Russian Agency for Export Credit and Investment Insurance (EXIAR) reported on its supporting of the domestic exporters of agricultural products on foreign markets, and the task to increase the volumes of supply of agricultural products abroad.
According to forecasts of analysts, in 2014 Russia will face some success in terms of the new harvest of grains and oilseeds. To date before beginning of the active harvesting works, agricultural experts forecast the general harvest within 90-100 mln tonnes, and it is expected that agricultural commodity producers will start actively supplying their products on foreign markets, on the one hand, in order to adjust the supply and demand balances on the domestic market of the country, and on the other to sell the excess harvested volumes on world markets, which will undoubtedly affect the global supply and demand balances. The harvest-2014 can provide competitive activity for customers, and the suppliers expect for serious competition for customers and sales markets. While examining the proposals, the buyer will scrutinize both prices, and terms of delivery, and payment conditions. Historically, both in Russia and during export transactions, grain trading was mainly based on usage of advance payment mechanisms, cash against documents, or using letter of credit payment method, when the customers pay 100% of delivery either through prepayment, or on arrival of the goods to the port of destination. Delay in payment (or as it is called, trade credit), which is one of the main factors driving the further development of trade relations, and allowing to increase the volumes of trade and purchased products, is not applied in the supply of agricultural products.
However, the global markets continue actively changing under the influence of supply and demand balances, and the market of fertilizers is one of the most illustrative examples. It is no secret that several years ago the world market of fertilizers worked mainly with traders, and on prepayment terms only, without applying any mechanisms of payment delay. Recently the rules started changing, because such large-scale consumers as Asia and Latin America began consuming fertilizers in more active way, due to increasing of agricultural production rates. Fertilizer producers started looking for the final consumers, trying to form more long-term production ties and more stable customer base, which allows providing a foothold on the market.
In terms of the expected good harvest a growing number of players of the market of agricultural products started to think about more flexible forms of trade with foreign buyers. Also, provision of more convenient method of payment for delivered products is one of the major competitive factors to date. Delay in payment from the supplier to the buyer is one of the possible methods of payment, which in fact is realization of trade financing of the buyer, and allows significantly increasing the volume of purchased products. Trade credit, or so-called delay in payment, allows to the customers to include the reporting deliveries to its industrial processes, and pay to the suppliers at later stages of the production process, or after receiving the proceeds from sales, without diversion of financial resources or attracting the funds from banks and credit institutions (the need for the enterprises to provide additional collateral, security and, finally, the costs for attracting of funding).
Many exporters note that they would have supplied much more commodities to foreign buyers, but they are often limited in financial resources: it is the deficit of proprietory funds, unwillingness of banks to provide full funding, lack of collateral value and provision to attract additional financing. At the same time, a single market may easily cope with large volumes of imported products.
In such case the supplier reasonably faces the risks of non-payment by the buyer for the delivered products, due to insolvency or bankruptcy of the buyer. The risk of non-payment of the buyer is one of the main constraining factors for development of trading, as exporters are forced to minimize such risks. According to the world statistics, annually a lot of different small- and medium-scale companies become bankrupt. For example, in Western European countries the number of bankruptcies can reach tens thousands of companies per year, most of which is working with its suppliers or customers on deferred payment terms.
On the other hand, the real and tangible political risks in the modern world, which may have a significant and direct impact on realization of foreign trade contracts by the parties. The typical example is the impact of the authorities of the certain country of the buyer on the participants of foreign trade contract, resulting in termination of the previously concluded contract or impeding its further realization. The political risk can be realized in the form of imposition of various embargo preventing further realization of the contract, bans on currency conversion or transfer of foreign currency to the exporter, civil unrest, etc. Despite the seeming exoticism, the reporting risks can bring quite significant losses for the exporter.
Expansion of foreign trade activities of Russian agricultural enterprises has the strategic importance not only in terms of economic and social benefits, but also in order to strengthen the political role of Russia at the international level, strengthening its presence in various regions of the world. That is why, supporting of Russian exporters by the authorities is quite important. Insurance of business and political risks is one of such mechanism. OJSC Russian Agency for Export Credit and Investment Insurance (EXIAR) realizes such insurance operations. The Agency provides support to exporters using the instrument of foreign trade insurance against the risk of default payment and political risks, which are discussed above.
The global institute of national export credit agencies (like EXIAR in Russia) has existed since the beginning of the last century. The first analogues began appearing in the 30-ies of the last century, designed to protect the delivery operations of national exporters from military and political risks. To date the export credit agencies are successfully working in more than 70 foreign countries.
It is not a secret that the state policy supporting the exports using the mechanisms of insurance of credit and political risks greatly supports European and American companies on various markets. The experience of such countries as Japan, China, the USA and the EU shows that successful foreign trade and investment activities in various regions of the world is associated with the government guarantees and the programs of export financing and insurance.
While understanding the importance of agricultural commodities exports and the further development of cooperation with agribusiness companies, since 2013 EXIAR started realizing operations on insurance of export supplies from non-payment risks and political risks, which can significantly improve the competitiveness of Russian products and the terms of cooperation. At the stage of discussion of the possible terms of delivery, the Agency is actively helping to exporters to verify potential foreign trade partners for creditworthiness and reliability by using all available range of opportunities – beginning from the global and local credit bureaus, accumulating credit and financial information, to interaction with the Russian trade representatives, local authorities and the banking community, in order to form the certain opinion for the exporter on the partner's reliability, and provision of insurance coverage to the foreign buyer. Often the Agency contacts with the buyers who are interested in working with Russian companies on deferred payment, and understand the principle of the insurance mechanism provided by the Agency, to disclose its financial position, to get approval of the insurance coverage from the Agency.
According to our experience, the country which has the ability to supply food and agribusiness products on credit terms, chains buyers and the governments of the countries-importers much stronger and for longer-term prospect. Such activities involve construction of long-term security of economic and political relations, which value continues growing at the international level.
As a result, provision of the insurance coverage by the Agency for exports of agricultural products is one of the most effective tools for the real market support of national agricultural producers. It greatly increases their competitiveness on foreign markets, and at the same time provides safe protection of their interests against the risk of default by the buyers on commercial and /or political risks.
Alexei Bezdenezhnykh, Director of customer service at EXIAR
