration in the Russian economy due to economic sanctions. Global exports to Russia secured by L/Cs have substantially declined since the imposition of the sanctions. Meanwhile, there has been moderate growth in guarantees and growth with respect to supply chain finance products. Factoring has also shown modest growth in many of these countries. However, an International Chamber of Commerce report indicates that a majority of SMEs experience significant barriers in accessing trade credit. In 2015, SMEs in these countries submitted 44 percent of all trade finance proposals and accounted for about 60 percent of rejections by banks and other financial institutions.

Questions

1. Do many CIS economies use L/Cs as an important means of payment for international trade? Discuss.

2. Briefly discuss the role of trade financing in CIS economies.