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June 20, 2012updated 12 Apr 2017 4:07pm

Solving the Eastern block

While Ukraines monsters of political instability and liquidity shortage still scare off the big players, the potential for leasing growth in this growing nation is no myth .. With a population of 46 million people, a large agricultural and industrial base and a national capital expenditure pool barely touched by asset finance, the case for development of leasing in Ukraine is undeniable

By Fred Crawley

While Ukraine’s monsters of political instability and liquidity shortage still scare off the big players, the potential for leasing growth in this growing nation is no myth … it’s surely only a matter of time before onlookers invest, says Fred Crawley

With a population of 46 million people, a large agricultural and industrial base and a national capital expenditure pool barely touched by asset finance, the case for development of leasing in Ukraine is undeniable. Yet while the 20% drop in GDP and the consequent near-shutdown of the leasing industry experienced in 2009 has largely been overcome, it seems there is a barrier preventing asset finance from reaching its true potential in the vast state. At the third Annual International Leasing Conference in Kiev, lessors gathered to work out what’s keeping the Eastern giant from standing to its full height.

It’s a hot day in the pine woods northwest of Kiev, and a good proportion of the country’s leasing brass are gathered at a quiet rural hotel to compare notes and make their predictions for the year ahead.

The outlook, in short, is mixed. Yes, leasing volumes have bounced back to levels not far shy of the young market’s initial boom in 2007, and demand is strong, particularly in the auto market. However, the national portfolio size of 34bn UAH ($3.4bn) is unlikely to increase this year, and leasing’s penetration into capital expenditure – already low at 4.4% compared to a 15.5% European average – is forecast to shrink as economic growth outpaces development of the leasing sector.

As the graphs are projected on screen and the pros and cons of current market conditions are discussed, there is a sense of underlying frustration; that the market would be capable of great things if only both current and potential players could secure the right investment to make the most of it.

International interest

For Ukraine, as with other Central and Eastern European countries, the leasing market relies upon participation from international banking groups – at present, international banks make up 70% of the market, with this predicted to rise to 85% by 2013.

Some of this increase is coming from new players, and there is a hope that more banks will enter the country soon. Specifically, lessors are hoping for more Russian players, spurred by the fact that five lessors from across the border have opened their doors in Ukraine since the start of 2011.

Yet while it was hoped that Russian investment might follow the pattern set by Hungarian bank OTP, which has risen to third place in the ranking of Ukraine’s lessors by new business volume in just three years of business, the Russian entrants appear to be doing very little so far. 

New leasing business compared to real GDP growth UkraineAccording to Roman Ivanenko, former chairman of domestic lessor Euro Leasing and chairman of the Ukrainian Union of Lessors (UUL), one should not expect the same big-ticket boom currently shaking the Russian market to be replicated in Ukraine.

“In Russia you have tax depreciation on fixed assets financed with financial leasing occurring three times faster than in Ukraine, which is the main driver for that trend. Another question is long-term financial resources. Russian financial groups have them, but they are not available in Ukraine.”

Ivanenko explains that while Russian bank VTB Leasing has executed a small number of big deals in the country’s rail industry this year, they are largely the exceptions to the rule – in fact, Ukraine’s average leasing deal size has decreased 71.9% from its peak in 2007, to a current value of 808,802 UAH.

So why the reluctance from foreign investors, both present and potential, to drive growth in Ukraine?

The uncertainty that comes with low market maturity is an issue – after all, there has only really been a leasing industry of any significant size in the country since 2006, and it took some time for the government to understand exactly how it worked.

UUL director Marina Masich explains her organisation’s typically pragmatic solution to the problem of political understanding; a billboard set up opposite Kiev’s parliament, displaying a ball of rolled-up neckties in the rough outline of a monster (above), accompanied by a legend which translates as: Leasing – it’s not a frightening beast, but a modern financial instrument.

