The Lease Agreement: a Lessee’S Per- Olga Kosikhina Told Us How Spective Leasing Helped Her Transform Pg

39584 Published by the Leasing Development Group of the International Finance Corporation (IFC), a Member of the World Bank Group, with financial support from the Canadian International Development Agency INFORMATION BULLETIN Public Disclosure Authorized

CONTENTS : http://www.ifc.org/russianleasing MARCH-APRIL 2001, Issue 2 (14)

A SUCCESSFUL SUPERMARKET IN OUR PROJECT NOVOCHEBOKSARSK An Interview with Karim Ahmad, IFC Investment Officer pg. 2 uring the Leasing De- Training velopment Group’s re- pg. 5 Public Disclosure Authorized Dcent seminar in Chu- vashia, we learned about a THEORY AND PRACTICE lessee named Trading House How to approach a leasing company #55 from the city of pg. 9 Novocheboksarsk. Director The Lease Agreement: a lessee’s per- Olga Kosikhina told us how spective leasing helped her transform pg. 12 her store from a loss-maker The Eurasia Foundation Private Enter- into a rising star. prise Development pg. 15 Olga Kosikhina, Director of Trading Continued on pg. 24 House #55, with a leased refrigerator Risk minimisation for leasing companies counter. The counter has allowed the pg. 22 store to increase turnover and the range of Public Disclosure Authorized products offered LEASING IN REGIONS Leasing Development Project in the Tomsk Region pg. 18 he overall theme of this edition of the Leasing Couri- er is lessees. Why have we chosen to devote so LEASING IN RUSSIA Tmuch attention to the «consumers» of the leasing in- Leasing licenses dustry? Because unlike the savvy experts from the leasing pg. 19 companies, banks and equipment manufacturers, who al- Leasing in Chuvashia ready thoroughly understand leasing, lessees often have pg. 19 only a vague idea of the specifics of this financial tool. In The Canadian Business Association the hope of educating lessees about leasing, we have de- visits Russia’s Northwest Region cided to launch a new section of the Leasing Courier enti- pg. 20 tled «Advice for Lessees.» This section will include practi- Public Disclosure Authorized cal information to help lessees in their business activities. SMALL BUSINESS The Leasing Development Group is also developing a new A successful supermarket in series of seminars for lessees entitled «Acquiring Fixed Novocheboksarsk Assets Using Leasing» The first of these seminars will be pg. 24 held in Krasnodar this May. NEWS If you would like to suggest any topics that may be of Press Digest special use or interest to lessees, please contact us at the pg. 26 address listed on the back cover of this journal. QUESTIONS AND ANSWERS pg. 30 2 OUR PROJECT March-April 2001

IFC INVESTMENT PROJECTS

An Interview with Karim Ahmad, IFC Investment Officer. By Viktoria Struts, IFC PR Specialist.

How do IFC investment projects work?

We basically have two kinds of project. Sometimes the IFC buys shares in existing companies or helps found new ones, always capping its involvement at 25%. In other cases, it simply gives loans to client companies. These loans are usually more long-term than those readily available on the market, but they are still commercial in nature, so potential clients should not expect to receive any dis- Karim Ahmad, IFC Investment Officer counted rates. Furthermore, our loans may not exceed 50% of a client’s total assets, so we are never the sole source of funding. What is the goal of the IFC’s investment projects? Can you tell us more about the IFC’s crite- The IFC was created for the purpose of mak- ria for investment projects? ing investments in the private sector. It essentially acts as an investment bank with two ob- First of all, potential clients must already have jectives: on the one hand, of course, it tries to a well thought-out plan. A mere desire «to get in- turn a profit, but on the other, it tries to devel- to leasing» is not enough. The IFC is not a leas- op the markets where it operates. The leasing ing company; it is more like a bank that is inter- industry is one area that we consider especial- ested in financing the process of leasing itself. ly important. Therefore, companies should not come to us for help with just one or two deals. We are looking We use two basic criteria to assess our infor long-term partners. When we do give loans vestment projects: they must be profitable, to leasing companies, we make a number of de- and they must contribute to market growth. In mands. First of all, the companies must diversi- countries like Poland and the Czech Repub- fy their portfolios so that no single lessee or in- lic, where the private sector is already well dustry makes up more than 25-30% of their to- developed, we are undertaking fewer and tal. Second, the companies must adhere to a fewer projects, since the markets in these strict repayment schedule. Third, certain kinds of countries have begun to function on their business are strictly prohibited, such as any pro- own. In Russia, we see our principal task as ject that involves the manufacture of alcoholic creating and supporting «model» enterprises drinks, firearms, military technology or gambling that might serve as an example to other com- machines. As I mentioned before, projects are panies. expected to be profitable, so companies have to

Karim Ahmad headed the IFC Leasing Devel- nior manager of the IFC’s Technical Assistance opment Group for more than two years until his Program. Karim runs technical assistance pro- transfer, in July 2000, to a new position within jects for the leasing sectors of Russia and the IFC’s Central and Eastern Europe Depart- Ukraine and helps promote investment in the ment. He is now an investment officer and se- financial markets of these countries. March-April 2001 OUR PROJECT 3 consider whether their leases will pay off, where with an appropriate balance of Western and lo- they will make their profits and how much in- cal specialists. DL Vostok has been able to se- come they will earn on their investments. cure funding from some major banks, which is extremely important for a leasing company in Russia, where finance is hard to come by. Final- Every time the IFC creates a new leasing ly, the company has been careful to tailor its ser- company, the other players on the market be- vices to the Russian market. It spent half a year gin to realize that leasing can be a profitable developing the basic structure of its lease agree- business. At the same time, we try to influence ments, putting together a solid insurance policy, the development of the market itself by push- working out agreements with its principal suppli- ing for legislative reforms. We also send a sig- ers and selecting its clients. All of these nal to potential investors that it is safe and painstaking preparations should soon begin to profitable to invest in this particular market - pay off. The company plans to expand its portfo- otherwise we wouldn’t be doing it ourselves. lio dramatically over the next six months.

Karim, how does a company apply for IFC Could you give us some concrete exam- funding? ples of companies that the IFC has created? There is no standard application form. Anyone We have formed successful leasing compa- with a well thought-out plan and a desire to form nies in more than 60 countries. A prime example a new company, or to expand an existing one, is the Korean Development Leasing Company, can contact the IFC directly. This applies to both which has now become the largest leasing com- foreign companies and local ones. Applicants pany in South Korea. must tell us about their companies and their proposed projects, either by mail or in person. If a In Russia, the IFC helped form Deutsche project seems interesting, the IFC will ask the Leasing Vostok, together with Deutsche Leas- applicant to prepare and submit a detailed busi- ing, the fourth largest leasing company in Ger- ness plan for further consideration. many. Deutsche Leasing Vostok is the first universal leasing company in Russia with a significant amount of foreign capital. Although the How exactly does the IFC decide which company is still young (it was founded in spring projects to finance? 2000) it has already achieved a certain measure of success for a variety of reasons. The project’s The review committee usually consists of an main sponsor, the DL Gruppe, has proven very investment specialist with considerable experi- effective. They have put together a strong team ence and a thorough knowledge of both finance

In addition to leasing companies, the IFC also ernized, since a modern yogurt factory can use invests in industrial firms, banks and insurance only the highest-quality milk. Thus, during the companies. second stage of the project we helped modern- One example is the well-known yogurt com- ize and re-equip the local dairy farms. We did pany Campina. This project was developed in not begin working on the construction of the two stages. In February 1992, when the Dutch factory until we had already developed the lo- company Campina Melcuni decided to build a cal infrastructure. That took about one year. yogurt plant in the Stupino district of the The construction itself cost about 60 million Moscow Region, the IFC helped finance the guilders ($30m). Over the two-year term of the construction. However, before granting the loan, we helped modernize 12 local dairy loan, we required that the local farms that were farms, all of which continue to work with to supply the factory with milk be fully mod- Campina to this day. 4 OUR PROJECT March-April 2001 and local conditions, and an engineer with the tions to the IFC, which then decides whether to appropriate technical experience. Together they fund the project. If the project gets the green are responsible for making a complete assess- light, the IFC’s legal department begins to draft ment of the technical, financial and economic the necessary documents. Any unresolved aspects of the project. They visit the project site questions are discussed with the client company itself in order to become familiar with every and the other financial institutions involved in the minute detail, which they later discuss thorough- project. Only when every last detail has been ly with the principal investors. When they return thoroughly worked out do we finally present the from the site, they present their recommenda- project to the IFC Board of Directors.

HOW TO PREPARE AN INVESTMENT • Availability of manpower and infrastructure PROPOSAL (transportation, communication, energy, water, etc.) • Itemized estimate of operating costs All investment proposals submitted to the IFC • Sources, cost and quality of raw materials and must include the following information: connections to auxiliary industries • Import restrictions on essential raw materials 1. A brief description of the project • Proposed location of enterprise in relation to suppliers, markets, infrastructure and manpower 2. The principal investors, management and • Projected strength of enterprise in comparison technical assistance: to analogous enterprises • The principal investors’ history and types of • Potential environmental hazards and possible business (including financial history) solutions • Proposed management structure, list of directors and their biographies 5. Need for investment, project finances and • A description of all technical agreements and profits: other external assistance (management, pro- • Estimated cost of project: expenditures on real duction, sales, finance, etc.) estate, construction and equipment; volume of turnover capital, including required sum of foreign 3. Market report currency • Description of local, regional, national and • Proposed financial structure of the enterprise, export markets including expected sources of finance and con- • Expected production volume, cost per unit, ditions for loans and shareholder capital marketing plan and projected market share • Type of finance to be requested from the IFC: • Potential consumers and distribution network loans, shares or both (including amount) • Existing suppliers of raw materials • Expected financial results and return on in- • Potential competitors and the probability of vestment satisfying consumer demand with analogous • Any important factors that may affect the products profitability of the project • Trade barriers and import restrictions that may affect production and sales 6. Government support and legal framework • Important factors that may influence the • Governmental programs for economic de- market’s potential velopment and investment • Incentives and support offered by the state 4. Technical foundation, manpower, access to • How the project can contribute to the raw materials and environmental issues country’s economic development • A brief description of the production process • Overview of foreign currency regulations • Specific technical difficulties and need for special know-how or skills 7. Projected schedule for developing and • Potential equipment suppliers realizing the project March-April 2001 OUR PROJECT 5

Does the IFC control how its loans are used? and requiring quarterly reports on the state of the project with complete information about any fac- Absolutely. After the Board of Director ap- tors that could influence its development. The proves a project we begin to allocate the funds IFC also requires annual financial reports, which according to the procedures stipulated under the we submit to independent auditors. agreement. From that point on, the IFC strictly controls how the funds are used. We continue to monitor our investment for the duration of the For additional information, please contact the project, holding regular consultations with man- Central and Eastern Europe Department of the agement, sending working groups to the site, IFC at (095) 755-88-18 in Moscow.

