Trade & Export Finance
14 July 2016
Trade & Export Finance
VTB steps up trade support despite sanctions burden
Ollie Gordon catches up with VTB Bank's head of global commodities and the managing director of its Trade and Export Finance division to find out how the bank is supporting its exporting clients in a postsanctions environment.
Trade & Export Finance (TXF): Without access to the international capital markets since VTB became a target of Western sanctions in 2014, has the bank found it difficult to meet the demand for finance from their export and commodity finance clients?
Igor Ostreyko (IO), managing director, Trade and Export Finance (TEF), VTB Bank: VTB's wide international presence allows us to provide financing solutions in more than 20 countries, mainly from our headquarters in Moscow, as well as through our European subsidiaries and the office in China. It is worth mentioning that our banks in Austria and Germany are accredited by most OECD countries' export credit agencies and have a "house bank" status locally. This helps to provide export finance at competitive terms in euros.
At the same time, export support facilities provided from our Moscow office ensure the most favourable terms of financing in Russian currency.
In the current conditions, we highly value the quality of partnerships we have with the international banking community. This cooperation helps us provide conventional trade finance solutions such as LC confirmation and discounting, counter-guarantees, along with structured ECA finance etc.
Today VTB is supporting business activities of its customers with counterparties in more than 50 countries worldwide. Since 2013 we have arranged deals for a total amount exceeding RUB500 billion, and over the last three years the trade and export finance portfolio has increased seven-fold.
Atanas Djumaliev (AD), head of global commodities, VTB Capital: VTB's set-up allows it to extend commodity financing through its trading companies in Moscow and Zug, as well as through VTB Capital plc and VTB Austria. Since the launch of the commodity finance business in the summer of 2015, VTB volume of business has grown up to RUB100 billion.
TXF: On the other side of the table, with international financing increasingly difficult to attain for many Russian exporters, have you seen an uptick in demand for your export and commodity finance products?
Ostreyko: Indeed, we see respective demand on the exporters' side and use this opportunity accordingly. In 2015 VTB has increased its trade and export finance portfolio by 40%.
Djumaliev: Demand for commodity finance has increased as international banks scaled back capital and funding commitments from Russia. In addition to that, we are seeing an uptick of demand that is driven by VTB's growing capabilities to do structured commodity trades and to provide solutions to its clients that cannot be achieved through plain-vanilla loan instruments.
TXF: Does that increased demand reflect in the cost of your export and commodity financing products; how much more expensive, pricing-wise, are they now than before the sanctions?
Ostreyko: When it comes to doing business with exporters, banks always operate in a competitive market. Therefore our pricing always reflects market conditions at the time of a transaction as well as risks of the borrower/transaction. To be more effective and to react faster to customer requests, we operate as a global business line providing local trade solutions through our subsidiaries and branches.
TXF: Traditionally, the large Russian commodity producers were always heavily reliant on international financing to fund their operations. With that being much more difficult to come by, or at least much more expensive, are you seeing any knock-on effects on the operational performance of those producers? Are there any worries of bankruptcies (particularly considering the added effect of the commodities downturn), or have local Russian banks been able to make up the shortfall sufficiently?
Djumaliev: Russian corporates have gone through a significant deleveraging over the last two years and Russian banks have been more than able to cover all of the capital needs of their clients, despite limited access to international markets. In fact, the Russian banking system has excess liquidity at the moment and corporate-bond yields have fallen below the pre-sanctions levels.
TXF: Have experienced any breaking of covenants from your producer clients, and have you had to do many restructurings to avoid such covenant breakages?
Ostreyko: No. In the current environment, the TEF portfolio confirms the statistically favourable risk profile of trade finance products, as illustrated in ICC Trade Register reports for 2014 and 2015.
TXF: On export finance side, Russia's export credit agency, Exiar, has become a lot more active in the past year or so. Has it been asked to help plug the financing gap for Russian exporters, and how well do you think it's doing that at present?
Ostreyko: Exiar is a relatively young agency, which nowadays supports trade of Russian exporters at the level of leading export credit agencies. As a strong risk mitigant, its insurance products allow to finance exports for longer tenors and higher amounts on a competitive basis, and significantly expand our business geographies. With support from Exiar and VTB, Russian companies are now able to enter new markets with package of "commercial + financing proposals" and compete with exporters from the OECD countries.
Being one of the key partners for Exiar, we share its key strategic goal of supporting Russian value-added exports and provide financing to producers, suppliers, foreign buyers and their banks.
TXF: From a Russian business perspective, there has been a distinct shift in reliance towards China and other Asia-Pacific countries in the last two years. How is that reflected in the operational output of VTB's export and commodity finance departments?
Ostreyko: By cooperating with Chinese financial institutions, VTB continues to re-affirm its leading positions among Russian banks in promoting Sino-Russian Trade. This cooperation allowed us to extend our trade and export finance offering to companies doing business with China to around RUB200 billion since the beginning of 2015.
VTB has a Shanghai Branch with a fully operational license. VTB Group also has offices in Beijing and Hong Kong. This gives us opportunities to continuously generate new business there.
TXF: Are there specific markets within Asia that VTB has its sights on?
Djumaliev: China is our top target market for future growth of our Asian business. We plan to invest in our Chinese operations and to facilitate trade in commodities between Russian and Chinese companies. VTB already has a branch in Shanghai and VTB Capital has an office in Hong Kong. In 2015, VTB became a member of the Shanghai Gold Exchange and started trading physical gold with Chinese banks. In 2016 and 2017 we plan to extend our precious metals' business in China and to enter oil and oil products markets, as well as base metals.
Ostreyko: In addition to China, VTB Group has offices in Vietnam, India and Singapore and is able to provide trade finance solutions to our customers doing business in different parts of Asia.
TXF: Have you got any big/interesting deals in the pipeline?
Ostreyko: We have an extensive pipeline consisting of conventional trades, ECA and Exiar transactions. In June 2016, with the support of Exiar, we provided a $65.4 million loan to the Development Bank of Mongolia. This was the first disbursement under a three-year credit facility for a total amount of $300 million. The facility will be used to finance the purchase of Russian products for Mongolia's growing mining industry.
Djumaliev: Over the last few months, we have closed several landmark deals in commodities finance. Most recently, VTB extended a large pre-payment against a long-term base metals offiake contract with one of our clients. VTB provided the full spectrum of product expertise in this transaction, acting as a lender, offiaker and a hedge provider to our client. We have closed a number of transactions of this type this year and have a strong pipeline for the rest of the year.