Competition for business in the vast regions of Russia
grew to almost unprecedented levels last year. Then came the credit
crunch. Who will survive following the gold rush?

John Grimmett reports.

 

According to a Russian saying,
half of new business in the country comes from its regions, and
half of the business in Moscow originates from the regions.

For evidence of this, look no
further than URALSIB Leasing, a Moscow-based company and Russia’s
largest lessor. One of the first lessors to set up in a big way in
the regions of Russia, in 2007 it expanded its operational base
even further by opening 37 new branches nationwide. This brought
its number of branches up to 71; it also explains how in the first
half of 2008 it managed to triple its business volumes year on
year, according to general director Elena Gushchina.

URALSIB Leasing is not alone in its
desire for regional expansion. In fact, it appears that the level
of competition for a regional powerbase – for example, one that
does not include Moscow and the rest of Russia’s central region –
is growing ever more intense.

Others from Moscow and St
Petersburg, besides URALSIB Leasing, have been driven to
geographical expansion by tough competition on their home turf.

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Meanwhile, regional leasing
companies themselves have grown sizeably over recent years. In some
cases they have done this despite the arrival of larger lessors
from far afield, partly because the latter have suffered, in some
instances, from undeveloped infrastructures.Russia: Population by region

A glance at figures might suggest
that, far from growing stronger, the regions are dwarfed by Moscow
and the central region (greater Moscow and its surrounding region).
For instance, Moscow has 12 percent of Russia’s population and 26
percent of the country’s new leasing volumes. However, in the
middle of last year, Moscow’s share of new business was as high as
38 percent. The regions are catching up. Business in Ural FD is
larger than its relative population would suggest, although this is
largely because of its major iron, steel and oil-producing
industries, all supported by a considerable railway infrastructure.
Nonetheless, the regions have still a long way to go before they
are the same size as Moscow and St Petersburg.

National lessors have the advantage
over regional rivals of having better access to funding. They also
have a closer link with suppliers of machinery and equipment. On
the other hand, local markets are far from being saturated, and
there will be opportunities for everyone as and when finance for
leasing is normalised after the current economic turmoil.

Into the regions

Muscovite lessors, and those from
Greater Moscow, have largely entered the regions via the
establishment of branches and representative offices. There are 59
such offices in the Ural region alone, according to Russian
magazine Expert-Ural, and new business performance of the
top seven leasing companies in the Ural region exceeded RUB1
billion (€27.06 million) in the first half of 2008.

Russia: Regional distribution by value of new leases in the first half of 2008The attraction of
this greenfield approach is that Moscow-based lessors do not
believe that they can simply purchase companies, and retain the
strengths they possessed at the time of acquisition, after a change
of ownership.

There have, however, been some
acquisitions. In 2008, NOMOS Leasing acquired some of the portfolio
of the far east business of Regio Leasing, Absolut Leasing bought
part of Uralinvest Leasing’s portfolio in Perm, and VTB Leasing
acquired part of the portfolio of Magistral Leasing. According to
Stanislav Kim, general director of Progess-Neva Leasing of St
Petersburg, consolidation by merger and acquisition will soon speed
up.

For the time being, national
players are targeting large and medium-sized clients, but this will
change, says Alkhat Masayev, director of NOMOS Leasing,
Yekaterinburg. Local companies charge more than national ones,
which will thus be able to win some of the highly profitable retail
business.

Drop in demand

The future looks less bright,
though, as the credit crisis takes a grip. The slowing of some
economic sectors – particularly in construction – together with the
increasing cost of leasing as refinance costs rise has reduced
demand. Another hard-hit industry is agriculture. Usually, in
September farmers replace their obsolete machinery with the latest
technology. Traditionally most of the required credit has been
provided by banks, with leasing as a subsidiary source of finance.
This year the banks turned off the credit taps to farmers, spurring
a growth of enquiries for leasing. Two of the most active banks in
this sector are Sberbank, the state savings bank, and VTB. Sberbank
is still financing leasing, but VTB has pulled back on the grounds
that leasing in the present climate is too risky.