SEMINAR IN SMOLENSK

Eleonora Veitsman PR Specialist IFC Leasing Development Group

n February 8, 2001, the Leasing Develop Group held a seminar in Smolensk enti- Otled «The Principles of Leasing in Rus- sia.» The Smolensk Chamber of Commerce and Industry helped organize the event, which was attended by 74 people representing a variety of interested parties: leasing companies, potential lessees, banks and the regional government. Participants learned about essential elements of leasing and analyzed the legal and financial in- tricacies of leasing transactions. They also had the opportunity to meet with representatives from the sole active leasing company in the Smolensk region and discuss the possibility of future joint projects. more and more of the region’s entrepreneurs have begun to understand the advantages of The seminar concluded with a press confer- leasing over other forms of finance. As of De- ence for local print and television media. The cember 2000, the Smolensk Business Develop- speakers noted that industrial firms in the ment Center had signed over 120 lease agree- Smolensk Region desperately need to modern- ments. ize their facilities. Therefore, leasing, as an effective financial tool for acquiring new equip- Although virtually all of the region’s enterprises ment, has enormous potential in the region. need new equipment, only certain industries have really begun to make active use of leasing: At present, the only registered and active leas- namely, those that use relatively inexpensive ing company in the Smolensk region is the technology and have a high rate of capital Smolensk Business Development Center. Two turnover. The Smolensk Business Development other companies, Askold Bank and Smolenska- Center’s leasing portfolio breaks down as fol- grosnab [Smolensk Agricultural Suppliers], a lows: retail equipment, 36%; food-processing subsidiary of Sberbank, also offer leasing plans equipment, 13%; real estate, 13%; petrol sta- in addition to their primary lines of business. In tions, 13%; vehicles, 7%; and printing equip- spite of the small number of leasing companies, ment, 3%. 6 OUR PROJECT March-April 2001

The Smolensk regional government has be- The region allocated 4.8 million rubles to its gun to promote leasing in earnest, as it recog- business development fund in December 2000, nizes the importance of leasing to the region’s with 2.35 million rubles specifically earmarked social and economic development. It allocated for the region’s bakeries to help them lease new one million rubles to the Smolensk Regional equipment. However, due to tax shortfalls, only Fund for the Support of Small Entrepreneurship 200,000 rubles have actually been transferred to for the creation of a business incubator in 1999, the fund so far. and half of these funds will be used to finance leases. In August 1999, the region also received The Smolensk Region’s business develop- 1.5 million rubles for leasing projects from the ment program for 2001-2002 will continue to Federal Fund for the Support of Small Entrepre- promote leasing as a valuable tool for support- neurship. ing small enterprise.

A SEMINAR FOR THE ICE CREAM PRODUCERS’ UNION

Aleksei Trepykhalin Training Manager IFC Leasing Development Group

n March 1, • The concept of leasing and its advantages 2001, the • An overview of the Russian leasing market. OIFC Leasing • A survey of Russian leasing legislation Development • How to choose a leasing company and build Group held a semi- an effective partnership nar entitled «An • The essential clauses of a lease agreement Overview of Leas- • Essential accounting and tax regulations for ing in Russia» at leasing transactions the All-Russian Ex- • Leasing as an effective means of acquiring hibition Center in new equipment Moscow. Organiza- tional support was Several leasing companies attended the sem- provided by the inar, including RG Lizing, Rosagrolizing, Prod- Union of Russian mashlizing, KNK Lizing and the Moscow Leas- Ice Cream Produc- ing Company. These companies were able to ers and the Region meet with expo participants and establish con- InvestConsult Cen- tacts with potential lessees. ter, a joint project of the Council for the Study of Productivity (part of the Russian Ministry of Economic Development and Trade) and the Russian Academy of Sci- ences. The seminar was held concurrently with the Eighth International Exposition of Ice Cream and the Frozen Foods Industry.

The IFC seminar attracted a great deal of attention at the exposition, since the frozen food industry is in desperate need of new equipment, and leasing represents one of the most realistic solutions. The seminar addressed the following topics: March-April 2001 OUR PROJECT 7

SEMINAR IN SARATOV

these circumstances, leasing is one of the most effective means of helping manufacturers acquire new equipment, modernize their production facilities, raise productivity, become more competitive and create new jobs. And the more the leasing industry grows, the more the regional government will earn in tax revenue.

Despite the huge demand for leasing services, the only licensed leasing company currently ac- n March 22, the IFC Leasing Develop- tive in Saratov is the Volga [Povolzhsky] Leasing ment Group held a seminar on «The Center. Several local banks also have leasing li- OPrinciples of Leasing» in the city of censes. An extensive publicity campaign is still Saratov. Organizational support was provided required to make potential lessees and suppli- by the Saratov regional government, the state ers in the region realize the benefits of leasing. enterprise Saratov Special Programs Manage- ment and the Directorate for Investment and The IFC seminar addressed the following topics: Leasing. • The concept of leasing and its advantages Yury Mikhailovich Sapronov, director of Sara- • An overview of the Russian leasing market tov Special Programs Management, opened the • A survey of Russian leasing legislation seminar with a detailed discussion of the poten- • The stages of a lease tial for leasing in Saratov and an account of the • How to choose a leasing company and build regional government’s initiatives to create favor- an effective partnership able conditions for leasing in the region. Sever- • The essential clauses of a lease agreement al of the region’s ministries are currently working • Essential accounting and tax regulations for on a «Leasing Development Program,» which leasing transactions will include concrete measures for the support of • Lease payments leasing projects and the dissemination of infor- • Implementing a lease agreement mation about leasing among potential lessees in • Guarantees on leases the region. The program will also include pilot • Leasing as an effective means of acquiring projects such as an equipment yard for regional new equipment construction companies. By inviting the IFC to hold its «Principles of Leasing» seminar in Sara- Seminar participants were able to ask ques- tov, the regional government has taken an im- tions and receive detailed consultations from the portant first step towards developing the local IFC’s panel of experts. Local media provided leasing industry. It is no surprise that the admin- thorough coverage of the event. The seminar istration of Saratov has taken such an interest in raised considerable interest not only within the leasing: the region’s factories are in urgent need commercial sector, but also among regional of new equipment, while its small and medium- academics. The IFC Leasing Development sized businesses cannot achieve their full po- Group has already been invited to hold a sec- tential due to a shortage of financing. Under ond seminar on leasing in Saratov. 8 OUR PROJECT March-April 2001

NEW SEMINAR FOR LESSEES

Veronika Shtelmakh Economist IFC Leasing Development Group

he Leasing Development Group is prepar- ture their leases and how to handle the various ing a series of seminars on «Leasing as a tax and accounting problems that arise over the TMeans of Acquiring New Equipment.» The course of a lease. Some time will also be spent seminars are intended for lessees of all levels of analyzing difficult legal problems. The IFC’s at- experience, from novices to experts. The first of torneys will explain issues such as the essential the seminars will be held in late May 2001 in clauses of a lease agreement and the forms of Krasnodar. guarantees that leasing companies typically re- Over the last few years the IFC Leasing De- quire of lessees. velopment Group has held seminars on «The A lot of attention will be devoted to business Principles of Leasing» in 19 regions throughout planning and financial analysis. Participants will Russia. These seminars, which shed light on the learn how to write business plans for leasing financial and legal aspects of leasing, were in- companies and how to make important financial tended for a diverse audience, including lessors, decisions, such as whether to purchase an as- lessees, attorneys, economists, financial ana- set outright with working capital, take out a bank lysts, scholars and students. loan or enter into a lease. The IFC’s experts will However, we began to notice from the very be- analyze the main features of lease payments ginning that most of those attending seminars in and use concrete examples to show how they the regions were lessees. This is not surprising, affect a lessee’s cash flow. since, according to the Registration Chamber of Most topics will be accompanied by practical the Ministry of Justice, 75% of Russia’s regis- exercises. At the end of the seminar, partici- tered leasing companies are concentrated west pants will be invited to take part in an educa- of the Urals, while only 15.6% are situated in the tional game, in which they will be divided into Ural Mountains and a mere 8.4% in Siberia. teams and asked to critique some sample busi- Therefore, whenever we held seminars in the ness plans and find the weak points in the ac- provinces, no more than four or five leasing companying financial documents - in short, to companies sent representatives, while the over- play the role of a lessor. whelming majority of the participants were either We hope that our seminars will help Russian potential or active lessees. That is why we have businesses and leasing companies build con- decided to organize a new series of seminars structive partnerships that will cater specifically to lessees and their particular interests. The seminars on «Leasing as a Means of Ac- Package of the documents given in the leasing company quiring New Equipment» are designed for company directors and financial specialists. Partici- 1. Company charter and other pants do not have to be experts on leasing: any- legal documents one with a basic understanding of how leases 2. Financial documents work will be welcome to attend. The seminars 3. Business Plan with attachments promise to be useful to both experienced 4. Collateral & guarantees for the leasing agreement lessees and those that are only beginning to 5. Draft equipment contemplate their first lease. They will help purchase contract lessees make contact with leasing companies 6. Other documents as requested and structure more effective leases. During the seminars, participants will learn about the history of leasing in Russia and the important features of the Russian leasing mar- A slide from the IFC’s seminar on «Leasing as a Means of ket. They will learn how best to plan and struc- Acquiring New Equipment» March-April 2001 THEORY AND PRACTICE 9

Dear readers: beginning with this issue of the Leasing Courier, we will be publishing a series of articles intended specifically for lessees in the «Theory & Practice» section. We hope that these articles will serve as a useful guide for both experienced lessees and those that are just contemplating their first lease agreement. The first two articles in our series will explain how to make initial contact with a leasing company and draft an effective lease agreement. We would also like to acquaint lessees with the various aid organizations that support private enterprise in Russia. You can read about the Eurasia Fund’s programs on page 15 of this issue.

