Any mention of trading opportunities in the east is mostly likely to invoke thoughts of China, yet we may look nearer home for a financial success story. In the face of continuing economic uncertainty in the west, eastern Europe offers a glimmer of hope for economic recovery on a global scale. For the purposes of this article, the region will be taken as consisting predominantly of the former Soviet states and the former non-Soviet eastern bloc of central and eastern European (CEE) countries. Most of this region’s economies, although not all, proved relatively resilient in the face of both the 2008 financial crisis and the subsequent ongoing sovereign debt crisis in the eurozone. As such, they offer an interesting trading opportunity on the doorstep of any western corporate seeking foreign expansion as a means to counteract sluggish growth in their home markets.
Proximity should not be mistaken for similarity. Eastern Europe remains an area where political, economic and legal risks can hamper trading relationships and ruin well-planned expansion or diversification strategies. Going in blind is not an option, which means that corporates unfamiliar with the unique East European trading landscape need an experienced pair of eyes and ears. In this respect, correspondent banking networks that combine the on-the-ground expertise of local banks with the strategic and processing capabilities of a global bank may offer the best solution.
The European Stabiliser Effect
Eastern Europe withstood the financial crisis relatively well and continues to stand firm in the face of the current sovereign debt crisis engulfing its western neighbours. What’s more, rather than simply weather the storm there are increasing hopes that economic growth in the Commonwealth of Independent States (CIS) and CEE countries – expected to average about 2.5% in the coming year – may act as an economic stabiliser. This would provide trading opportunities to counteract wobbles in the West, where a slight recession is anticipated in 2012. To a certain extent, the foundations for this role have already been laid, with trade between the EU, particularly Germany, and the CIS/CEE countries increasing significantly over the past five years.
That is not to say that eastern Europe was completely shielded from the financial crisis. Some currencies were sharply devalued, while many countries saw export orders shrink to their main markets of western Europe. Perhaps most significantly bank credit lines became constrained, preventing exporters from benefiting from competitive financial support when they most needed it.
Indeed the economic picture is becoming increasingly polarised, mainly because of the different exposures to struggling western banks and flagging western export markets. The likes of Croatia, Romania, Hungary, Ukraine and Bulgaria, where Greek banks hold nearly 30% of the banking market, continue to struggle. But others are flourishing; none more so than the regional heavyweights of Russia and Poland.
It is Russia, still the EU’s third biggest trading partner, which represents the brightest beacon of hope. According to the EU’s statistical office Eurostat, EU exports to Russia have steadily grown since the turn of the century with the sole exception of 2009. Indeed, the value of EU exports in 2010 showed a sharp increase of 31% from 2009, and rose again by 46% in the first two months of 2011 from the same period a year earlier. By comparison, exports to China increased by 33% over the same period.
With the Russian economy likely to be sustained by high oil prices, high real wage growth and expansionary fiscal policy, the opportunities for trade with the country are almost limitless – an appeal that is only likely to be increased when Russia joins the World Trade Organisation (WTO) later this summer.
Russia is not alone in offering opportunities however. The CIS and CEE regions in general are fast becoming the workshop of the EU, with multinationals setting up production and service facilities across a range of industries. Many suppliers and distributors, local and international, are therefore increasingly keen to forge links that place themselves in this supply chain.
Avoiding the Pitfalls
Yet the changing economic landscape in eastern Europe does not mask the risks that remain prevalent. To make the most of the burgeoning trade opportunities brought about by eastern Europe’s economic resilience, it is essential that western corporates are aware of and respond to the unique political, economic and legal risks, including those relating to corruption and law enforcement, which could potentially affect their trade transactions.
When planning for the risk of non-payment – often accentuated by insufficient information on the creditworthiness of potential buyers, weak legal protection for creditors and poor or slow payment practices – corporates clearly need to join forces with a trusted financial partner. Crucially, this partner must be local enough to have in-depth knowledge of cultures, regulation and the creditworthiness of trading partners, yet global enough to have this knowledge across the whole region, with the full range of trade finance capabilities to match.
In this respect, correspondent banking ticks all the right boxes. Its strength lies in its combination of a community bank’s local expertise with the trade finance infrastructure of a leading international bank. Commerzbank, for instance, has 14 representative eastern European offices that source trade finance relationships from local financial institutions. The group’s pan CIS/CEE correspondent banking network has burgeoned to over 1,000 account relationships; a footprint that enables Commerzbank to promptly detect and respond to new and changing trade flows.
The value of local knowledge provided by correspondent banks should not be underestimated when conducting business in eastern Europe. The advantage to customers is that complex trade finance processes, such as the negotiation and settlement of letters of credit (L/Cs), can be either overseen or undertaken by a correspondent bank with expert knowledge of the local regulatory environment. This is a major advantage when trading with eastern Europe, where L/Cs will remain prevalent for some years to come. Indeed some countries in the region outlaw prepayment for imported goods, making L/Cs the only payment method available.
As with any structure, a correspondent banking chain is only as strong as its individual links. On one side, the outlook for the banking sector in Eastern Europe is positive, as evidenced by Russian state-owned Sberbank’s expansion into the region with the purchase of Volksbank’s operations in Slovakia, the Czech Republic, Hungary, Slovenia, Croatia, Ukraine, Serbia and Bosnia and Herzegovina.
Many western banks have problems at home, and some have responded to the eurozone sovereign debt crisis and the need to bolster their capital reserves by calling in loans and contemplating the sale of CIS/CEE subsidiaries. However, if eastern Europe is to fulfil its potential as a ‘European stabiliser’, a degree of commitment from global banks is required. Many countries in emerging Europe have small, open economies, which routinely use trade finance – predominantly provided by western banks. While in emerging Asia and Latin America local lenders can step in and pick up the slack, in emerging Europe the withdrawal of western European lenders from trade finance leaves a gap.
Given this, the role of the European Bank for Reconstruction and Development (EBRD) is also important. Through its trade facilitation programme (TFP), the EBRD provides guarantees to international confirming banks, taking the political and commercial payment risk of international trade transactions. The TFP strengthens the ability of local banks to provide trade financing and gives businesses in eastern Europe and the CIS the necessary support they need to expand their import and export trade.
For global banks the TFP allows them to expand their network, by conducting transactions when they may have no authorised credit lines for that country and it keeps banking relationships alive where credit lines may have already been exhausted. For example, in 2010 the EBRD guaranteed a transaction for the import of industrial equipment from Turkey to Russia for the manufacture of vehicles and trailers. In this transaction NBD Bank issued an L/C, confirmed by Commerzbank, and the EBRD guaranteed Commerzbank up to 100% of the political and commercial payment risk. With Commerzbank’s credit lines exhausted in the region, the completion of an important deal for a trusted and well-valued client rested solely on the EBRD’s involvement.
Yet this commitment should go further than just providing credit. Banks need to be a long-term strategic partner for their correspondent banks in eastern Europe. That is why Commerzbank has 14 representative offices in eastern Europe, supporting financial institution business and acting as an ‘on-the-ground’ partner. What’s more, a contribution and commitment to training banking personnel in the region can also enhance this partnership and strengthen the ultimate end product. Indeed, while the opportunities for conducting trade in eastern Europe are rapidly increasing, the strength of the proposition is only as strong as the banking chain that sits underneath it.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.
In the aftermath of the Brexit referendum, it was feared that the consequences would be catastrophic. Now, 14 months on, we’ve seen how the UK has weathered the storm – at least in the short term.