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Although factoring has only been available in the Russian market since about 1998, it has already grown to about $10bn per year in value of invoices assignments, representing about 1% of GDP at the end of 2006. Many banks have started to invest in factoring operations in the last two to three years but just the top six factoring companies and banks account for some 80% of the factoring business. The top two account for 50% of the factoring business in Russia, these are Eurokommerz and NFC (National Factoring Company). NFC is a licensed bank whilst Eurokommerz is completely independent.

Apart from Eurokommerz and NFC, virtually all the other factoring operations are departments of banks. The main reason for this being that “best advice” was to have a central bank license for factoring operations. But this “best advice” has changed recently with two factoring operations, including the market leader, reverting to “non-licensed operations”.

This is due in no small part to a conflict in Russian law, but also politically, there is an acceptance that factoring can be de-regulated from the Central Bank and a draft law was presented to the State Duma (parliament) in April 2006. Being non-licensed/non-regulated by the CBR eliminates the huge burden of daily reporting to CBR and costly financial reserves which have to be set aside on both debtors and clients. In any case, many think the CBR does not understand factoring!

Future growth – potential market

Factoring is expected to grow to 3% of GDP by end of 2008. The biggest problem facing the current factoring companies is lack of capital and financial resources. Many of the banks’ factoring departments do not have sufficient financial resources and they literally have to compete with their own treasury departments to gain funding (which is often limited and expensive). Most Russian banks outside the top 10 are under-capitalised. A western bank, prepared to enter the market, would have a huge competitive advantage and grow quickly.

The two market leaders are currently always looking at ways of attracting more funding. Typically the most commonly used financial “instruments” are bonds and CLN’s at 150-300 basis points over US$ libor. One of the market leaders will enter into an IPO next year on the London market – an increasingly fashionable thing to do for Russian financial institutions. Strategic financial partners are always welcomed by Russian factoring businesses, so if any western banks have a desire to enter this highly attractive market, then now is the time.

One of the biggest difficulties for factoring businesses in Russia is the need to find the right people. But this problem exists not just in factoring but in many different businesses because the economy is growing at such a rate that the need for good people is ever present. Experienced factoring people are in short supply and it’s definitely an employees’ market. There is a trend now to provide excellent HR services including training for staff retention, but compared to mature markets, salaries are very low: typically US$1,000 - $2,500 per month for experienced people. Net profit margins are excellent: two times larger than mature markets. So, with good margins and a low salary economy, Russian factoring offers attractive prospects, if you know what you are doing here!

How does factoring in Russia differ from, say, the UK?

Firstly, registering your factoring contract is not possible as there are no central registers. Setting credit limits on clients or debtors is difficult because there isn’t any credit bureau. Nor is there any central register/s for encumbered or pledged property, instead companies have to keep a register themselves for all pledged property which they show you upon request. There is also no such thing as a debenture or fixed charges.

Factoring is not whole turnover. Many companies which use factoring often use a number of different factoring companies. It is common to factor the same debtor with different factoring companies and/or factor different debtors with different factoring companies. It’s not uncommon to take on a new client which has three or four factoring contracts already. It’s not dangerous, however, if you know the market and the procedure.

Every invoice that is factored has to be physically signed by the debtor on the original of the invoice. This is essential if you ever need to take the debtor to court. Every invoice must be assigned in accordance with a pre-agreed sales contract between the debtor and the client. Every invoice must show the contract number and the invoice must comply in every way with the contract. The client and the debtor must always sign an assignment letter recognising the assignment before factoring commences and an assignment letter should be signed for each sales contract. Factoring in Russia is at “invoice finance level” rather than “current account level” which means every invoice is financed individually and all charges are set against each invoice. Invoice discounting, with a trust account, is not yet available in Russia.

Many of the factoring operations do not provide dunning procedures or proper “receivables management” although this is gradually being offered. Risk management is in its infancy and only in the last two years has some resemblance of effective/proper risk management been implemented, regretfully at the cost of some frauds and losses. One of the reasons for this is the poor standard of good factoring software. But again, this is gradually changing for the better with the emergence of some excellent “western” factoring software becoming available. In my opinion there isn’t any good Russian factoring software!

The Russian factoring market will become one the largest markets in Europe within the next couple of years. I encourage much more participation in Russian factoring from western financial institutions. Why? Because of the excellent margins through greater resources at competitive rates and excellent “cross-sell” opportunities into the dynamic growth of Russian business: opportunities which simply do not exist in mature markets. It’s also a good time for factoring in Russia because of the increasingly stable business environment, which is proven by the multi-$bn investments made by global brands.

The UK is the second largest inward investor in Russia.

I would be pleased to hear from anyone who wishes to visit Russia!

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Barry Rogers, MICM, DipFDA
E-mail: info@abacusfactoringconsultants.com
Tel: +7 917 598 5162

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