HOW TO APPROACH A LEASING COMPANY

Veronika Shtelmakh, Economist IFC Leasing Development Group

n our discus- it is always effective. There are cases where sions with nu- leasing makes less sense than other sources Imerous Russian of financing. There are several reasons why leasing companies, this can occur. First of all, lease agreements, we have discov- like loan agreements, come in many different ered a very inter- forms, and their specific terms can vary con- esting fact: it turns siderably from case to case. The terms offered out that when by a commercial leasing company are probably Russian lessors not going to be attractive in comparison to a first meet with po- subsidized government loan. Second, one of tential lessees, the main economic benefits of leasing is that it Veronica Shtelmakh, Economist, IFC Leasing Development Group they often have to allows a company to reduce its profit tax. If a dispel certain company is not earning any profits, this advan- myths about leas- tage is lost, and leasing will probably turn out ing that have gained currency among Russ- to be a relatively expensive form of finance. ian businessmen. Therefore, companies should consider leasing as only one of several possible ways to finance Some Common Misconceptions among New the acquisition of new assets. They should Lessees: make all of the necessary calculations and • Leasing is an effective tool for any enterprise compare their options while they are still devel- • The application process for a lease is much oping their business plans. simpler than for a bank loan • Leasing companies make quick decisions We will devote more attention to this question in about whether or not to sign a lease subsequent issues of the Leasing Courier. For • Leases do not require additional guarantees the purposes of this article, we will proceed on • Lessees do not have to be in solid financial the assumption that the lessee has already de- shape in order to take out a lease veloped a business plan, chosen a vendor and a particular piece of equipment, examined all of the We hope that this article will help clarify these financial possibilities and come to the conclusion misconceptions, prepare lessees for their first that leasing will be the most effective choice. meeting with a leasing company and facilitate the negotiating process. Choosing a Leasing Company When is leasing profitable? We would like to begin by dispelling one of nce a company has decided to take out a the most dangerous myths about leasing: that Olease, the next step is to choose a suit- 10 THEORY AND PRACTICE March-April 2001 able leasing company. Some of the questions that potential lessees often ask at this stage INSERT 1 include: The Lease Application

1. Where can I find information about exist- 1. Company Information ing leasing companies? Full name You can obtain information about leasing com- Legal and physical addresses panies from several sources. It is quite likely that Date founded the bank you are currently using has its own Charter capital leasing subsidiary or preferred leasing company. Primary business activities Your local Chamber of Commerce probably has 2. The Proposed Leased Asset data on leasing companies that do business in Contract value your area. And of course, you can always refer Vendor to the IFC Leasing Development Group’s Direc- 3. Preliminary Conditions tory of Russian Leasing Companies; the third Guarantees offered edition, which came out in October 2000, can be Willingness to make advance payment found on our web site. 4. Contact Persons Full name and telephone number According to the most recent data from the Function Ministry of Justice’s Registration Chamber, there Authority to negotiate are now some 1,500 leasing companies regis- The application should be certified by the tered in Russia. However, many of these com- CEO’s signature and company seal. panies only obtained their licenses for the sake of one or two major deals, after which they never signed another lease. The Leasing Develop- ment Group estimates that only some 30% of is due to expire. It could happen, for exam- Russia’s licensed leasing companies - that is, ple, that the company’s license is due to ex- around 500 - are currently active. Most of them pire within one year, while your project is go- (around 70%) are concentrated in European ing to last for a three-year period.1 After the Russia (west of the Urals), and another 15% in lessor’s license expires, the lease agreement the Urals region and Western Siberia. will remain in effect, but the parties will no longer be able to claim any of the tax bene- 2. Should I choose a local leasing company fits allowed for leasing transactions. There- or one from another region? fore, as the date of expiration approaches, When choosing between a local leasing lessees should make sure that the leasing company and one from another region, one company has extended its license or applied should always factor in the cost of travel and for a new one. long-distance telephone calls. On the one hand, working with a local leasing company Lessees should also be sure to note whether a means lower overhead. On the other, if the leasing company is open or secretive. Legiti- project is a large one, local leasing companies mate and successful leasing companies do not might not have sufficient financial resources to hide information about themselves and should see the deal through. Furthermore, local leas- always be glad to name their key partners and ing companies and the larger firms from important clients. If a leasing company does not Moscow and St. Petersburg are likely to offer give you straight answers, you should hear very different terms. alarm bells ringing.

3. How do I know if a leasing company is reliable? When considering a potential leasing company, one should always check whether it 1 See Leasing Courier #7 (2000), «Questions and Answers», for has a leasing license and when that license a more detailed discussion of this problem. March-April 2001 THEORY AND PRACTICE 11

How to Lay the Foundation to submit 20 supporting documents, but in the for an Effective Partnership case of automobile leases it requires only six: the application form, company charter, balance e suggest that you clarify the following sheet, bank statement, confirmation of signing Wquestions during your first meeting with a authority and a copy of bank signatures. leasing company: • How long will it take to reach a decision? • What sort of guarantees will be required? • What kind of documentation will the leasing INSERT 2 company require? (a complete list) Sample of Documentation Typically Re- A mutual understanding on these points will quired by Leasing Companies put your relationship with the leasing company 1) Company charter and other legal papers on a solid footing and eliminate the risk of false 2) Financial documents: expectations during the application process. a) Quarterly balance statements and Form #2 (usually for the current and previous years) The Lessee’s Application b) Bank statements As a first step, many leasing companies ask 3) Business plan with supplements their potential lessees to fill out a lease applica- 4) Documents regarding possible guarantees tion. In Insert #1 below you will find some sam- 5) Additional documents at leasing com- ple questions from a typical application form. pany’s request Even if the leasing company does not require any application, it is to the lessee’s advantage to prepare a written outline of the project in prepa- ration for the first meeting with a leasing compa- Guarantees ny. This will make the lessee appear more trust- It is easy to explain how the «myth» arose that worthy in the eyes of the leasing company. leasing does not require guarantees. In the West, Leasing companies tend to appreciate clients this «myth» is actually a reality: the leased asset who know from the outset exactly what kind of itself serves as a sufficient guarantee, and addi- equipment they want, who manufactures the tional collateral is usually not required. In Russia, equipment and how much it costs. however, this arrangement is still impossible for a number of reasons, including the prohibitive costs On the basis of the lease application, the leas- of finance and the absence of any reliable mech- ing company’s experts will make a preliminary anism for repossessing a leased asset. estimate of the lease payments and payment schedule. The lessee is then expected to incor- Business Plans porate this estimate into the financial section of Writing a business plan for a leasing compa- his business plan. ny is no different from writing a business plan for any other financial institution. We have al- Documentation Required by Leasing ready noted that lessees should provide de- Companies tailed forecasts of their potential sales and pos- In Insert #2 we show the documentation typi- sible developments in their markets. The busi- cally required for leases. Leasing companies ness plan’s overall financial data will be based usually require potential lessees to submit the on these forecasts, so any error in the calcula- following documents when applying for a lease: tions may lead to serious problems, even insol- company charter and other legal papers, finan- vency, further down the road. It goes without cial documents, business plan with supplements, saying that all of the financial data that the and documentation of possible guarantees. lessee reports in the business plan should ac- curately reflect the state of the balance sheet, In some cases, leasing companies might re- as leasing companies will check this informa- quire a smaller number of documents. For ex- tion in much the same way as a bank would be- ample, Baltlizing usually asks its potential clients fore issuing a loan. 12 THEORY AND PRACTICE March-April 2001

According to A.P. Mokin, director of Kreditim- pleks Leasing Company, one of the most com- INSERT 3 mon misconceptions among potential lessees is that they do not have to be in good financial The Ideal Lessee shape in order to take out a lease, since the • Knows the important features of the asset leased assets themselves (motor vehicles, in the he wishes to lease (price, manufacturer, case of Kreditimpleks) already serve as suffi- technical features) cient guarantees. One has to realize that leasing • Clearly understands what he has to gain by is essentially a form of lending, so leasing com- leasing (lower taxes, freeing up of working panies will always prefer to work with lessees capital, positive balance indicators, etc.) whose current revenue easily exceeds the size • Has significant annual turnover, of which of future lease payments. the lease payments will constitute only a small part The leasing company’s decision will be based in large part upon the documentation that the lessee has submitted. diately. It is better for the lessor to hear about such problems directly from the lessee than Some Useful Advice from some third party. This way the lessor will be While we are on the topic of creating a positive more willing to work out a mutually acceptable working relationship with a leasing company, we resolution. should add a few words of advice about main- taining that relationship throughout the duration of Keeping up regular contact with a leasing a lease. We suggest that lessees maintain regu- company makes it easier for a lessee to resolve lar contact with their leasing companies. Regular such issues as restructuring the lease, obtaining contact is essential for building trust, which plays payment deferrals and signing new deals. an important role in long-term business relationships. Useful forms of contact include regular up- Good luck! dates on the financial status of your projects (supported by financial documents), information about your company’s activities and how the leased as- The author would like to thank I.M. Chuvilova, set is being used, regular phone calls, etc. head of the credit analysis department at RG Lizing, as well as the directors of Kreditimpeks, Whenever a lessee finds himself in financial Baltlizing and other Russian leasing companies difficulties, he should let his lessor know imme- for their assistance in preparing this article.

