Market overview: trade finance in Russia, a Sberbank overview

TFG’s Editor Deepesh Patel (DP)  interviewed Evgeny Kravchenko (EK), Head of Trade Finance in Sberbank. Russia faces continued turbulence and unrest amongst the international community, yet being the largest country in the world by territory, holding the 4th largest FX reserves in the world, we wanted to get under the skin of what running a trade finance business is like in Russia. We spoke to Evgeny Kravchenko, Head of Trade Finance in Sberbank and Chairman of the Board of Directors of Sberbank Switzerland. 

Still, most documents connected with trade (invoices, bills of lading or inspection certificates, etc.), remain in paper form. For companies involved in trade, this volume of paperwork is challenging, especially for small businesses that have neither the time nor the resources for bureaucratic procedures, which is why they try to avoid such complex paper-based documentation processes in banks. For banks, such manual processes only pay off with corporate customers. As a result, SMEs remain underserved in this area.

DP: Hi, Evgeny, please tell us what the trade finance market looks like in Russia? 

EK: Russia is clearly an export-oriented country, for instance Russian total exports exceeded US$420 bln, meanwhile goods and services imported to Russia amounted to US$250 bln in 2019. Both import and export finance serve strongly to the needs of Russian clients, though the share of export finance prevails. We shall not also ignore domestic, ruble-denominated trade finance business, which accounts for trillions of rubles in terms of turnover.     

Worth mentioning that trade finance and documentary instruments by far are not currently used in each and every commercial transaction between buyers and sellers, and however huge is the Russian trade finance market, there still remains much room for its growth. We see a great potential for market expansion as more corporates and even individuals take up using trade finance products or do so more and more frequently. In terms of market dynamics, we face an increasing demand for long term finance for capital goods and equipment imports and, even more notably, for non-commodity goods exported from Russia, given that Russia is strongly focused on increasing the share of high value-added goods. 

DP: Evgeny, tell us about the trade finance business you are running in Sberbank.

EK: I am delighted to lead the Sberbank Group’s trade finance business which encompasses a vast range of products, like LCs, LGs, IRUs, escrow accounts related to international and domestic transactions, ECA and EXIAR covered financing, Commodity Trade Finance and other. To give you some flavor, Sberbank Group’s total volume of trade finance deals and documentary operations amounted to USD39.6 bln in 2019. This figure is split among Russian and international business 60/40 approximately. 

Cross-border trade finance deals with companies and contractors representing all key industries from over 80 countries have been signed. Trade finance services are available across 12 countries of Group’s presence, incl. Switzerland where Sberbank AG actively develops Commodity Trade Finance.

DP: What are the recent developments you see in the Russian market and what are the client’s needs?

EK: Traditional trade business is going just fine. There are some supporting news to appear soon and some have already been released, actually. Certainly, there will remain some focus of Russian banks in terms of trade finance on large export-oriented domestic project for Russian companies planning to renovate or upscale their existing production or developing greenfield projects. For instance, you can hardly find such projects in the world like Gazprom’s Amur Gas Processing Plant which is expected to become one of the largest in the world. Total financing amount reached EUR 11.4 bln, 22 banks participated in the financial closure and Sberbank was not an exception, Exiar-covered part included. We anticipate this kind of deals to proliferate in the coming years. Commodity trade finance products like prepays for Russian exporters is also a hot topic for many industries: chemicals, oil and gas, agriculture and others. Switzerland is the main hub for these transitions at Sberbank where we arranged our dedicated team to meet the growing demand from clients. For instance, almost each second ship with grain which sailed in 2018 through Bosporus strait was financed by us. However, Switzerland has an expertise in financing the deliveries of all types of commodity goods supplied all over the world, not necessarily to Switzerland directly. 

What is more, it’s hard to miss the uprising trend on universal digitalization and customized IT services in banking.

DP: Could you please tell us more about digital products in trade finance that Russian banks are focusing on now? 

EK: Many of our clients see the benefits associated with digitalization and emergence of e-services, namely, greater speed in execution of transactions and cost reduction. All market players look forward to eliminating the entire need to physically visit banks, submit paperwork, rely on human processing and verification, and other similar inefficiencies. For instance, almost all of our clients already joined online bank “Sberbank Business Online”, all-in solution available for corporate clients, and transact with LCs without any need to physically attend the bank office. LC application can be drafted electronically there, signed with e-signature and be automatically submitted for issue within minutes. Once LC application is issued, a beneficiary may submit the required documents to receive payments online. The whole process turns faster and simpler which helps our clients to manage its liquidity better and without additional costs.  

More and more clients and banks are testing Blockchain technology in trade finance. Typically, all similar transactions required arduous manual handling of multiple documents by supplier and the bank. But it’s obvious, that the clients are keen to get rid of it. We also recently arranged a pilot deal with Trafigura in purchase of receivables based on the distributed ledger solution. This allowed to track every step of the transaction online (i.e., request for purchase of receivables, bank approval, issuance of the bank’s offer, confirmation of transaction terms, and settlement of the transaction). Blockchain solution optimised the whole business process and dramatically improved the efficiency of document flow. As a result, time to deal was reduced from one day to one hour. But there’s still a long way ahead to build the IT infrastructure and agree on standards universally acceptable along international supply chains. We see that different blockchain trade platforms like Komgo, We.Trade, Marco Polo and others are tapping into international markets, but they haven’t been actively used in Russia yet. Also, we observe fintech platforms not using distributed ledgers that provide banking services, including trade finance solutions, which might in some situations be convenient for clients. 

API services (Application Programming Interface) are also on the rise to allow financial institutions and clients to integrate their IT systems and enable direct virtual access to various trade finance services. Sberbank is proud to pioneer in this field. For instance, our LCs in real estate transactions may already be drafted automatically based merely on information supplied by a real estate developer’s internal CRM IT-solution and instantly issued by a buyer using Sberbank’s mobile app. To receive the payment under LC, the seller may submit required transaction documents using online channels without their physical delivery. Similarly, we are building on API solution for escrow accounts in real estate deals. As a result, not only risks of the parties become greatly reduced but also time to secure the deal diminishes from several days to several clicks. Such unparalleled speed has been welcomed by the market. 

DP: Evgeny, what’s your view on the future of trade finance business in Russia?

EK: I strongly believe that everybody will continue to invest in technology and will be switching from paper-based transactions to 100% digital. New fintech companies or already mentioned Blockchain trade platforms will pose competition to banks, especially, in trade finance. More and more global IT companies start to provide financial services, like Chinese WeChat. Russian IT giants like Yandex are also moving to this direction. We also see it globally when banks are building up joint blockchain platforms, for example, trying to share the costs of new solutions development. While large-volume deals like project finance still remain one of the key drivers for trade finance business in the near future, we believe that there is huge potential for the development of trade finance services for SMEs which require quick and easy solutions from the banks to cover their financing and secure payment needs.