Supply capacity has fallen even
further as bank refinance ceases to be available to lessors. Local
lessors are affected worse than their national competitors as the
latter are more often bank-owned, meaning they have preferential
access to loans. Their greater size also gives them better access
to bond markets.

Some lessors have been working with
short-term refinance which they are now unable to roll over. It
seems that some companies have put their portfolios on to run-off
and have closed to new business. Opinions differ as to whether a
wave of consolidation of the leasing sector is set to take place,
but this would seem to be a logical consequence of current
events.

In the north-west there has been a
sharp drop in demand for construction equipment over the past 12
months as projects have dried up or been put on hold. More
recently, demand for cars has halved. The commercial vehicle sector
has seen a decline, although less sharply than in the car
market.

Leasing companies are now bracing
themselves for a rise in lessee defaults, and the result could be
the emergence of mass defaults in the leasing sector. Dmitri
Korchagov, general director of NOMOS Leasing, commented that it had
noted a 10 percent increase in late payments over the past
month.

Meanwhile, in St Petersburg last
month, lessors appealed to Prime Minister Putin for urgent measures
to support leasing during the financial crisis. They sought a
moratorium on unilateral changes by banks to the terms of
already-concluded loans, and a stabilisation fund to support
leasing companies in meeting their financial obligations.

Ural FD: new business of top seven lessors, Jan-June 2008The appeal is being
addressed to Putin by the North-west Leasing Association on behalf
of its 80 members. Andrey Pushkarev, president of the association,
complains that bank loans for three to four years now cost 17-25
percent, and that banks are imposing interest rate hikes and early
repayment of loans. In the north-west about 60 percent of leasing
company finance are long-term bank loans.

Lessors are trying to help
themselves out of trouble by tightening the terms of leases.
According to Mikhail Korolev, manager of the St Petersburg branch
of VB Leasing (part of the German VR Leasing group), the maximum
lease tenor is dropping from five years to two years with an
advance payment of at least 30 percent. Rouble leasing interest
rates rose from 16 percent to 24 percent over the first 10 months
of 2008.

In the Ural region, leasing volumes
were growing healthily before the consequences of the credit crisis
began to be felt. In the first half of 2008, lease volumes were 50
percent up on the same period in the previous year.

One national lessor that claims to
be well-positioned to profit from the crisis is Transleasing, which
is ranked 11th in Russia by new business in the first half of 2008.
Andrey Beloglazov, its general director, claims it has a strong
financial position, both in terms of liquidity and its credit
facilities with banks. It now aims to use its current situation to
gain a larger market share.

“What is a difficult time for all
financial institutions can be used by our company to make a leap
forward and move to a new level of performance,” said
Beloglazov.

Strong position

Larisa Yefremova, a partner at BDO
Unicon, said lessors that secured banking lines before the crisis
will come out strongest, not least as they are avoiding borrowing
rates of 18 percent. URALSIB Leasing is one lessor in such an
enviable position.

URALSIB Leasing chief executive
officer Elena Guschina said: “To ensure high sales of corporate and
retail products in the first half of 2008, we structured $200
million of external borrowings, made the second placement of
securities for RUB5 billion and financed $217 million trade and
export transactions in association with domestic and foreign
banks,” said

Not unlike many European leasing
companies, Russian lessors face a multitude of troubles. However,
for the likes of VTB Leasing et al, with the flow of money from
Western banks, as well as state banks, switched off, quite how they
will cope in the months ahead is uncertain. They, too, might learn
an important lesson the hard way: that quickly growing production –
as many have done with their rapid entry into the regions – might
not always be the best way forward. Entrenching themselves, and
providing value rather than increasing volume, might not be the
keys to success, rather a means of survival.

The author is a consultant
at Invigors.