Many Russian leasing companies are at a
standstill as capital funding dries up. Meanwhile, regional lessors
are gaining ground. John Grimmett reports.

The headline message is clear the moment one arrives on the
leasing forum of bankir.ru, a leading Russian banking information
site. On 22 October, the most recently updated thread was entitled,
in capitals, ‘WHO IS LENDING TO LEASING COMPANIES?’

The answer appears to be, “only Sberbank (the state-owned
savings bank)”. Not that Sberbank is any other than the largest
Russian bank and, in some regions, effectively the only significant
bank.

Cutting back

Many leasing companies, especially Russian-owned ones, are
severely cutting back their new business activities, as well as
their staffing. At least for the time being, the leasing
subsidiaries of major foreign banks are not as affected, though
their new business volumes are falling as they become more cautious
about the creditworthiness of their clients.

Vitaly Liaskavka, general director of Hansa Leasing Russia, said
his company is very cautious about the repayment ability of many of
its potential lessees, but there are still companies that are
well-qualified for credit and to which it is prepared to extend
finance. It is, however, keeping below a ceiling of €1 million to
€2 million per exposure.

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According to Anton Kuleshov, head of leasing operations at RMB
Leasing, the Russian-owned part of the market has been at a virtual
standstill for the past month, with leasing companies very short of
funding. Some are limited to using returning funds to cover, say,
the requirements of very important customers for relatively small
assets such as a car.

Even to the extent that leasing companies do have available
funds, they are holding back from new business because they feel
unable to price risk.

One Russian bank-owned company said it has been testing the
market’s acceptance of higher pricing by gradually hardening the
terms of their offers. It has found that a lease on something like
an excavator worth $100,000 (€79,623) can command a 30 to 40
percent down payment and a leasing rate of 30 percent per annum in
roubles.

It is hard to extrapolate the leasing margin in the absence of a
lively refinancing market, but the same company was approached
recently by a bank offering rouble finance for 25 percent per
annum. This implies a leasing margin of 5 percent, which is in line
with what they would expect. They were averaging a leasing margin
of 8 percent in the fourth quarter of 2007 and would not expect to
be able to pass on all of their increased funding costs. The same
leasing company has provided exclusively rouble leases since the
fall of the dollar a year or so ago, but will review its policy in
the light of market demand once conditions normalise.

Approaches to pricing seem to differ from company to company.
Manuela Pahoinig, responsible for CEE sales at UniCredit Global
Leasing, commented that the excess demand for leasing, together
with higher levels of risk, had led to the company increasing its
margins in March this year and that another round of increases is
currently taking place.

She regards this as a normal phenomenon in the market that is
understood and accepted by lessees – both existing and new – under
the current circumstances.

On the other hand, Hansa Leasing’s experience has been that it
is not possible to force through pricing increases, but only to
maintain margins for repeat business where previously a returning
customer could have expected a margin reduction.

An Expert view

According to Expert magazine, which published its
semi-annual review of the state of the Russian leasing market on
October 6, new business in the first half of 2008 was 3 percent
higher than in the same period in 2007. The equivalent figure a
year earlier had been 235 percent.

Expert also reported that, as leasing companies become
more cautious and enjoy the luxury of choosing to whom they provide
finance, they are tending to favour highly liquid-asset types, such
as vehicles and construction equipment, as well as projects that
depend on finance from the state budget, such as road building. The
leading asset type financed in the first half of 2008 was
trucks.

According to the Expert review, the new market leader
in terms of new business is URALSIB Leasing, which tripled its
market share compared to a year ago, when it was in tenth
place.

Elena Gushchina, its CEO, said the main factors behind this
growth were decisions in 2007 to expand strongly in the regions and
to target SMEs. It had also managed to expand its financing base
with the support of Sberbank and other banks, as well as a RUB5
billion (€146.11 million) bond issue. Just under half of URALSIB’s
new business came from car leasing.

The Expert review also reveals a stark contrast between
Russia and the markets of Central and Eastern Europe, in that west
European bank-owned leasing companies are not among the
leaders.

The top-rated such companies by new business was Raiffeisen
Leasing in 17th place (12th on portfolio size) and UniCredit
Leasing in 21st place (13th on portfolio size).

An interesting absentee from the above figure is Alfa Leasing,
ranked 4th in 2007. It is not clear why Alfa is omitted.

Regional focus

Regional business is becoming more important. Several companies
significantly expanded their branch networks and Moscow’s share of
new business fell from 38 percent in the first half of 2007 to 26
percent in 2008.

As Anton Kuleshov said, half of new leasing business originates
from outside of Moscow and half of what originates from Moscow is
routed there via a head office controlling regional activities. RMB
Leasing, rated by Expert as the 44th-largest company by
new business, has recently set up 15 regional
offices, of which 13 are already profitable.

There is a longer-term trend among Russian leasing companies to
target SMEs. Most of the leading Russian companies have based their
growth on the largest companies, but these are no longer seen as
offering attractive margins.

Some lessees – for example, in forestry and wood-processing –
are undergoing a downturn in their business and are seeking early
termination of their leases. Others, such as property developers,
are running around the leasing companies trying to replace bank
funding, which is no longer available.

A long-running story in Russia has been the problem of getting
refunds for VAT paid on the acquisition of new assets, rather than
having to wait for the offsetting VAT receipts over the life of
leases.

Notwithstanding a 2007 judgement of the Supreme Arbitration
Court in favour of Hansa Leasing, which ruled that the tax
authorities were not entitled to withhold VAT refunds to leasing
companies, some companies continue to experience problems.

Liaskavka commented that the most severe problems with the tax
authorities have gone away, but that general improvement in their
attitude to leasing companies and better adherence to their own
rules is needed.

Pahoinig said that UniCredit Leasing has not encountered
problems over VAT, although she is aware that many other leasing
companies have been less favoured.

There is a general feeling of outrage that leasing companies are
treated as if they are in business for the purpose of tax avoidance
and that many of their transactions, and especially sale and
lease-back, have no other economic purpose.

The author is Central and European advisor at Invigors, the
leasing consultancy

leasing companies by new business 2008

Leasing: market share by asset type: 2007