A memorable year for Russian lessors

 

2011 is proving to be a momentous year for the Russian leasing industry. Firstly, theUnited Leasing Association of Russia (ULA) joined Leaseurope and then the association  held its first convention of the Russian leasing industry. Finally, in September theassociation is due to celebrate its first anniversary as the pan-Russian leasing  association.

 

For a visitor the size of the country is overwhelming; it is difficult to comprehend that the part of Russia which is in Europe accounts for around a third of the continent and a such is far bigger than any other European country.

 

The non-European part of Russia is of course far greater, so put the two together andyou have a market that none of us should ignore.

 

 

Although we naturally think of Moscow as the hub of the Russian leasing industry (it is after all where the majority of leasing business is conducted), I am told that it was in  fact St Petersburg where it all started and that is where the Russian leasing association is based.

 

It is also the home of the first Russian leasing company to receive a licence to conduct leasing business. That was Baltic Leasing which received leasing licence No.1, but we shall look at Baltic Leasing, its history and present in a future article. Its general manager, Dmitriy Korchagov, who is vice president of the ULA, told me “We are extremely keen to increase the international profile of the Russian leasing industry and to learn more about best practices in the more mature markets.”

 

The ULA (Russia) grew out of the previously local North-Western Leasing Association when, as the name suggests, the  industry became "United" and lessors from all over Russia were blended into one association for the first time. This is the third name change for what started out as The St Petersburg Leasing Association back in 1999. Each change has reflected an increase in the geographic reach of the association and it now has more members from outside of the North-Western Federal District, than from within it.

 

It is not surprising that the North-Western became the focal point as it was the one that had the drive to send representatives to major leasing conferences around the world and I first met them some four years ago in America. Although there are in the region of 1,000 lessors registered with the Ministry of Economics, the association is of the view that there are only around 150 active leasing companies large enough to file returns and most are members of the Association.

 

It is most welcoming to see the ULA join Leaseurope and we can but hope it will not be long before Leaseurope brings it annual convention to be hosted by its newest member association.

 

The president of the Association, Kirill Tsarev, said that he is delighted that they have become members of Leaseurope and in particular welcomes the fact that it brings them together with their colleagues in the leasing industry in CIS countries.

 

 

But onto the business of the 1st Annual Convention. It was attended by 122 delegates including representatives from the Federal government, CIS leasing associations, Leaseurope and members of the international leasing community.

 

The conference included sessions, from foreign speakers, about leasing practices elsewhere and a session involving CIS Leasing Associations on bringing together the

leasing community within the CIS.

 

The main focus of the conference was a discussion about the most critical matters the industry was facing. The good news was the recovery of the leasing market, with new business activity exceeding the most optimistic forecasts with growth of 2.3 times the previous year. There was the view that qualitative changes continue to happen and are a clear indication that the market is continuing to develop beyond early stage leasing.

 

Indicative features noted at the convention were: an increasing complexity of deals, the evolvement and refinement of financing structures among lessors and the introduction of new enhancements to leasing products offered as a result of an increasingly competitive market.

 

Tatiana Pozdnyakova, director of the ULA, explained: “the delegates specifically felt that such evolvement of leasing included building solid and effective connections between all the various participants involved in leasing deals – vendors, lessees, lessors, finance and credit organizations, insurers, shippers, leasing brokers, consultancy firms and others.”

 

The delegates discussed what they felt to be a growing interest by the global leasing community in the Russian market and an increase in the interests of foreign leasing companies to establish operations. Within the Russia banking community, leasing is increasingly being acknowledged as a separate form of finance in its own right.

 

Insurance and leasing companies are perceived as developing strong mutually strategic interests.

 

Reverting to the main topic - the challenges facing the industry - it has to be recognized that these remain numerous and complex and include:

 

• the possible removal of accelerated depreciation appears to be foremost in lessors’ minds. Leasing has enjoyed what has been perceived as a tax advantage

and if current suggestions of the government are implemented, the industry will have to sell their product using service-related arguments;

• problems arising from a number of imperfect leasing laws, particularly in the area of arbitration, VAT refunds and other tax matters;

• an increasingly negative approach of Russian courts and arbitration practices to leasing;

• the growth in the number of leasing companies and the resulting competition has given rise some unfair practices; in addition there is an increasing level of

fraudulent activity by lessees on inexperienced lessors;

• a lack of any meaningful statistics regarding the performance of the industry overall and indeed what such statistics should focus upon;

• insufficient adoption of International Accounting Standards by businesses generally;

• lack of definition and recognition of the different nature of operating leases for

legal and fiscal purposes;

• as yet no common terminology is in use in the leasing market, leading to different understandings of what is meant; and

• difficulties with international leasing from the perspective of taxation and customs treatment.

 

The convention delegates agreed that the ULA should direct its efforts in pursuing the following objectives:

• activate consultations with the Russian Federation Ministry of Economic

Development concerning the development of the Federal law on leasing;

• consult with members to achieve a common terminology in order to avoid the present ambiguity that sometimes arises from different interpretation of leasing

terms;

• the convention was of the opinion that they should seek to have leasing recognized as a separate activity in its own right and that it would be reasonable

to seek the inclusion of a separate chapter for leasing in the Civil Code of the Russian Federation;

• create a legal workgroup which would track and analyze court and arbitration practices reported by members and develop recommendations for court

proceedings to provide practical support for leasing companies;

• develop relationships with lessors across Europe in order to gain a better

understanding of progressive leasing practices;

• develop close relationships with Leaseurope and national leasing associations of CIS countries;

• seek increased coverage in press, both national and international; and

• collaborate with and support organizations that collect and analyze statistical

information on the leasing market.

 

Altogether the convention was deemed a great success by all who participated.

 

The enormous potential of the Russian market means that it is definitely one that we will inevitably hear a lot more about in the future and I will be writing more articles about Russian leasing for Asset Finance International in the future.

 

Alan Leesmith is director of International Business at IAA-Advisory.