THE LEASE AGREEMENT: A LESSEE’S PERSPECTIVE

Olga Shishlyannikova, Attorney IFC Leasing Development Group

lease agreement entails a complex set of in the terms of the lease agreement. As a rule, legal rights and obligations on the part of lease agreements tend to favor the lessor. We Aboth the lessor and the lessee. People of- believe that this is inappropriate. In this article, ten forget this and think only in terms of the we shall look at the provisions of a standard lessor’s rights and the lessee’s obligations — an lease agreement from the point of view the unbalanced point of view that is often reflected lessee’s interests. March-April 2001 THEORY AND PRACTICE 13

Agreeing on the of the Russian Civil Code gives lessees the right Terms of the to make direct claims against the vendor for any Sales Agreement violation of the terms of the sales agreement. Since the lessee effectively has the rights and ne of the differ- obligations of a buyer1, he must therefore be in- Oences between formed of the provisions of the sales agreement. a lease agreement and a regular rent As we noted above, the most convenient agreement is that arrangement would be to attach a copy of the with leasing, the sales agreement as part of the lease agree- Olga Shishlyannikova, Attorney, lessor purchases the ment. If the leasing company refuses to do so, IFC Leasing Development Group asset on behalf of a the lessee should require it, under the terms of particular lessee. the lease agreement, to reveal all essential pro- The lessee, who is not a direct party to the sales visions of the sales agreement within a specified agreement, must be given some form of control period. The lessee should also make sure that over the terms of this agreement. the leasing company is legally liable for failing to provide this information, e.g., by stipulating fines The most convenient way of achieving this, or penalties for each day it is late.2 from the lessee’s point of view, would be to require the lessor to obtain the lessee’s written approval of the sales agreement before it is Formal Acceptance of the Leased Asset signed. But leasing companies rarely agree to such arrangements, arguing that they must pro- ccording to Article 668, Clause 1 of the tect the confidentiality of their agreements with ARussian Civil Code, the vendor usually de- suppliers. In such cases, the lessee should livers the leased asset directly to the lessee. make sure the lease agreement itself stipulates Therefore, one of the first responsibilities that the essential terms of the sales agreement, the lessee faces is to formally accept the leased such as those regulating the characteristics of asset. He should therefore pay careful attention the leased asset, the delivery of components to the provisions of the lease agreement that and spare parts, delivery times and places, re- deal with the procedures for formal acceptance. ceipt of the leased asset, procedures for making On the whole, receiving a leased asset is no dif- complaints regarding quality or quantity, manda- ferent from receiving goods under a sales tory technical training for the lessee’s personnel, agreement. However, we would like to point out maintenance procedures, etc. In practice, two important aspects that sometimes give rise lessees often make these demands at the out- to questions: the actual procedures for accept- set, when submitting their lease applications. ing the leased asset and the time frame for fill- ing out the appropriate paperwork. If the vendor refuses to include any of these important terms in the sales agreement, the Financial leasing is a trilateral affair, involving lease agreement should require the lessor to vendor, lessor and lessee. Since the transfer obtain the lessee’s consent before agreeing to and formal acceptance of the leased asset af- any other conditions. The lease agreement fects all three parties, they should draw up the should also give the lessee the right to annul the paperwork together.3 Unfortunately, geography lease if the lessor fails to obtain his consent be- often makes this difficult, as the parties are not fore signing the sales agreement.

It is also critical that the lessee be informed of 1 Except the obligation to pay for the asset and the right to annul the terms of the sales agreement at all times. the sales agreement without the leasing company’s consent. 2 Penalties and fines can be expressed either as a fixed sum or as This is particularly important in cases where the a percentage of the total contract value, the cost of the leased leasing company has chosen the asset and the asset, etc.). 3 Current legislation gives the parties considerable freedom to vendor, and the lessee has limited knowledge of determine the procedures for transferring and receiving the the terms of delivery, since Article 670, Clause 1 leased asset. 14 THEORY AND PRACTICE March-April 2001 situated in the same region. Therefore, when As we noted above, all three parties have a considering whether to have all three parties vested interest in the proper delivery of the sign the transfer documents, one has to consid- leased asset. But the legal relationships be- er both the positive effects (e.g., the ability to re- tween the parties are defined under two sepa- solve certain problems during the process of rate agreements. The parties must therefore transferring the asset) and the negative effects make sure that these two agreements, the lease (e.g., added time and expense). agreement and the sales agreement, contain the same provisions for transferring and delivering If the parties agree to draft and sign the trans- the leased asset. fer documents together, the lease agreement should stipulate not only who will take part, but also the consequences for failing to turn up at Insuring the Leased Asset the designated time and place. Thus, the lease agreement might give the lessee the right to ease agreements very often stipulate that one draw up the formal acceptance documents uni- Lof the parties must insure the leased asset. laterally if the other parties fail to appear. Alter- We devoted an article to this subject in a previous natively, the date of acceptance might simply be issue of the Leasing Courier.6 Here we shall only postponed.4 In any case, it would make sense to discuss the process of negotiating the terms. stipulate the lessor’s liability for failing to appear. According to current legislation, the leased as- One question that often arises is the appro- set may be insured by either the lessor or the priate time frame for signing the formal accep- lessee. But no matter who assumes this respon- tance documents after the leased asset has sibility under the lease agreement, the lessee been delivered. Current legislation does not must remember that insuring the leased asset is provide any useful guidelines, so it is up to the as much in his own interests as in the lessor’s. Ar- parties to reach an acceptable agreement. The ticle 669 of the Russian Civil Code stipulates that model lease agreement for a fully depreciable the lessee normally assumes liability for acciden- leased asset5 stipulates that the transfer pa- tal damage or destruction of the leased asset pers must be signed within 30 days of delivery. from the moment he takes possession of it. One In our opinion, this time frame cannot be ap- rarely hears of agreements whereby the leasing plied universally. For some types of assets, the company remains liable for accidental damage or period is unjustifiably long; for others, such as destruction. Therefore, insuring the leased asset high-tech equipment, the period does not give protects the lessee from possible losses.7 the lessee enough time to evaluate the quality of the asset. Once you have decided to insure a leased asset, you must clarify the following points: The schedule for signing the delivery record • Which party will take out the insurance policy? for the leased asset should be determined on a In deciding this issue, one should consider case-by-case basis, depending on the specific each party’s ability to pay insurance premiums characteristics of the leased asset and the par- and to include these premiums in their produc- ties’ abilities to visit the delivery site. One should tion costs. also bear in mind that delivery can take a con- • Which party will be the beneficiary? This siderable amount of time if the leased asset should depend on which party will be respon- needs to be assembled or installed. The leasing sible for restoring the asset if it is damaged. company and the vendor will not wish to prolong the overall delivery period substantially, but it might not be feasible to speed up the assembly 4 The transfer cannot be postponed indefinitely, however, so the and installation; therefore, the lessee and the parties should agree on a final date, after which the lessee has the right to effect transfer unilaterally. leasing company might want to agree on sepa- 5 Confirmed by both the Russian Ministry of Economics and rate periods for the physical delivery of the Ministry of Finance on 12/29/1995. 6 leased asset and its final readiness (after as- See LC#5 (1999), pp. 27-28. 7 Insurance is particularly important in the case of automobile sembly, installation, etc.). leasing. March-April 2001 THEORY AND PRACTICE 15

• Which insurance company will the parties ing license. Since leases tend to be fairly long- use? Very often, the party that assumes re- term, while licenses are only issued for a limited sponsibility for insuring the leased asset also period, there is a high probability that the leasing chooses the insurance company. At the same company’s license will expire at some time over time, he must obtain the other party’s written the course of the lease. approval of his choice. In practice, this arrangement often leads to conflicts and mis- Imagine, for instance, that a lease agreement understandings. In our opinion, it would make was signed on February 1, 1999. The leasing more sense for the parties to indicate the company obtained its leasing license on May 1, name of the insurer within the lease agree- 1997, valid through May 1, 2001. The lease ment itself. agreement was signed for a three-year term, ex- • What are the terms for notifying the other par- piring on January 31, 2002. Thus, the leasing ty once the insurance policy has been signed? company’s license does not cover the entire Since both parties have a vested interest in in- term of the lease. In order for both parties to be suring the leased asset, the lease agreement able to claim their tax benefits between May 1, should require the insured to provide the other 2001, and January 31, 2002, the leasing com- party with a copy of his insurance policy. pany will have to extend its license on time. • The lease agreement may contain other important provisions, such as responsibility for In order to make sure that he will not lose his future insurance payments, consequences of tax benefits, the lessee might want to require payment delinquency, etc.). the lessor to extend his leasing license by a certain date (for example, no later than 30 days before his current license expires). The lease Having a Valid Leasing License agreement should stipulate the consequences for the leasing company if it fails to obtain a ne of the most important advantages of new license on time. Oleasing is that it allows both the lessor and the lessee to claim certain tax benefits. Howev- In the next issue, we will look at more stan- er, the tax authorities will not be able to grant dard provisions that demand the lessee’s spe- these benefits unless the lessor has a valid leas- cial attention.

