Part of the
quad of BRIC emerging markets, the Russian economy is beginning to
swell and leasing is one industry looking to benefit. Grant
Collinson and Claire Hack discover how the massive federation is
set to become the biggest leasing market in
Europe
Russia created
something of statistical anomaly when the country’s United Leasing
Association (ULA) joined Leaseurope last year, introducing a 10%
spike into the European trade body’s six month new business
figures.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Business volumes in
the Russia market grew 110% in the first six months of 2011, as
reported in the latest Leaseurope figures, although this was
largely on the back of big-ticket leases.
It’s a pattern to
be expected for an emerging leasing market, says Alan Leesmith,
director of IAA-Advisory who regularly consults on the Russian
industry.
“Simply because of
the way most new markets develop, the big transactions –
multi-million dollar transactions – were the ones which grew
fastest first.
“Smaller-ticket
segments take longer to build. I should imagine the portion of
smaller assets is becoming larger but the large market grew quickly
and then it will slow down whereas the market for smaller equipment
is slower to grow,” he says.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataLeesmith adds the
automotive leasing market is also significant and is confident the
smaller-ticket sectors are currently on the increase along with
big-ticket business.
“You just need
to look at what industries are driving the Russian economy –
mining, construction, agriculture – but the service-related
industries are also generating widespread demand, from office
equipment right through.
“You’ll be able to
find a lessor to lease most things,” he adds.
Beyond the
accelerated growth of an emerging market, however, Leesmith – who
is due to speak at the annual ULA meeting at the end of May – sees
the colossal potential of the Russian market developing into
Europe’s largest leasing market.
“The sheer size of
the country gives it enormous potential. Obviously, it’s a growing
market so it’s going to grow a lot faster than Western European
markets which are mature so will only show limited
growth.
“I would predict
Russia is going to become the largest market in Europe – maybe
within the next five years or even sooner,” he says.
Before that
happens, however, it is still the big state banks and the
big-ticket equipment that dominates the Russian leasing
industry.
URALSIB Leasing is
one such major Russian lessor. The company, which has been in the
market for 10 years, undertook a significant restructuring of all
its lease contracts in 2010 to focus on rail wagon leasing
deals.
URALSIB also
reported a RUB2.1bn (€54.2m) net investment in finance leases in
the six months ending 30 June 2011.
The restructuring
resulted in the replacement of certain lessees with a new lessee,
Ob’edinennaya Transportnaya Kompaniya [OTK], and ownership of a 50%
share in OTK, the company said.
The sale took place
in 2011 and was aimed at minimising investment risks created by
shifts in market conditions for railway transport. The move also
marks an ongoing focus in the Russian market on financing for
infrastructure, including railcars and construction
equipment.
“The legal, tax and
regulatory frameworks continue to develop but are subject to
varying interpretations and frequent changes, which, together with
other legal and fiscal impediments, contribute to the challenges
faced by entities operating in the Russian Federation,” the bank
said in its half-year report. “In addition, the contraction in the
capital and credit markets, and its impact on the Russian economy,
has further increased the level of economic
uncertainty.”
The current
economic uncertainty across Europe has, to an extent, dampened
enthusiasm from foreign-owned companies to enter Russian market,
Leesmith believes.
“Some European
bank-owned lessors are less enthusiastic about Russia now than they
were, but that isn’t necessarily because of the Russian market. It
is more about what markets are important to the banks at a time
when they have to be selective in their use of capital and the
areas in which they see long-term growth,” he says.
Foreign
Firms
One major European
player with an established Russian business is UniCredit Leasing.
The Italian bank-owned lessor claims to be a leader among
foreign-owned firms operating in Russia and has flourished on the
back of big-ticket business to mainly large corporate
clients.
“Russia is one of
the most promising markets with a UniCredit Group presence, from a
short and long-term perspective,” says Fabrizio Rollo, chief
executive of UniCredit Leasing in Russia.
The company
concluded 800 contracts in 2011 focused on large assets for the
rail, air freight and construction sectors, matching the industrial
needs of the Russian economy, and Rollo sees further growth in the
big-ticket market.
