Trade Finance for Small and Medium-Size Enterprises in Transition Economies

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 2001, country risks for export credit are subdivided into seven levels, with one signifying minimal risk and category seven indicating the highest risk. Among the transition econo­mies, the Czech Republic, Hungary, Poland, and Slovenia were ranked at level 2, followed by Latvia and Croatia (level 4), Bulgaria and Lithuania (level 5), and Kazakhstan, Romania, and Russia (level 6). All other transition economies were categorized as very high risk countries (level 7). In many of the countries with high risk perceptions, payment terms are largely based on letters of credit and cash in advance. In Russia, for example, three out of five import shipments require ad­vance payments. For small and medium-size imports in these countries, the use of letters of credit and cash in advance represents a significant cost, with adverse effect on their competitiveness.

In many of these countries, the banking system is not well developed to handle foreign trade transactions. In 1999, for example, the sum of loans to the private sector was estimated at about 20 percent of GDP, compared to more than 100 percent for eurozone countries (International Monetary Fund, 2003).

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 preshipment 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. In Russia, for example, commer­cial loans granted for more than one year accounted for only 18 percent of total commercial loan volume in 2000 (Economic Commission for Europe, 2003; US­AID, 2000). The role of leasing in capital investment and trade financing remains quite limited.

In the 1990s, most transition economies introduced export credit insurance and guarantee schemes and established export credit agencies and state- sponsored export-import banks. Besides receiving training and technical advice from the Berne Union (The International Union of Credit and Investment Insurers), many of the more developed members, such as Hungary, Poland, and the Czech Republic, have become full members of the Berne Union (i.e., they have met the benchmarks for membership in terms of trade turnover insured per year and an­nual premium income). For many of the less developed countries in Central and Eastern Europe, eximbanks and export credit agencies remain undercapitalized, lack reliable credit information, and face difficulties collecting “problem” loans.

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.