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When the bear found bees in the honey
Russia, Monday, 16 February 2009

Ilya Pokamestov, General Manager of Factoring Pro, provides his views on the state of the Russian factoring industry and reveals what his expectations are for Russia's future. 

 The Russian economy has enjoyed impressive growth for years, buoyed up by high oil prices and a boom in the financial and consumer economy, which has helped to consistently push annual growth rates up to around 7% for ten years. Russian confidence in the economy has been understandably high, with Russians happy to compare their country’s levels of growth with those of the sluggish economies of the EU and North America. Sustained economic growth has for a decade been the norm, so when the Russian economy began to founder a couple of months back, the shock to Russians and the Russian economy were all the more keenly felt. Russians had widely believed in two simple truths: that global demand for oil would remain high, and that Russian energy exports would insulate them against the worst that a global recession could throw at them. The credit crisis has proven these convictions to be dangerously incorrect, and after having been so confident for so long, Russia is now finding itself dangerously exposed and under prepared as deepening woes engulf the country.     

Factorscan talks with Ilya Pokamestov, General Manager at Factoring Pro, Russia, about the impact of the crisis upon the Russian factoring industry, whether he expects failures in the downturn and the systemic problems that factors continue to face in the Russian legal and economic landscape.

How deep is the current crisis in the Russian economy?

Looking at all the indicators, it seems likely that Russia will plunge deeper into crisis before there will be any signs of recovery. The economic environment looks set to worsen in 2009 with bank rates having risen sharply in recent weeks, with Central Bank rates following suit reflecting growing pessimism and uncertainty. There is a lack of liquidity and a scarcity of financial resources that is exacerbating the problem, leaving virtually all sectors of the economy struggling, despite government intervention. One of the worst hit sectors is consumer goods, which has seen sharp rises in pricing in recent weeks; increases that are four times what they have been in the rest of Europe. Pressure from the crisis seems to be mounting on all fronts.  

How long do you think that the crisis will persist?

My optimistic hope is that this frozen period will last only until September-October 2009, from which point the economic situation will finally begin to thaw. However, my pessimistic fear is that the crisis will continue throughout 2009-10 and that it will only end in 2011. For me, the issue of the crisis is as much a psychological one as it is an economic one. Human behaviour has in a large part dictated the downward spiral of the crisis, and until people decide that something must be done to change the present situation there will be no chance for a real recovery.

Has the Kremlin’s response to the crisis been adequate?

This is a difficult issue to judge. In my view the government’s response has been adequate. In some ways they did lose sight of the reality that Russia would be affected by the crisis, but since the meltdown struck, the Russia government has been active in seeking to resolve the situation. The Kremlin has increased government presence in the economy and introduced increasing regulation to limit the impact of future crises. The global economic collapse has been felt all the more keenly in Russia due to the collapse in the value of oil. For the past five years, Russians have enjoyed the fruits of a boom in banking, oil and consumer products. The dramatic downturn came as a nasty shock to everyone, and the government has fought to find a remedy to the situation. They are doing what they can, but they are not miracle workers and there is no magical solution.

Should we expect failures in the Russian factoring market?

Yes, with failures in both the traditional and unorthodox sense. Some factors will certainly go under in the downturn; others will stop doing business with new clients, whilst others still will stop doing business even with existing clients. There aren’t a huge number of players in the Russian factoring market, particularly on the international scene, and we expect these numbers to decline still further. A number of factors are struggling. Some are facing bankruptcy, others are on shaky ground, and some have been recently sold to government banks. In the current climate, those factors with solid experience and strong portfolios look best positioned to weather the storm and emerge as continuing players on the Russian factoring market.

What problems are Russian factors facing at the moment?

Factors are facing a range of complex problems. The only area in which they are not facing problems is sales. Queues of clients are seeking factoring services, but due to a lack of liquidity, factors have been obliged to turn away large numbers of clients. Indicative of the crisis in liquidity are the compressions in staff levels that have reached 30% in some factors.

Factors’ problems are further compounded by increasing levels of overdue debtor payments, which have in reached 30-50% of invoices. Considering that many of these debtors are already, or set to become, bankrupt, the problems facing factors look set to deepen. My expectations are that the crisis will peak in March-April 2009, with overdue debtor payments and bankruptcies mounting until that point. Factors look set to respond to this situation by lowering advances down to around 70%, by not offering non-recourse services and by staying clear of industrial sectors considered risky.      

Factors have sited being forced to employ collection agencies to recover debts? Is recovery a particular problem in Russia?

With bankruptcies and defaults on the rise, resort to collection agencies has increased and will undoubtedly continue to do so. However, it has not been good for the image of factors to consort with certain collection agencies and it is unclear whether their involvement will improve the payment situation. Factors should really have started their recovery efforts earlier. By doing so at the recovery stage, and at this point in the crisis, it seems unlikely that the returns will be significant.  

Are issues concerning rule of law damaging the position of factors struggling in the downturn? 

There are laws on both factoring and collection in Russia, but unfortunately it is the laws concerning collection that are the more well developed. Initiatives have been made to develop Russian factoring law, but their impact has been limited. Banks have traditionally been regulated by the Bank of Russia, but factors have fallen outside the traditional remit of the bank’s regulation. The current crisis has revealed the need for greater regulation. The industry can argue that it has been audited by famous names, but this wont be the first time, or the last, that auditor oversight has been found wanting.

The factor industry in Russia needs a powerful and active non-commercial association that will promote its interests. Central to its work, should be a drive to develop the law on factoring. The present Factoring Association of Russia has done little over the past two years to redress the legal situation and my hope is that is will now be obliged by the crisis and the government to bring about positive changes to Russian factoring law.  

Who do you think will emerge as market leader in the next couple years?

2009-10 will be strange years, and I’m no oracle. We shall see. This year will be the tenth year that factors have been operating in Russia and my hope is that the year ahead will be a positive one for factors. There needs to be a wiping clean of the slate so that we can all move forward. And when we do, then perhaps a leader will emerge.

Источник: www.factorscan.com