Russia: opportunity and risk

Nissim Chitrit

Bank Hapoalim foreign trade desk director Nissim Chitrit talks about the possibilities and pitfalls of exporting to Russia.

One of the basic questions that has worried Russias leaders throughout its history is what is the countrys true path: is Russia part of Asia or part of Europe? Its territory spreads across both continents and many nations live in it. Naturally, the center (west of Ural Mountains) and northwest lean toward Europe, but the east and the south are more influenced by Asian countries. Traditionally, the centers of control focused on the countrys north and west, and since the reign of Tsar Peter the Great in the 17th and early 18th century, the political and economic models adopted by Russias rulers tended to be based on the Western model. There is no argument that Russia has held regional hegemony in different periods, and continues to influence the political and economic agendas of its neighbors. Those who argued that Russia has its own way and that it connects the two words were right, says the Israel Export and International Cooperation Institute in its comprehensive review of one of the most interesting countries in the world.

There is considerable justification in these remarks. Russia connects two worlds - East and West - and this is apparently a feature that makes it a country worth exporting to, even from the comparatively miniscule Israel.

To learn a little more about the export process from Israel to Russia, we interviewed Bank Hapoalim (TASE: POLI) foreign trade desk director Nissim Chitrit. He began by explaining to us the definition of an export transaction and how exports to Russia differ from less complicated countries (such as the US). International trade, i.e. import and export transactions, have become more complicated recently, he says. Exporters are dealing with new and unknown markets and with frequent changes in the economic standing of various countries. The global economy is undergoing many upheavals, exposure to currency changes, and developments such as tightening sanctions against financial institutions connected with the countrys regime, both by the US and the EU, as well as growing dangers of fraud and stings.

Chitrit says that export deals have four contractual aspects: a sales contract (i.e. the nature of goods purchased, their value, and the final point of delivery); the transportation contract (how the goods are moved); insurance (insurance coverage); and payment (the payments terms between the parties).

The export deals bank loan begins at the early stages, i.e. when contact is made between the seller and the buyer, says Chitrit. Right at the start, it is important the exporter customer knows the importance of the commercial deal and its terms, how he will be paid for it, which are the applicable rules and international conventions, what are the costs involved, and the extent that payment to the exporter is secured, if at all.

Globes: What do you tell a new exporter?

Chitrit: First of all, prepare a transaction plan. This must include precise calculations of the production costs and financial worthwhileness of the export, in other words, a thorough analysis of the relevant market, the target clientele, competitors, prices, and so forth, and, of course, components such as taxes, transportation costs (air or sea), insurance, standards - i.e. learn the test process and costs of the standards institute - and more. There are many open sources for this information and fieldwork is also recommended, as well as participating in foreign exhibitions. Talking with a banker who specializes in foreign trade can be very helpful, especially for new exporters.

What are your recommendations to clients in the Russian market, in the wake of the US and EU sanctions?

Great caution should be shown and ask a foreign trade banker any question. These sanctions include financial restrictions on organization affiliated with the Russian regime, blocking their access to the US and European capital markets, and an embargo on trade in military equipment and sensitive equipment for developing energy industries. We advise our clients to avoid situations in which payment will be seized by US or European banks. This means checking which banks can handle deals. For each deal, it is necessary to examine the money path and direct the client to operate through financial institutions that do not appear on the black list.

The ruble recently collapsed, and Russia hiked its interest rate. For the exporter, how do currency risks affect the export process?

Anyone engaged in foreign trade, both importers and exporters, is exposed to risk from sharp fluctuations in currency rates. We recently saw this with the plunge of the ruble, but such fluctuations can also occur in markets that are considered to be more stable, such as Switzerland, where the Swiss franc skyrocketed early this year, because of the Swiss National Bank decided to abolish the exchange rate cap on the franc and cut the interest rate on deposits to a new low. It is therefore strongly recommended to seek the help of expert bankers in the field to make suitable hedges.

What can be done about stings?

This is a known factor in many countries, but, in recent years, the main harm has been to Israeli importers who imported goods from East Asia. We caution them in their conduct with East Asian suppliers, we tell them the suspicious signs, and we advise them to consult with us any time suspicion arises. A repeated sting is to send an email to an Israeli importer from someone impersonating its supplier, including a request to update or change details of the account for payment of the goods.

To better highlight what a contemporary Israeli exporter to Russia looks like, we spoke with Davik Ltd. export sales manager Eran Barlev. Davik, which uses Bank Hapoalim services, was founded in 1982 at Kibbutz Sde Boker in the Negev, and is fully owned by the kibbutz. The factory manufactures and sells a wide range of adhesive tapes.

Barlev says that the company, in its current format, has operated in Russia for the past years, and exports just one product to the Russian market: carry handles. These are plastic handles that hold a six-pack of water bottles, for example, he says. This handle is a kind of adhesive tape, which very few manufactures make. Daviks Russian customers include non-alcoholic and alcoholic beverages companies.