Since the founding of the Leasing Development Group, we have been asked to help with local investment projects or provide information about other organizations that support private enterprise in Russia. We have therefore decided to start publishing information in the Leasing Courier about Western aid organizations. In this issue, we present the Eurasia Foundation:

THE EURASIA FOUNDATION PRIVATE ENTERPRISE DEVELOPMENT

Alan Moseley Outreach Coordinator, Eurasia Foundation

rivate enterprise serves as the primary piring entrepreneurs still need support and as- engine of economic growth throughout the sistance in establishing and operating their busi- Pworld. While the percentage of private nesses. The Eurasia Foundation’s private enter- businesses in the economies of NIS countries prise development program supports projects has grown significantly over the past decade, that meet these needs, specifically by improving this transition is not yet complete. New and as- business practices, increasing access to capital, 16 THEORY AND PRACTICE March-April 2001 and reducing legal and regulatory barriers to Russia, the acute shortage of capital is one of business development. Given the great potential the biggest obstacles to the development of pri- of small and medium-sized enterprises to spur vate enterprise. To increase the amount of capi- economic growth, the Eurasia Foundation tal that is available, the Eurasia Foundation sup- places priority on projects targeting this sector of ports the creation and expansion of financially the economy. sustainable credit mechanisms aimed at micro, small and medium businesses, both through existing banking systems and through innovative Improved Business Practices mechanisms, such as micro-lending programs, equity funds, credit unions, and savings and stablishing and running a successful business credit associations. Etakes more than just a good idea - it requires leaders with management, marketing, finance, planning, accounting, and other critical skills. The Reduced Legal and Regulatory Barriers Eurasia Foundation seeks to meet the demand for to Business Development such skills by supporting the creation and development of high-quality, sustainable business train- iven the potential of central and local gov- ing and education programs that provide students, Gernmental policies to directly impact pri- entrepreneurs, and business leaders with the vate sector development, the Eurasia Founda- skills they need to transform their ideas into suc- tion supports projects aimed at creating a cessful enterprises. In addition to building skills, more favorable legal and regulatory environ- the Foundation promotes ethical practices in busi- ment for the growth of private enterprise. Pro- ness and sound corporate governance. jects aimed at reducing regulatory barriers, improving protection of economic rights, or developing more efficient mechanisms for resolv- Increased Access to Capital ing disputes fall into this category. The Foun- dation also promotes tax policies that enhance ntrepreneurs also need access to capital to growth in the small business sector and regu- Eestablish and develop their businesses. In lations that enable credit mechanisms to

countries. At the same time, the Foundation tries to build solid partnerships between these organizations and their counterparts in other democratic countries. The Eurasia Foundation currently operates through a network of offices located in Almaty, The Eurasia Foundation was incorporated in Baku, Washington, Vladivostok, Yerevan, Kiev, 1993 with the goal of aiding the development of Moscow, Saratov, Tashkent and Tbilisi, as well democratic and market institutions in the as through representative offices in Ashgabat, Commonwealth of Independent States. In Bishkek, Gyumri, Dushanbe, Kishinev, Minsk working toward this goal, the Eurasia Founda- and Yuzhno-Sakhalinsk. Through its network tion recognizes that the spread of democratic of offices, the Eurasia Foundation currently values and market principles depends on well- awards approximately 1,000 grants worth over functioning governments, social organizations $20 million on an annual basis. Field offices are and commercial structures. Therefore, the responsible for awarding grants directly to NIS Foundation seeks to develop local organizations organizations. Averaging $20,000, these grants that help local citizens become active partici- presently account for approximately 80% of the pants in the political and economic life of their total grant dollars awarded by the Foundation. March-April 2001 THEORY AND PRACTICE 17

oped and realistic? What barriers or risks might In order to complement and augment the impede achievement of the stated goals? What grantmaking programs of its field offices, the steps will be taken to mitigate these risks? What Washington office of the Eurasia Foundation external conditions are necessary for the project supports partnership projects that are devel- to succeed? oped and implemented jointly between U.S. or other foreign institutions and NIS organiza- 2) Cost-Effectiveness. To what extent is the tions. Partnership projects are aimed at proposed effort cost-effective? Is this the most transferring skills to NIS organizations that cost-effective approach to achieve the project will strengthen their capacity to become self- goals? sustainable, while simultaneously promoting strong relationships between NIS organiza- 3) Qualifications. To what extent do partici- tions and their foreign counterparts. The pating individuals and organizations have the Foundation currently supports approximately experience and qualifications needed to imple- 40 partnerships each year, with grants aver- ment the project successfully and to manage aging $100,000. grant funds?

4) Outcomes. What significant changes will emerge and prosper. Finally, the Foundation the initiative produce among its beneficiaries? helps to build the capacity of business and Has a realistic plan been developed to measure professional associations to advocate for and report on these effects? What steps will be sound public policies. taken to incorporate these results into future decision-making?

Grantmaking criteria

The Foundation first considers the following The Eurasia Foundation’s grantmaking pro- three criteria in its review of grant proposals: gram supports innovative projects with the potential to advance significantly one or more • Fit with Foundation Goals and Priorities. of the following goals: 1) private enterprise How does the proposed effort support the development, 2) improved public administra- Foundation’s strategic goals and regional pri- tion and policy, 3) civil society development. orities? In this article we have focused exclusively on the Eurasia Foundation’s Private Enterprise • Project Demand and Local Support. In what Development Program. You can learn more way does the initiative respond to demands about the Foundation’s other programs on the and needs that exist locally? What degree of web at http://www.eurasia.msk.ru. local support and commitment does the initiative have?

• Sustainability. To what extent is the effort 5) Leveraging. To what extent does the effort locally sustainable, both financially and op- leverage other resources, including contribu- erationally? Will the initiative result in sus- tions from other donors, project revenue, and tainable and positive changes that continue grantee in-kind contributions? over time? 6) Synergy. To what extent does the proposal If the proposal satisfactorily meets the above complement or build upon other initiatives in the criteria, the Foundation then applies the follow- region, including those supported by the Eurasia ing considerations: Foundation?

1) Implementation Plan. Is the strategy for For more information, please contact the Eura- achieving the goals of the initiative well devel- sia Foundation in Moscow at (095) 956-12-35. 18 LEASING IN REGIONS March-April 2001

LEASING DEVELOPMENT PROJECT IN THE TOMSK REGION

Natalya Ivanovna Kichko Director Tomsk Leasing Development Project

he Tomsk Leasing Development Project consult with the Center before approaching was founded in September 2000 with a any leasing companies. The Center employs Tgrant from the Moscow office of the highly qualified specialists (economists, ac- Eurasia Foundation. The project is run by the countants and lawyers) who can explain the Tomsk Regional Center for Resource Devel- advantages of leasing, provide excellent legal opment. Its goal is to improve access for small advice and help lessees choose the most suit- and medium-sized enterprises to investment able leasing company. capital by fostering the growth of the local leasing industry. Since its creation, the Center has published a series of articles in the local press about Among its most important activities, the leasing and the Leasing Development Project. Leasing Development Project holds regular For example, several articles about leasing training seminars on the principles of leasing. were published in the local business journal The Center held its first seminar, «Leasing: A «Nashe Delo.» The Center has also estab- Financial Tool for Businesses», in September lished a web site (http://leasing.stkm.ru) that 2000. These seminars familiarize local busi- gives additional information about leasing in nessmen with the concept of leasing and help the Tomsk region. them understand some of the legal and financial issues involved. Representatives from lo- Over the last few months, the Center’s spe- cal insurance companies gave additional pre- cialists have been gathering and analyzing da- sentations on insurance aspects of leasing ta about the local leasing industry. It has com- transactions. piled and circulated a directory of leasing companies that are active in the region. The Center Seminar participants are able to meet with has drafted a report about the state of the re- representatives from a variety of leasing com- gion’s leasing industry and problems that hin- panies, learn about each company’s policies der its growth, and has also put forward a set of and ask questions about leasing deals. Not proposals on how to solve these problems. only does this allow the participants to make useful business contacts, it also gives them The Center plans to continue its program of the opportunity to learn more about leasing di- seminars, round tables and consultations on rectly from leasing company specialists. leasing. In April 2001, it will launch a new series of seminars for the local timber industry In addition to the seminars, the Leasing De- with support from the Tomsk regional govern- velopment Project also holds individual con- ment. The Center also plans to hold a joint sultations about leasing and other aspects of seminar with the IFC Leasing Development running a business. The Project acts as a link Group. This April, the Center will publish a between potential lessees and leasing com- textbook for lessees that will include materials panies. Local businessmen usually prefer to from past seminars. March-April 2001 LEASING IN RUSSIA 19

LEASING LICENSES

s of March 19, 2001, the new licensing Economic Development [Ministerstvo eko- agency for leasing companies is the nomicheskogo razvitiya i torgovli RF], 125818, ARussian Ministry of Trade and Economic GSP, A-47, ul. Tverskaya-Yamskaya 1-3. Development. The Ministry receives applications on Tuesdays and Thursdays from 10:00- The Ministry of Trade and Economic Develop- 16:00 by appointment only. To make an appointment will not consider applications that were ment, call the Ministry’s Moscow office at (095) submitted to the Ministry of Justice’s State Reg- 209-8423, 209-8943 or 209-8504. istration Chamber. If you have already filed an application with the State Registration Chamber, Applications are also accepted by mail. Send you will have to resubmit your documents to the documents to the Russian Ministry of Trade and Ministry of Trade and Economic Development.

LEASING IN CHUVASHIA

he Chuvashia Small Business Leasing Company1 and Chuvashkreditprom Bank Thave agreed to work together to finance leasing projects in the region. The two companies signed an agreement in the city of Cheboksary on March 5, 2001. The IFC helped organize a press conference devoted to this important agreement.

