This article is co-authored by: Andy Romanov of Ukrgasbank, Vladislav Berezhny of Credit Agricole and Carter Hoffman of Trade Finance Global
The humanitarian and economic war between Russia and Ukraine has sent ripples all around the world, with practitioners, financiers, and governments urgently stepping in to try and help.
Boosting and restoring trade exports will be key for Ukraine, as well as ensuring a safe entry route for trade imports.
The European Bank for Reconstruction and Development (EBRD) has been one such organisation, actively stepping up to support the country which has become one of its top investment destinations, second only to Turkey.
To gain insight into the trade and structured finance landscape of Ukraine currently, Trade Finance Global’s (TFG) Deepesh Patel sat down with Andy Romanov, deputy head of trade finance at Ukrgasbank, and Vladislav Berezhny, director of trade and structured finance at Credit Agricole.
Both Romanov and Berezhny will be speaking at EBRD’s flagship Trade Facilitation Programme (TFP) conference in Istanbul. TFG are a proud media partner of this EBRD forum.
The changing trade and trade finance landscape in Ukraine
The trade and trade finance markets in Ukraine prior to 2015 grew and developed very slowly, but the years 2015-2019 saw rapid development in terms of imports and exports.
In 2017, Ukrainian exports reached around ₴143 billion (hryvnias) and imports amounted to ₴162 billion, figures that were surpassed in both 2018 (when they were ₴160 billion and ₴191 billion, respectively), and 2019 (which saw ₴164 billion and ₴195 billion).
2020 started well, but the COVID-19 pandemic disrupted this growth pattern, as it did for so many other nations and industries at that time.
Nevertheless, export remained at ₴164 billion and, likewise, imports stayed at ₴168 billion by the end of 2020, rising again to ₴221 billion and ₴222 billion respectively in 2021.
In Ukraine, however, trade finance and trade differ significantly, with the former lagging behind the latter.
This is partly because Ukraine often feels the impact of global crises quite strongly, with the international banking community closing or limiting lines to Ukrainian banks.
This often means that, despite the large import and export volumes, the financing lines are simply not always there to support them. There is also a need to boost Ukrainian trade finance through further regulatory and marketing instruments, promoted by Ukrainian Alliance for Trade Finance and Factoring (UATFF), the interbank trade finance lobby.
At the end of 2021, the country reached around ₴100 billion in total trade finance, with the Ukrainian banking community working closely with the international and trade finance banking sectors to help bring more credit into the country.
But February brought with it a turning of the tides.
Within one month of the war starting there was a 10% drop in trade finance portfolios, and a substantial decrease in origination due to seaport blockades and other military activity.
Berezhny said, “We expect that by the new year the volume of trade finance portfolios will decrease by a further 20-30%.
“Nevertheless, the majority of leading banks’ trade finance commitments continue to contribute to the general stabilisation of the business environment.”
High interest rates in Ukraine and market adjustment to the current geopolitical conditions
Thankfully, trust in the Ukrainian banking system has remained high, meaning that there has not been a run on deposits. Regulatory changes to ensure economic structures were upheld were enacted upon the initiation of the war.
Unfortunately, rising interest rates are making it more difficult for businesses to secure necessary business loans.
On June 2, the interest rate in Ukraine was raised from 10% to 25% to ease pressure on the foreign exchange (FX) market and fight inflation.
On July 21, the hryvnia-dollar FX rate was lowered to 36.5: 1, a 25% decrease since the beginning of the war.
Such steps were enacted by the National Bank of Ukraine (NBU) to stabilise the FX market, helping to increase the supply of foreign currency in the country.
Deposit rates are now at 13-17% per annum with loan rates sitting at, or above, 20%.
For Ukrainian businesses, these rates are very high and bankers anticipate that it is likely to lead to a significant decrease in bank loan portfolios throughout the country, as well as the banking system’s overall liquidity.
To help alleviate some of the pressure on businesses, banks have been instituting payment holidays, agreed by NBU in a package of anti-crisis measures. At this point, it is still unclear the impact this has on the aggregate economy as the situation is continually evolving.
The response from the international banking community
Banks need to continue providing clients in the Ukraine region with the same level of support that they were receiving prior to February 24.
However, the entire situation, including the levying of sanctions against Russia, has made the role of bankers more difficult than it was before, especially for trade finance transactions.
International banking groups present in Ukraine have demonstrated a strong commitment to supporting their subsidiaries and customers through continued lending. Therefore, despite constraints, international trade finance operations have continued.
The reality for many local banks is that direct interbank trade finance transactions without cash-cover are now closed. The cost of financing has also increased, although this is generally considered to be a global trend.
This adds additional pressure on Ukrainian businesses to stay afloat.
According to Romanov, however, many multinational financial institutions, like the EBRD, have performed their functions both timely and effectively.
Romanov said, “We are very grateful to the EBRD and everyone who now supports Ukrainian banks, customers, and Ukraine in general during this challenging time for our country.”
It should come as no surprise that periods of economic stress and unrest––as Ukraine is currently experiencing––are not well suited to the acquisition of new clients.
However, during difficult times such as these, it is common to see companies that have had relations with certain banks in the past––but perhaps not actively at present––return to rekindle these relationships as they now need all of the support that they can get.
This is particularly the case with banks that have a strong reputation for delivering on promises made to clients.
This type of pattern, which is being seen today, is not new to experienced practitioners in Ukraine, who will have witnessed similar behaviour throughout the country’s economic challenges inflicted by either global events like the financial crisis of 2008, COVID-19, or the Russian intervention of 2014.
This has put many bankers in a position to consider the return of these old business relations and how they might be restructured to meet the current needs faced by the market without interrupting trade and business relations.
This culture of resilience, which seems to be shared by the top Ukrainian banks, is a large reason why trust has remained high.
Looking ahead, both Berezhny and Romanov call on the international banking community to keep lines to Ukraine open.
They can be small and they can be limited, but in order for Ukraine to continue on despite the pressure of the conflict, they need to have that lifeline of support coming from abroad.
TFG are proud media partners of the EBRD TFP in Istanbul