Barlev says that the Davik only exports carry handles to Russia, because the companys other products have no price advantage in the Russian market. Carry handles are a unique product that has a market with 3-4 competitors. Thats it, he says. The Russian market accounts for a few percent of the companys revenue. Although Russia accounts for a small portion of our revenue, we pay attention to the country, he adds.

What is the main difficulty working with Russia?

Barlev: Language difficulties are not small. I attended a huge food fair in Russia a while back, and Russians simply dont know how to speak English. Language problems became a major obstacle. There are also differences in mentality. For Russians, everything has to be documented. Absolutely everything - even the summary of a meeting. Israelis arent used to working like that.

Advice for the exporter to Russia

  1. Be aware of dealing with quotas
  2. Be aware of bureaucratic barriers
  3. Foster personal relations. Go out together, extend invitations to Israel, give gifts from Israel (something authentic, such as dates)
  4. Use a translator
  5. Remember that a signed contract is not necessarily binding
  6. Have a lot of patience
  7. Learn the local mentality
  8. Know who to talk to. Systems in Russia are highly centralized, and organizations are usually run by one dominant figure
  9. Check with the lending bank, before making a payment to Russia, whether the beneficiary appears on the black list

How to pay when the time comes

Choosing the method of payment is affected by a number of factors: the relative strength of one of the parties; the nature of the buyer-seller relationship; the type of goods; the political situation in the buyers country; the amount of the deal; and the laws and procedures in the countries of the buyer and the seller.

Foreign trade has four main methods of payment: advance payment; open account; documentary collection; and letter of credit.

Advance payment: the importer pays the exporter the full or partial amount before the goods are sent. This method characterizes a number of possible situations: the seller (i.e. the exporter) is a large company and the buyer (i.e. the importer) is a small company or private individual (especially true for small transactions); there is strong demand for the goods, or the seller has exclusivity on manufacture; this is the first deal between the parties, or there is bad experience between them; the seller grants the buyer a large discount for advance payment; or the buyers country has a foreign currency shortage, in which case the seller guarantees receiving payment.

Open account: the importer receives from the exporter the delivery documents and pays the exporter at the agreed-upon date. This method is easy to execute, fast, and the cheapest method, and the bank is only involved in the money transfer. This method is used when the buyer is a large and reliable company and there is full confidence between the buyer and the seller based on prior business experience. Another option is a consignment transaction in which the buyer is the sales agent of the seller, and the goods are owned by the seller until they are sold.

Documentary collection: the exporter sends the goods to the importer, but the exporter sends the delivery documents to the bank, which acts as its trustee. The bank sends the delivery documents to the importer on the basis of the payment terms dictated by the exporter. The advantage of this method for the exporter is that the delivery documents are not sent to the buyer until the payment has been made (in a cash transaction) or when the note has been signed (in a credit transaction). The disadvantage of this method is the risk that the buyer will renege, not carry out the deal, and refuse to redeem the documents. Another risk is where there is no bank guarantee of a credit transaction, and the buyer receives the goods, but refuses to pay, or encounters problems that prevent it from fulfilling the terms of the deal. To avoid exposure to this risk, an exporter can instruct the collecting bank (the bank of the importer/buyer) to release the documents to the importer only on the condition that the collecting bank completely guarantees payment in full to the exporter on the redemption date.

Letter of credit: an irrevocable commitment by the bank to pay the exporter the amount on the date set in the letter of credit, on the condition that all documents have been presented and all the terms stated in them have been fulfilled. Exporters sometimes ask another bank to assume responsibility toward the exporter to pay the proceeds. This method gives both parties advantages that do not exist in the other methods of payment. For example, the exporter obtains an irrevocable commitment of the bank to pay if the terms of the letter of credit are met. The importer can set the terms and documents in advance. The importer is also guaranteed that payment will only be made after the documents it demanded are received on time, as set in advance in the letter of credit.

In addition to the advantage of this method, it should be noted that the exporters right to be paid is fully subject to the quality of the documents submitted to the bank that opened the line of credit. Even if the exporter perfectly executed the transaction at the terms agreed upon, a flaw or discrepancy in the documents is liable frustrate receiving the proceeds.

The case of the importer is similar: creation of a commitment to pay subject to presenting the documents. A letter of credit does not grant immunity in cases of flawed goods, goods which were not ordered, etc. It is the most complicated of the methods of payment mentioned.

Chitrit says that it is possible to combine two or more methods of payment, depending on the needs of the transaction. For example, by combining advance payment and a letter of credit, so that part of the payment is in advance and the balance is by letter of credit against presentation of the importers documents and the terms agreed by the parties in advance.

Published by Globes [online], Israel business news - www.globes-online.com - on April 19, 2015

Copyright of Globes Publisher Itonut (1983) Ltd. 2015

 
Nissim Chitrit
Nissim Chitrit
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