“Our portfolio
structure mirrors the current structure of the Russian leasing
market portfolio,” he says.
“The main assets
are a combination of railway equipment, passenger cars and
commercial vehicles, as well as different types of industrial
equipment: printing, metallurgical, food industry, construction,
storage and mechanical engineering.”
Railroad machinery
financing has also become a large part of the leasing market in
Russia, Rollo told Leasing Life, and has had a
continuously high share in the total volume of asset finance deals
in the country.
“Starting from
2008, it had [more than] 25% of total volume of deals, and in 2011,
its share of contracts made up 50% [of the market],” he
says.
“In 2011, the share
of the majority of other types of machines experienced a certain
amount of reduction due to the rapid growth of the railroad
machinery share of the market.”
Rollo adds,
however, that the largest segments of the market – air freight,
construction equipment and machinery used in road building – did
not witness a similar reduction in volumes during 2011
UniCredit, Rollo
says, plans to maintain a diversified portfolio for the foreseeable
future, but will also look to increase the percentage of aircraft
and water transport leasing deals in which it is
involved.
A foreign entrant
with a different approach is Société Générale Equipment Finance
(SGEF), which took over the lease portfolio of a Russian bank
acquired by its French parent group.
Operating under the
name Rosbank Leasing, SGEF is focusing on the established markets
of its international operations, says Pierre Heninger, sales
manager of SGEF Russia & Rosbank Leasing.
“Our vendor finance
activity in Russia focuses on SGEF traditional markets such as
production machinery, construction equipment and high tech
assets.
“Our range of
transaction amounts is wide as we handle programmes starting with
small IT equipment for a few thousand euros to much larger and
costly industrial equipment representing several million euros per
unit,” he says.
Operating as a
vendor practice, SGEF’s Russian business is less linked to the
market trend for big-ticket assets, says Heninger, but sales
forecasts in the firm’s chosen sectors are positive.
“Leasing
penetration is still very low in certain business areas and the
potential for growing business is therefore huge.
“Besides, Russia’s
ongoing projects related to infrastructure, the huge modernisation
needs of certain industrial sectors plus the localisation of some
global industries are, from my point of view, enhancement factors
in fixed assets investment, eligible to leasing solutions,” he
says.
However, operating
vendor leasing in an immature market where the practise is not
fully established requires caution and patience, Heninger
adds.
“Our business line
– vendor focused – requires a lot of preparation in terms of
products, processes and guidelines to fit with the business profile
of each of our vendors,” he says.
“We sometimes
address industry sectors where a vendor finance approach is far
from systematic. The maturity of the market is not homogeneous and
consequently requires a lot of investment to make a financing offer
accepted by both the vendor and the end customers.
“Risk wise,” he
adds, “Russia requires being selective, taking into account that a
customer’s business parameters are not always easy to
identify.”
While European
bank-owned lessors weigh-up the risks of Russian expansion,
Leesmith sees global captives doing well along with the large
independents such as Siemens, which brought its Financial Services
(SFS) division to Russia last year. The German industrial giant
acquired Russian asset finance company DeltaLeasing in April last
year, and by October, it was fully integrated into SFS.
The new business is
headquartered in Vladivostok on Russia’s eastern coast, and has 17
branch offices across the country.
Since entering the
market, SFS has, like SGEF, focused on the business areas where it
has found success elsewhere and has developed financial products
aimed specifically at addressing the needs of the private
healthcare market in Russia, as well as the heavy industry and
energy markets.
Big
Agribusiness
Catering more for the
traditions of Russia than the traditions of leasing is
Rosagroleasing – a state-owned lessor which is dominating the huge
agricultural market in the Eurasian nation.
Russia has the
fourth largest area of cultivatable land in the world and
agriculture has grown steadily through significant investment
schemes over the past 10 years following a tumultuous post-Soviet
period.
Rosagroleasing has
been heavily involved in the industry, including in a state-run
investment programme aimed at growing the production of quality
beef in which the firm leases the livestock.
From 2009 to 2011,
the company leased a total of 134,206 heads of livestock and, in a
recent statement, said it plans to deliver 40,000 heads of
“pedigree animals” in 2012 alone.