The agreement represents an important step in the development of the region’s economy. This kind of cooperation will help spur growth in the region’s leasing industry, which will benefit The signing of an agreement between Chuvashkreditprombank and the Chuvashia Small Business Leasing Company. local enterprises and suppliers in addition to Cheboksary, March 5, 2001 Chuvashkreditprom Bank and its leasing part- ner. Leasing will enable local firms to obtain new tion among regional enterprises as a reliable equipment and machinery with relatively small and effective supplier of modern equipment. The amounts of capital. Local equipment manufac- company initiated talks with the commercial turers will be able to use leasing as a valuable bank Chuvashkreditprom in the interest of ex- sales tool. The leasing company will be able to panding its leasing portfolio. The two institutions expand its portfolio, while the bank will be able reached a long-term agreement to finance leas- to increase its turnover without subjecting itself ing projects in the region. According to the to the high risks associated with ordinary loans. agreement, the leasing company will select promising projects and conduct a preliminary The Chuvashia Small Business Leasing Com- analysis. The bank will then decide, on the basis pany was incorporated in June 1998 with finan- of the leasing company’s evaluation, whether or cial support from the Chuvashia Foundation for not to finance a given project. The bank and the the Support of Small Enterprise. Over the last leasing company are expected to sign a credit three years, the company has earned a reputa- agreement for 500,000 rubles in the near future. The leasing company plans to use this loan to

1 For more information about the Chuvashia Small Business lease new equipment to Telefonstroy Manufac- Leasing Company, see Leasing Courier #9-10 (2000). turing and Construction Company. 20 LEASING IN RUSSIA March-April 2001

Telefonstroy is a major cable television istries of Finance, Economics, Industry, Agricul- provider in Chuvashia. It specializes in manu- ture, Business Development, Trade and Rural facturing and installing telecommunications net- Crafts. The speakers noted that most enterpris- works and electricity grids. A projected one mil- es in the region badly need new equipment, and lion-ruble lease will enable Telefonstroy to ac- that leasing, as a financial tool, would bring quire much-needed cable-laying equipment. In much-needed capital to the region’s manufactur- the future, the Chuvashia Small Business Leas- ing sector. If the region succeeds in developing ing Company plans to lease three kinds of its leasing market, it will become much more at- equipment to Telefonstroy: receivers for satellite tractive for both domestic and foreign investors. television, cable-laying equipment and home- viewing equipment. This means that television State Duma Deputy Anatoly Aksakov, who viewers in Chuvashia will finally have access to helped draft the recent bill of amendments to the a wide variety of quality programming. We will Federal Law on Leasing, also took part in the provide more information about Telefonstroy in a press conference. He explained how the legisla- subsequent issue of the Leasing Courier. tive branch was working to improve the Law on Leasing and bring it into line with other Russian The deal with Telefonstroy is only the first in a laws and international agreements. Deputy Ak- series of planned projects, as the agreement be- sakov emphasized that “stimulating the leasing tween Chuvashia Small Business Leasing Com- industry in the regions helps domestic producers pany and Chuvashkreditprom Bank allows both modernize and expand their facilities and devel- parties to expand their clientele substantially. op more competitive products, which in turn Future leasing projects include motor vehicles helps Russia integrate with the world economy.” for Mekhovshchik, a regional furrier, and cash registers for Municipal Trading House #55. The IFC Leasing Development Group considers the latest agreement between Chuvashkred- In the hope that leasing will help spur eco- itprom Bank and the Chuvashia Small Business nomic growth in the region, the government of Leasing Company a positive continuation of work Chuvashia is doing everything it can to support that was actually begun in 2000. The Group held the local leasing industry. Several government a seminar on «The Principles of Leasing» in the officials gave speeches at the press conference, city of Cheboksary last December with support including representatives from the regional Min- from the government of Chuvashia.

THE CANADIAN BUSINESS ASSOCIATION VISITS RUSSIA’S NORTHWEST REGION

he Canadian Business Association sent a Mr. Gorham noted that Russia’s leasing indus- trade delegation to the city of St. Peters- try remains underdeveloped. Although the in- Tburg in late March 2001. This is the sec- dustry has grown in absolute terms over the last ond time of late that a Canadian business dele- five years, it still comprises no more than 1.5% gation has visited the region. The visit included of total investment in Russia. To date, more meetings with Russian businessmen and local than 2,000 companies have received Russian officials, as well as a presentation on financial leasing licenses, but only some 500 of these leasing by the IFC Leasing Development Group firms are actively engaged in leasing. In the city and a round-table discussion on the investment of St. Petersburg, 66 companies have received climate of the Northwest Region. leasing licenses, of which nine are currently ac- The IFC Leasing Development Group’s pre- tive. Interestingly, Russia’s oldest leasing com- sentation on «Leasing in Russia» featured a pany, Baltic Leasing, was founded in St. Pe- speech by Project Manager James Gorham. tersburg ten years ago. Today, the city’s leasing March-April 2001 LEGISLATION 21 companies are supplying a wide range of ing a new Law on Leasing that would improve equipment using financial leasing, including the existing legal framework for leasing and, at manufacturing, construction, medical, shipbuild- the same time, introduce new tax benefits and ing and food-processing equipment, motor vehi- state guarantees for leasing transactions. cles, etc. Leases vary from two- to five-year In summarizing the Canadian delegation’s vis- terms, with contract values ranging from it to the region, Linda MacDonald, the Canadian $10,000 to $500,000. Consul-General in St. Petersburg, noted that the Last year saw the creation of the St. Peters- local investment climate has improved consider- burg Association of Leasing Companies, whose ably in recent years. However, the region still goal is to improve the local investment climate needs to «promote» itself, she said, adding that through consulting and legislative activities. The a number of Canadian firms are beginning to non-profit organization includes St. Peters- take a serious look at St. Petersburg as a possi- burg’s major leasing companies, banks and in- ble place to invest. Canada’s Chisholm, a major surance companies. exporter of meat and dairy products, has already The St. Petersburg city government has al- invested $4 million in a refrigerated warehouse ready implemented a variety of regulations to on Valdai. According to Consul-General Mac- stimulate the local leasing industry. It has Donald, «this kind of cooperation benefits both amended the city’s Law on State Support for In- Russia and Canada.» vestment in St. Petersburg and the Law on Tax Benefits to create a more favorable tax climate Natalya Ivanovna Kichko for leasing as a form of investment. The govern- Director ment of the Leningrad Region is currently draft- Tomsk Leasing Development Project

STATE DUMA WORKING GROUP FOR IMPROVING LEASING LEGISLATION

Olga Shishlyannikova, Attorney IFC Leasing Development Group

s our readers may recall, the State Du- the Law on Leasing in accordance with the ma held a session on October 3, 2000, Russian Civil Code and other laws, as well as Adevoted to the development of leasing introducing several new leasing regulations. in Russia, during which it decided to create a • An analysis of the Russian Civil Code’s chap- working group to improve Russia’s legislation ter on profit tax, including the bill of amend- on leasing. The group is composed of State ments proposed by the State Duma in March Duma deputies and representatives of the rel- of this year, as well as a set of recommenda- evant ministries, as well as leasing company tions on tax policy that could spur the growth directors and prominent academics. State Du- of leasing in Russia. The group’s recommen- ma Deputy Anatoly Aksakov was selected to dations include retaining accelerated depreci- chair the group. ation for leased assets, preserving the right to Since its creation, the working group has record a leased asset on either the lessor’s or come up with a variety of proposals for improv- the lessee’s balance sheet, and making it eas- ing current legislation and has also drafted sev- ier for leasing companies to include interest eral new leasing laws that are currently being payments in their production costs. debated in the Duma. Some of the group’s most notable achievements include: The group plans to continue its work as • A bill of amendments to the Federal Law on these important bills make their way through Leasing. The group submitted the bill to the parliament and new leasing regulations are State Duma in April of this year. The bill brings introduced. 22 THEORY AND PRACTICE March-April 2001

HOW LEASING COMPANIES CAN MINIMIZE RISK BY CONDUCTING A THOROUGH ANALYSIS OF POTENTIAL LESSEES: Analyzing a Lessee’s Current Finances and Projected Cash Flow

Elena Degtiareva Financial Analyst IFC Leasing Development Group

In this article, we continue our discussion of how leasing companies can minimize their risks, which began in Issues 9-10 (May-August 2000). In previous articles we looked at ways of minimizing risks associated with the leased asset itself and at strategies for building a solid lease portfolio. Now we turn to methods of evaluating a potential lessee.

