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May 1, 2008updated 12 Apr 2017 4:46pm

Dangers looming

However, lessors, faced with VAT problems and risk problems linked to small numbers of customers, could be hit hard by any Russian credit crunch

By Maryann Tan

Russian leasing appears to be booming. However, lessors, faced with VAT problems and risk problems linked to small numbers of customers, could be hit hard by any Russian credit crunch. Maryann Tan reports 


Demographically speaking, Russia’s economy does not possess all the desirable traits possessed by many of its emerging Asian counterparts. 

Characterised by a low national birth rate and male life expectancy at an alarming 59 years, Russia’s population headcount has been on the decline since peaking in the early 1990s. 

Without the key resource of a large and young labour force to power the economy, it is left to capital investment to pick up the slack. 

Indeed, economists expect massive increases in capital spending will have to take place for Russia to sustain the average annual gross domestic product (GDP) growth of seven per cent registered in the past decade. 

Russia’s under-investment in infrastructure is partly reflected in its investment-to-GDP ratio, currently just less than 20 per cent. That’s half the rate of China, the world’s fastest-growing economy, and lower than many emerging economies of Central and Eastern Europe. 

Russia’s government under former president Vladimir Putin knows this too well, hence the plan for an investment programme worth $1trillion over the next 10 years and the launch of National Priority Projects aimed at providing adequate healthcare, housing and education, and ensuring food security. 

With the Putin era far from over, and the petrodollars it is still raking in, Russia is not expected to back-track on its growth-oriented policies, forming an ideal backdrop for leasing as both the private and public sector seek funds to be poured into roads, railways, telecommunications and the energy sector. 

Reflecting the focus on infrastructure development, latest industry statistics by the Russian leasing association, ROSLeasing, show the fastest volume growth in leasing last year was in rail transport (287 per cent), oil and gas equipment (900 per cent) and metallurgical equipment (763 per cent). 

There is certainly enough new business to go around. 

“We have never planned to penetrate international markets. The Russian economy is growing very fast and we risk losing more than we can get if we were to [divert] some of our attention to other countries,” energy-sector specialist lessor Business Alliance told Leasing Life when asked if the company had plans to offer services in other parts of the CEE. 

One apparent trait among the Russian lessors reviewed here is their tendency to carry a highly concentrated portfolio. VTB Leasing, one of the top-five lessors and a unit of the second-largest bank in Russia, is estimated to have 95 per cent of its portfolio tied to its top 20 customers. 

“Concentration is something that happens in young companies and emerging markets as well, it’s not unusual,” comments James Longsdon, an analyst at Fitch Ratings, pointing out that concentration risk tends to be a feature of big-ticket lessors. 

Under prosperous conditions, this concentration risk hasn’t weighed on the asset quality of lessors, but their resilience remains untested in the absence of a downturn. 

Tellingly, of all the Russian leasing firms reviewed and rated by Fitch, none carry a triple A rating, even if some of them are effectively state-owned institutions. Of course, Russia itself does not carry a AAA sovereign rating. 

Still, this doesn’t prevent leasing companies from growing their respective portfolios in the sectors they are already focused on. 

As an emerging market for leasing, however, Russian lessors have a frustrating tax regime to contend with.The glacial pace at which value added tax (VAT) takes to be refunded to lessors is becoming a perennial problem for leasing companies. 


Lessors pay a VAT rate of 18 per cent (known as input VAT) upon acquisition of an asset, but, typically, expect not to recover the VAT from the tax authorities. Instead, they are expected to get this back through lease rentals from their customers over the period of the lease agreement, locking up precious cash and hurting returns. 

As a result, lease rentals are distortedly higher and lease tenors shorter to compensate for the deferred recovery of VAT. For reasons of transparency, some lessors specify the added premium imputed into lease charges and attribute that amount to non-refundable VAT. 

While both foreign and domestic lessors are hopeful for some reform in practice by the tax authorities, none are holding their breath for it to change any time soon. 

“We are hoping for changes to come, but, on the other hand, we also have to be fair because the VAT topic is new for authorities in Russia. If you have a leasing deal with a huge VAT payback or receivable from the state, if I were the state I would still ask what’s going on there… because I have to pay a lot out. In Russia, it’s normal that you at least have an investigation of the deal behind it,” comments Alexander Schmidecker, head of CEE at UniCredit Leasing. 

“In our opinion, this issue, together with the credit crunch, are the main factors hindering the development of leasing in Russia,” says a spokesman for the leasing company Business Alliance. 

Bob Wallingford, a tax partner at KPMG Russia, points out another hindrance to leasing realising its full potential in Russia. In Russia, the title to an asset does not give lessors the same level of security that it would in developed economies. Lessees can initiate court proceedings that greatly delay the repossession of the asset by lessors. 

“If you look up in the court cases how many times lessors have used the courts to get assets back, it’s not many. Instead, they negotiate with the lessee to get the asset back, which is not typical in the West. In the West, it’s not negotiated because the lessee knows they must give it back quickly. In Russia, there are very few cases of repossession of leased assets,” he said. 


Lease and loan 

The limitations to rights of lessors has led to many financial institutions treating a lease like a loan, asking for additional collateral when, under typical agreements, the asset itself would make for sufficient security. 

Yet, these issues are hampering the growth of leasing, especially finance leases, which are permitted to accelerate the depreciation of an asset, according substantial tax advantages. 

“I think it’s important for everyone in Russia to view leasing as a very significant way to fund the investment needs of the growing Russian economy. Energy, manufacturing, transport – because it has tremendous potential and that potential is not completely realised now,” Wallingford notes. “If the security and the VAT issues were resolved, that would significantly help the industry.”

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