Rosagroleasing is
also involved in a scheme aimed at updating farming equipment in
various regions around Russia to speed up the modernisation process
across the domestic agricultural industry.
The scheme is to
run from 2012 to 2014, and was allocated a total of RUB8.5bn of
funding over the course of this period of which Rosagroleasing has
been given RUB3.5m from the state budget for the project in 2012
and expects to fund 4,500 units of equipment this year.
It will also focus
on farms and agricultural enterprises whose equipment is more than
a decade old. Rosagroleasing said the average age of the tractors
being replaced ranges from 15 to 25 years old, with some of the
equipment as much as half a century old.
2012 and
beyond
Away from state-backed
investment projects, the Russian leasing market has also proved
lucrative for the foreign-owned lessors.
UniCredit Leasing
Russia has enjoyed a solid performance in the beginning of this
year, according to Rollo.
“The first quarter
performance has surpassed our expectations and the company was able
to outgrow the market,” he told Leasing Life.
Rollo is also positive
about the next 12 months, especially having just landed a major
vendor contract with a car manufacturer to offer car leases across
Russia.
That said, Rollo
emphasised UniCredit is not looking to expand beyond expectations
in 2012, although the outlook for the year has been generally
upbeat.
“This year’s
forecasts are mainly positive for the leasing market [in Russia].
We believe 2012 will be a very successful year in terms of real
estate leasing. Our company is one of the few regional players able
to carry out big and challenging projects in terms of costs, timing
and legal matters in this sphere,” he adds.
It’s a positive
time for SGEF Russia, too, with parent group Société Générale
having completed integration with the Rosbank network last
year.
“We are much
stronger today as a result of this move,” says Heninger. “Rosbank’s
huge footprint of almost 700 branches across Russia will be a great
advantage for our asset financing activities.”
SGEF Russia also
increased its business performance in 2011, according to Heninger,
and the trend is positive for the first quarter of 2012.
Things may be
looking rosy for Russian leasing, now and in the future, but there
are caveats.”Having said Russia is going to become the largest
market in Europe in five years, I should hedge that, with it
getting over some of the challenges the Russian leasing market is
facing,” says Leesmith.
He outlines two
major impediments to growth in the Russian market being experienced
by lessors.
“There is a lot of
concern in Russia at the moment about proposals to withdraw
accelerated depreciation for lessors and it will be one of the
major topics discussed at their conference this year,” he
says.
“Another topic is
the courts’ attitude to enforcement of leases and the legal
structure. The courts are not particularly sympathetic to lessors
when it comes to enforcements and that is something lessors are
concerned about.”
Heninger adds that
“rigid accounting rules, non-stable legal interpretation and
uncertainties about tax advantages” are constraining factors in the
Russian leasing market.
Leesmith says the
ULA is lobbying hard on both issues but identifies a third issue
which may only be a difficultly for foreign-owned lessors and
Heninger agrees it can be a challenge.
“One of the
challenges which Russian lessors seem to cope with but
foreign-owned lessors wouldn’t be used to is the difficultly of
obtaining credit information,” says Leesmith. “There are no credit
bureaus as we know them for business purposes.”
Instead, lessors
need to do much more background research to compile information and
lenders will almost always visit a lessee before agreeing a deal
which, given Russia is the largest country in the world, Heninger
says can be hindrance to some deals.
Nonetheless, the
outlook for leasing beyond the Volga is overwhelmingly
positive.
Russia joined the
World Trade Organisation at the end of 2011 and Rollo expects the
move will help boost modernisation of the country’s regional
economy in 2012.
Fierce competition
is also expected to push local manufacturers into renovating their
industrial facilities, mainly in agriculture and car manufacturing,
he adds.
“One of the main
answers for the companies facing these needs will be addressing
leasing services,” he says.
Heninger concludes,
“I think the dynamic is different in Russia than in Western Europe
where economic development remains uncertain.
“Domestic demand and investment perspectives are rather
positive for Russia and leasing naturally benefits from this
growing environment.”