ne of the pri- The Main Components of a Financial mary goals Analysis Ofor a leasing company, as for any valuating a potential lessee is one of the first commercial organi- Esteps in deciding whether or not to invest in zation, is to earn a a particular project. The process of evaluating a profit. In order to lessee can essentially be divided into two com- achieve that goal, a ponents: leasing company • An analysis of the lessee’s current financial must make balanced condition (the past) decisions about • An analysis of the project’s potential (the future) Elena Degtyareva, Financial Analyst, whether or not to in- Depending on the amount of funds involved IFC Leasing Development Group vest in certain pro- and other factors, leasing companies may re- jects, taking into acquire potential lessees to submit detailed busi- count the risks involved and the potential for ness plans, demonstrating the feasibility of their profit. Leasing companies can dramatically re- projects, or they may simply ask for essential fi- duce the risk of incurring losses by conducting a nancial data. In either case, the leasing compa- thorough financial analysis of potential lessees ny must conduct its own, independent analysis and weeding out projects that are likely to fail. In of the lessee and his proposal, using the this article, we will try to answer the following lessee’s own documents for comparison only. questions: • Which aspects and stages of the lessee’s business activities should form the basis of the The Main Components of Financial Analysis leasing company’s analysis? • The lessee’s current financial condition • What are some of the standard methods for • Project feasibility analyzing a potential lessee? • Which data should a leasing company use in its analysis? Analyzing a Lessee’s Financial Condition We will take a look at some of the main components of a standard financial evaluation. The amount of detail that is required in this kind of nalyzing the lessee’s financial condition analysis will vary from case to case, depending Ameans evaluating how the company has on a number of factors, such as the amount of performed to date. It includes analyzing the funds involved, the size of a given project in re- lessee’s profitability, liquidity, financial stability, lation to the leasing company’s total portfolio, management of working capital, etc. All of these the project’s strategic importance, etc. factors must be studied as a whole and individ- March-April 2001 THEORY AND PRACTICE 23 ually in order to get a clear picture of the composed project is not an independent commercial pany’s financial trends and outlook. This analy- unit, but is inextricably linked to the lessee’s op- sis should not be limited to a simple calculation erations, the leasing company must be sure to based on standard indicators. The leasing com- evaluate the lessee’s current cash flow as an in- pany should integrate all of the available data dicator of the project’s future solvency. This is es- and try to understand how it has evolved over pecially true if the project is small in comparison time. We shall write in more detail about the with the lessee’s total operations. In such cases, methods of analyzing and interpreting quantita- income generated through the project will not be tive data later. First, we shall explain why it is the lessee’s only source of revenue from which to necessary to evaluate a potential lessee’s cur- make the lease payments. However, if the lessee rent finances. is already operating at a loss, he may use the income generated by the leasing project to fund his The Main Goals of a Financial Analysis other activities. Analyzing a potential lessee’s current finances enables the leasing company: • To uncover negative trends in the lessee’s Conducting a financial analysis enables the business activities leasing company: • To verify financial data supplied by the lessee • To uncover negative trends in the lessee’s • To predict the lessee’s future cash flow business activities The most important reason for analyzing the • To verify the financial data supplied by lessee’s financial condition is to determine the lessee whether the company will be able to meet its • To predict the lessee’s future cash flow lease payments and whether there is a serious risk of default. Negative financial indicators may serve as sufficient grounds for rejecting a poten- Of course there are cases where it is not real- tial lessee, in which case the leasing company ly necessary to analyze the potential lessee’s does not need to make any further calculations. current finances. This is true, for example, when The importance of evaluating the lessee’s past the project involves the creation of a new and in- and present finances cannot be overstated, as dependent company, or when the amount of in- the success of the proposed project will largely vestment and expected turnover far exceed the depend on the lessee’s financial stability. This is enterprise’s current assets and turnover. In such especially true if the leased asset constitutes an cases, the lessee will obviously not be able to essential and inseparable part of the lessee’s en- provide sufficient guarantees on the lease, and terprise. Furthermore, the financial analysis will some additional form of collateral, such as a enable the leasing company to judge whether the bank guarantee, will be required. This means lessee’s projections of future cash flows are real- that rather than evaluating the lessee, the leas- istic. The leasing company should compare the ing company will have to analyze the guarantor. lessee’s current sales figures, transitional and regular expenses, and relationships with suppli- The Main Sources of Information ers and customers (consistency of deliveries and for a Financial Analysis payments) with the figures that the lessee has The financial analysis of a potential lessee forecast in his business plan. If there are any should be based on accounting documents, large discrepancies between the lessee’s current credit history, bank statements, tax reports, etc. performance and forecasts, they must be ex- As everyone knows, a Russian company’s ac- plained and justify them thoroughly. Acceptable counts do not necessarily correspond to reality. forms of proof may include signed agreements Therefore, one must be very careful about draw- with new suppliers and distributors, market re- ing important conclusions based on formal indi- search, etc. The lessee’s quantitative indicators, cators. However, by analyzing a company’s ac- such as turnover, current expenses, working counts over the past several years (leasing com- capital, etc., can be used to verify not only the panies usually require accounting records from starting figures reported in his business plan, but the last three years) and comparing the data also forecasts about future cash flow. If the pro- from different periods, you can trace the basic 24 SMALL BUSINESS March-April 2001 development of the company’s business. By • Make sure that the currency used in the calcu- comparing important indicators, you can deduce lations corresponds to the expected currency the original data, and by substituting real market of the lease payments. values, you can correct many of the figures. In other words, a leasing company can get a fairly accurate picture of a potential lessee’s finances A project is considered viable if it is: by scrutinizing the accounts and comparing • Financially solvent them to external data. • Profitable • Not susceptible to high risks

Evaluating the Feasibility of a Project

he second important component in evaluating Important Aspects of Evaluating a Project Ta potential lessee is analyzing the project’s 1. Analyzing the project’s solvency. feasibility. The method for carrying out this analy- How liquid is the project? In other words, will sis will depend on the nature of the project (i.e., it be able to meet all of its financial liabilities whether it involves creating new production facil- (payments) at every stage of its development? ities, expanding existing facilities, modernization, 2. Analyzing the project’s feasibility. etc.). In any case, the evaluation should be Will the project provide a sufficient return on in- based on the project’s predicted cash flow. Leas- vestment? ing companies should keep the following princi- 3. Analyzing the project’s risks. ples in mind when predicting the future cash flow of a potential leasing project: • Make an accurate calculation of all previous rev- In future editions of the Leasing Courier we will enue and expenses associated with the project continue to look at how analyzing a potential • Consider fluctuations in payments over time lessee can help a leasing company minimize its • Plan through the end of the lease term and risks. In the next issue we will take a closer look at break the forecast down into payment periods in the financial data that a leasing company should accordance with the lease payment schedule use in its calculations.

A SUCCESSFUL SUPERMARKET IN NOVOCHEBOKSARSK, CHUVASHIA

Continued from pg. 1

first heard about leasing five years ago,» Two years ago, Olga Kosikhina became the di- began Ms. Kosikhina. «At that time I was rector of Municipal Trading House #55. When «Iworking for another store, very similar to she first arrived, the store was a run-down affair Trading House #55. Our business was just with annual profits of 8,000 rubles. Working cap- scraping by, and we really needed extra capital ital was totalled only 90,000 rubles, and the in order to expand. The newspapers had been store urgently needed new equipment and ma- publishing articles about leasing, so I asked the jor renovations. Olga Kosikhina looked through owner what he thought about taking out a lease her folder of newspaper clippings and found an on some new equipment. He was very skeptical advertisement for the Chuvashia Small Busi- about it and said that he couldn’t see any possi- ness Leasing Company. ble advantage to leasing. In those days, it’s true, leasing companies were offering very unattrac- Without a moment’s hesitation, she made an tive terms. In the end, the owner decided to take appointment with the company’s director, Oleg out a bank loan, which, as far as I know, he is Nikolayev. First they talked about the concept of still paying off to this day.» leasing in general, as Olga Kosikhina had only a March-April 2001 SMALL BUSINESS 25 vague understanding of it. They then worked out and by March it had acquired full ownership of two separate leasing plans and signed an the equipment. Except for one short delay in agreement. «The plans were very convenient,» January, when Trading House #55 was forced explained Olga Kosikhina. «Leasing was the on- to replace its accountant, the store made all of ly way for us to acquire new equipment under its lease payments on time. Olga Kosikhina the circumstances. Investment loans would plans to work with the leasing company in the have been almost impossible to find, and even if future, so she was very careful to fulfill all of the we had been so lucky, we would never have terms of their agreement. Over the last year, been able to handle the interest payments.» the store has managed to increase its working capital to 300,000 rubles and take on seven The new partners began by re-equipping the new employees. store’s cafeteria. They wanted to complete the work before the summer tourist season began, as Ms. Kosikhina’s predecessors had considered the store was situated in a densely populated area the store’s spaciousness a disadvantage. The next to a summer resort. If the cafeteria could be premises are indeed quite large, with a total ready in time for the summer tourists, it was ex- area of 2,037 square meters. The shop itself pected to turn a profit very quickly. Olga Kosikhina measures 576 square meters. But Olga Kosikhi- used the store’s work- na sees this as an oping capital to renovate portunity. The grocery the cafeteria, and the store is absolutely es- Chuvashia Small Busi- sential to its densely ness Leasing Company populated, residential provided an icebox, neighborhood, so there mixer, grill, tables and will never be a shortage chairs under the first of customers. The trick leasing plan. The is to make the store as equipment, which was convenient as possible all foreign-made, cost a for them. total of 130,000 rubles. The lease agreement Retail display with a refrigerator, grill and racks were acquired Renovating the cafe- was signed in May using leasing for the cafeteria teria turned out to be a 2000, and just 30 days good test of the compa- later the cafeteria was already open for business. ny’s ability to use a leasing plan effectively. Now It was an immediate success. The grill, for exam- that she has some experience, Olga Kosikhina ple, turned out to be the only one in the city, and plans to use leasing to modernize the rest of her customers even started ordering food to go. «We store. «First we’re going to lease some new were afraid to buy a large grill,» explained Olga shop equipment. We need some new stands, Kosikhina. «We didn’t know how things would turn some refrigerated shelves and a new meat cut- out, so we just bought a small, 8-chicken grill. ter to replace our antique ax. We’re also invest- Well, that was a mistake, but at least now we know ing a lot into renovating our building. Since it that we can buy a bigger one next time.» Two was first opened 18 years ago, the shop has months later, the Chuvashia Small Business Leas- never undergone major renovations. We have a ing Company provided Trading House #55 with dark interior, dark tiles and a crumbling facade. some stands and a counter worth another 40,000 We want to make the place more cheerful.» Af- rubles. The store began to offer its customers a ter the renovations are complete, the store will wide selection of beverages, snacks and pastries. be able to expand its selection of goods. By ac- The leasing company also provided an Italian quiring the new equipment under lease, the slicer, which raised the store’s quality of service. store will still have plenty of working capital left over. Most important, it will be able to achieve all The lease was originally signed for a one- of its goals (renovation, modernization and ex- year term, but Trading House #55 managed to pansion) at once, without having to close down complete its lease payments by January 2001, the shop in the meantime. 26 NEWS March-April 2001

As we concluded our interview with Olga ing, and he probably never will. One has to be Kosikhina, we asked her whether it was hard willing to take on responsibilities and, at the to be a female entrepreneur in Russia. After same time, to make realistic plans for the fu- all, she has already managed to accomplish a ture. At Trading House #55, we have had our great deal, and it looks as though she is far ups and downs, but we have never stopped from finished. «Anyone who is willing to work moving forward.» hard can achieve,» she said. «It doesn’t matter if you’re a man or a woman. When I was Viktoria Struts working for the other store, the owner simply PR Specialist couldn’t understand the advantages of leas- IFC Leasing Development Group

