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. Last Updated: 07/27/2016

Lenders Turn to Medium-Term Gains

In the get-rich-quick world of Russian finance, where commercial banks almost never willingly make loans for longer than a few months, several pioneer lenders have turned toward medium-term industrial financing as a more secure and promising way to make money.


The banks' nascent interest in industrial projects is based on a simple grain of wisdom: In the long term, banks need industry as much as industry needs banks.


"If industrial decline continues, pretty soon banks won't have much to do here," said Alexander Myagkov, deputy head of the credit department at International Moscow Bank.


International Moscow, one of Russia's 10 largest commercial banks, has doubled its medium-term lending in the first six months of 1994, extending $142 million and 77 billion rubles ($25.4 million) worth of credits to domestic industrial enterprises, according to Myagkov.


In the last three months, the bank has lent another $23 million, including $12 million to help an oil refinery in Siberia increase capacity and $1 million for the Russian-Austrian shoe manufacturer Lim Dinamo to install Western-made production lines.


Myagkov said that the credits, extended for an average of 12 months at 12 to 15 percent annual interest on their dollar value, were directed both at helping Russian industrial enterprises recover and developing a long-term client network for the bank.


By any analysis, Russian industry desperately needs the money. While the largely untracked private sector appears to be booming and gross domestic product has shown signs of recovery in recent months, industrial production was still down 23.1 percent in the first nine months of 1994 compared to the same period in 1993.


In the absence of effective financing, Russian enterprises have run up more than 100 trillion rubles in debts to suppliers, and have been unable to raise funds to replace aging equipment.


As a whole, the commercial banking sector is still a long way from making a major difference.


Central Bank spokeswoman Natalya Khomenko said that industrial credits account for a mere 3-5 percent of total lending by commercial banks. "They all prefer to give loans to traders," she said, referring to high-risk, high-interest extended to trading firms that promise short-term profits.


"Today we can only talk of industrial lending as exceptional cases," agreed Mikhail Bazarya, credit expert with the Association of Russian Banks, adding that most of Russia's 2,500 banks are too small to finance costly industrial projects.


Nonetheless, some bankers say that the tide could be changing, with large banks -- such as Moscow International, Tokobank and Inkombank -- stepping forward to fill the gap in industrial financing left as the government has sharply cut credits to enterprises.


"There are more one-year industrial credits on the market," said Igor Zaitsev, deputy head of the credit department at Tokobank. "I've even heard of a couple of three-year loans."


Tokobank, Russia's 14th largest bank, has also doubled its industrial credits portfolio to over $300 million dollars over the past year and a half, lending mainly to energy and metallurgy enterprises, Zaitsev said.


The lenders stress that their decisions are not based on economic idealism, but on sound financial reasoning, with banks tending to pick borrowers that have stable export revenues.


Myagkov pointed out that while industrial projects can be risky due to "sudden and dramatic changes in taxation and prices," the medium-term loans are in many ways preferable to short-term loans to trading firms, which are mainly very young.


"They want the money now, and you do not have time to get enough information about them," he said.


Zaitsev agreed: "We try to be as tough as our Western colleagues when choosing a project to fund."


In most cases, he said, Tokobank requires the borrower to open an account with the bank so they can monitor its income.


Industrial lenders also try to reduce risks by diversifying their portfolios. International Moscow Bank, for example, lends to oil and gas, textile manufacturing, metallurgy and real estate firms.


"If you lend to one sector, it's so easy lose everything when something unexpected happens," said Myagkov.