This simple and striking appeal had the desired affect. On the first day of 2011, leasing commission was made exempt from VAT while the tax regime for operational car leasing payments was lightened, in what Ivanenko calls the most significant change to Ukraine’s leasing market since the crisis. 

Still, there is plenty of evidence to suggest that the government could take a more proactive stance on leasing. The world will be watching Ukraine in June as the Euro 2012 football tournament kicks off, and the week of the UUL’s conference saw central Kiev swarming with workers hurrying to finish off audiovisual rigs in time for the games.

However, unlike neighbouring tournament co-host Poland, where preparations have caused a boom in leasing business over the last two years, in Ukraine all infrastructure programmes related to the tournament have been financed directly from state budget, thus increasing state debt.

The inability of government to understand the nuances of leasing is not just a Ukrainian problem, however. In the UK market, for example, the Finance and Leasing Association has only just convinced regulators to abandon plans to treat the leasing market as if it worked with the same risk dynamics as the credit industry.

Short-term funding

It seems the largest obstacle to growth is that mentioned in Ivanenko’s explanation of differences between the Ukrainian and Russian markets: the scarcity, high cost and short-term nature of available funding.

In addition to the fact that Ukraine is still recovering from a recessionary crash felt more severely than in other European nations, a plethora of risk factors have stacked up to impede the development of a more clement funding situation: political instability, a long-running issue over gas prices, and the clarity of state financial health being the chief among them.

ranking of Ukrainian leasing companies by new business 2011 Add to that the anxiety over liquidity and capital requirements felt by the entire European leasing sector over impending Basel III regulation, and you have a recipe for a funding climate which is unlikely to brighten much in the near future.

Notwithstanding these concerns, it would be wrong to take away the impression that the expansion of asset finance in Ukraine is at a standstill.

The development of the consumer car finance market, in particular, may be the steady trickle that eventually provokes a more substantial flow of investment into the country. Aside from the Russian entrants mentioned above, there has been another, much more active new participant in the market.

Porsche Leasing, having had a very minor presence since before the 2009 crash, has made itself well-known through a flurry of car finance business in the last two years, and now holds the country’s eighth largest finance portfolio.

It is the first captive finance entity to have entered the country on a significant scale, and Ivanenko feels that it sets a precedent for more to follow. “I see a big space for development over the next five years in this segment,” he says.

Jiri Matula, chief executive of UniCredit Leasing’s business in the Ukraine and another speaker at UUL’s conference, agrees.

Growth of the Eastern European auto market, according to forecasts employed by UniCredit Leasing, is likely to be double worldwide average growth, and achieve five times the rate of the growth experienced in Western European nations. While Russia is recognised by UniCredit as being the most obvious source of Eastern market growth over the next three years, Ukraine is seen as a clear number three after Poland, with solid gains to be made both in new vehicle sales and the penetration of finance into the market.

The obstacles, says Matula, are not to be discounted, with “scarce, short and expensive” liquidity being chief among them. The country’s information infrastructure could also use some development, he adds, with costly contract execution, patchy enforcement of creditors’ rights and a lack of credit information services all forming barriers to more substantial car finance growth.

But growth, he is adamant, will come through “direct involvement of manufacturers”, either through the injection of captive arms, or through local bank partnerships with networks such as his own.

When asked what it will take to convince manufacturers to take the plunge into Ukraine, he answers: “Manufacturers will need to see more market scale to commit. Even in making partnerships with banks here, dealer control and finance models must be improved, but this is on the way. Volume and more advanced dealer models will come first, and then I think we will start to see major penetration increases.”

While consensus opinion seems safe in predicting Ukraine will not be European leasing’s headline growth story in 2012, it also seems the international community has noticed the huge potential of this large and ambitious country. As political and social stability, legislative infrastructure and consumer appetites continue to recover from a particularly acute recessionary experience, it surely can’t be too long before these onlookers make the decision to invest.

Challenges facing car finance in Ukraine

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