PRESS DIGEST

RECENT EVENTS IN THE RUSSIAN LEASING INDUSTRY

vangard Bank is planning to invest in the Russian gold mining industry. AAvangard, which has traditionally specialized in gold mining, is prepared to invest up to $25 million in Russian gold mines this year. The bank has already signed several leases, worth a help of the State Leasing Fund. Last year, 30- total of $2-3 million, for terms of three to four 40% of the region’s new equipment was ac- years. It plans to sign more deals later this year. quired under lease. The federal government has The bank’s specialists are currently considering promised to invest 3 billion rubles in 2001 to several investment projects in Kamchatka, Irkut- help farmers lease new equipment. sk, Magadan and Yakutiya. Rabochy put (Smolensk), Noble Metals Market News February 8, 2001 February 1, 2001 he government of the Moscow Region he government of Smolensk has ap- Thas finalized its plans to lease pedigree Tproved various measures to support lo- livestock and agricultural machinery to re- cal agriculture in the year 2001. Local farmers gional farmers. The region is prepared to in- will receive 21.9 million rubles in emergency re- vest 39 million rubles at 3% APR in agricultural lief. Ten million rubles will go towards repaying machinery and poultry farm equipment. The interest-free loans received in 2000 for fuel pur- lease terms will range from 2 - 5 years, depend- chases, while the remaining 11.9 million rubles ing on the value of the leased assets. Lessees will be used to repay tied credit granted in 1995. will be required to make 20% down payments The Republic of Belarus will repay its natural on any equipment valued at less than 50,000 gas debts by leasing 1.5 billion rubles worth of rubles, 10% on equipment worth more than farming equipment to the region. State-owned 50,000, and 20% on livestock. Lessees will also Rosselkhoz Bank [Russian Agricultural Bank], be required to insure all leased assets. whose charter capital is expected to reach 2 bil- RIA Novosti lion by the end of the year, will help finance the February 13, 2001 region’s farmers. Rosselkhoz Bank will also lead an initiative to create a network of farmers’ cred- tate-owned Rosselkohz Bank plans to es- it unions, develop agricultural insurance and Stablish a leasing subsidiary, Rosagro provide loans to private farmers. The region al- Leasing, with 500,000 rubles in charter capi- so plans to stimulate agricultural leasing with the tal, announced the bank’s public relations man- March-April 2001 NEWS 27 ager, Andrei Cherepanov. Rosagro, which will «This is the largest order for Russian-made air- be owned entirely by Rosselkhoz Bank, will not craft in the last ten years. You might say it’s the compete with already existing institutions such ‘deal of the century.’» The first planes will be de- as Rosagrosnab. Instead, it will work within the livered within 22 months. framework of state programs for the develop- RIA Novosti ment of agricultural equipment manufacturing. February 28, 2001 Kommersant February 17, 2001 he municipal government of Yakutsk has Ttaken out a lease on 20 new ambulances. he Okulovsky Bumazhnik Company of Sixteen of these vehicles will be equipped with TNovgorod has launched a new paper re- cardiographs, tonometers and specialized cycling line capable of processing up to 35 stretchers. The remaining four will contain drug- tons of paper per day. The company is leasing administering equipment, laryngoscopes and the $200,000 equipment through Rosmark-SI of other high-tech equipment. St. Petersburg. The new machinery will enable Yakutia (Yakutsk) the company to reduce its production costs February 28, 2001 considerably. Novgorodskie vedomosti (Veliky Novgorod) he Liksi Sugar Factory, located in the February 23, 2001 TVoronezh region, is in the process of as- sembling its new German production line, ccording to Vyacheslav Sokolov, deputy valued at $1.5 million. The factory will switch Adirector of the Center for Investment over to new production methods this April. The Market Research, the total volume of invest- restructuring should enable the factory to boost ment in Russia should rise by 17-20% this its output, improve the quality of its sugar, and year. Mr. Sokolov announced these figures at a reduce its production costs and energy bills. The round-table discussion on leasing at the Execu- new equipment was acquired under a three- tive Committee of the CIS. Mr. Sokolov ex- year lease. plained that in developed economies, leasing Bereg (Voronezh) accounts for some 30% of total investment, March 2, 2001 while in Russia it comprises no more than 1- 1.5%. He added that leasing is an essential dri- ulkovo Aviation, Rossiya Travel, the Gor- ving force behind investment in the West. Pbunov Aviation Plant (Kazan) and the In- Therefore, he explained, it is imperative that the ternational Bank of St. Petersburg signed a governments of the CIS countries take active protocol on March 11 to form a new aviation measures to support their local leasing indus- consortium. The consortium unites several tries. State guarantees would dramatically in- companies that have a vested interest in reviving crease the number of leasing projects in the CIS the Russian aviation industry. The airlines hope and attract more foreign lessors, he said. to expand their services by acquiring new, Russ- RIA Novosti ian-made aircraft that comply with international February 26, 2001 standards. For the International Bank of St. Pe- tersburg, joining the consortium was a natural ussia’s Atlant-Soyuz Aviation has an- and logical step, since Pulkovo and Rossiya are Rnounced its intention to lease ten new Il- two of its most important clients. The bank, which 96-300-T’s and four new Tu-203S’s. According already has considerable experience with such to Atlant-Soyuz’s general director, Stanislav Ley- industrial groups, will finance the consortium’s in- chenko, the company has already signed an vestment projects, including leasing plans. agreement with Ilyushin Finance Leasing Com- Nevskoe Vremya (St. Petersburg) pany. The contract is valued at around $450 mil- March 13, 2001 lion. «The aircraft will be manufactured at the Voronezh and Ulyanovsk Aviation Plants and ver since they signed a partnership equipped with Russian PS-90A engines and Eagreement in 1999, the republics of Kare- Russian electronics,» said Mr. Leychenko. lia and Belarus have steadily increased their 28 NEWS March-April 2001 economic, scientific and cultural ties. Be- sembly. Last year, farmers in the Altay region re- larus’s Belrusavto continues to lease equipment ceived 406 million rubles worth of new equipment to Karelian logging companies. The Onezhsky and raw materials, almost 40% through dealer- Tractor Plant now uses up to 10 million rubles ship agreements at discounted prices. The farm- worth of Belorussian components monthly. ers were able to lease 130 new grain harvesters, Onezhsky recently tested a new tractor engine 173 tractors, 41 fodder harvesters, 60 harvester from the Minsk Motor Plant and has already attachments and other equipment worth a total of signed a preliminary agreement for a shipment 249 million rubles. The government of Altay has of the engines. earmarked an additional 150 million rubles this Severny Courier (Petrozavodsk) year to finance leases in the region. March 16, 2001 Altayskaya Pravda (Barnaul) March 27, 2001 t. Petersburg’s Silovye Mashiny Group has Ssigned a partnership agreement with Ros- he Leningrad region will receive 130 mil- bank and Vneshtorg Bank. Silovye Mashiny in- Tlion rubles for equipment leases this year. cludes some of the largest manufacturers of pow- The regional government has already received er-generating equipment in the CIS: The Leningrad 20 million rubles, and an additional 110 million Metal Factory, Elektrosila, The Turbine Blade Fac- will come from the federal treasury in 2001. Ac- tory and Energomashexport. The agreement calls cording to the regional government’s press ser- for improvements to the companies’ international vice, the region has leased 1,080 pieces of and domestic payment systems, funding for mod- equipment since its leasing program was found- ernizing their facilities and expanding their sales ed seven years ago. The program favors agricul- networks, financing for their current export and im- tural producers that provide a good return on its port operations, and increased coordination on investment. First in line this year are the region’s joint investment projects. The signatories will be dairy suppliers; they will receive new milk tankers able to invest available capital in the Russian pow- this year. The demand for tankers has grown, as er-generating equipment industry through newly the region’s dairy production has surged to 20 opened credit lines and syndicated loans. Rosbank tons of milk per day. Last year, the leasing pro- has signed a five-year deal to help the manufac- gram helped farmers in the remote areas of Pod- turers modernize their plants. In particular, the porozhe, Tikhvin, Slantsy, and Lodeyiopol. The bank will evaluate their investment projects, moni- region plans to secure these leases by requiring tor their use of funds, act as a guarantor, set up a the lessees to make payments in kind. leasing program for the plants’ power-generating Vesti (St. Petersburg) equipment, attract investors and form an invest- March 27, 2001 ment consortium for joint ventures. Working with Vneshtorg Bank will give the industrial group ac- he capital growth rate among St. Peters- cess to the bank’s broad network of foreign and do- Tburg’s banks last year suggests that the mestic subsidiaries, as well as the services of the local banking sector is sufficiently liquid. leasing company Evrolizing GmBX. Vneshtorg Since 1998, the total volume of registered char- Bank will also be able to provide the group with ter capital among St. Petersburg’s banks has bank guarantees on international tenders and ex- grown 5.2 times to 2.86 billion rubles (as of Jan- port contracts. uary 1, 2001). Further evidence of the banks’ Rosbalt Information Agency good financial health is the fact that 80% of them March 20, 2001 are currently profitable. Many of the banks have expanded to include new kinds of services. Most ltay Agropromsnab was declared the important, considering the high demand for new Amost successful supplier of agricultural equipment in the region, the banks have begun equipment, spare parts and raw materials at to expand their leasing programs. Inkas Bank an interregional seminar devoted to preparing has opened a third leasing subsidiary to handle for this year’s sowing season. Vladimir Ye- the growing demand for leasing services. sionov, deputy director of Rosagrosnab, made Delovoy Peterburg (St. Petersburg) this announcement during his speech to the as- March 29, 2001 March-April 2001 NEWS 29

tlant-Soyuz Aviation and Ilyushin Fi- Minister Ilya Klebanov pointed out that Russ- Anance Leasing Company have signed an ian airlines, which currently have no choice agreement to equip Il’s 92-ton-capacity air- but to use obsolete technology, will suffer craft with Russian-made engines and elec- next year when the European Union begins tronics instead of American imports. The new to enforce a ban on outdated aircraft. Even if planes will cost half as much as the current 96- Russia’s aviation companies tried to modernize T series and only one-third as much as Western their planes, they would not be able to bring equivalents. The planes will be assembled at the more than 25% of them into compliance with the Voronezh and Ulyanovsk aviation plants. new European regulations. This is why the gov- Kommuna (Voronezh) ernment has decided to finance leases for new March 29, 2001 Tu-204 and Tu-214 aircraft, as well as Il-96s. Tupolev is expected to come out with a new wo of Russia’s large, state-owned banks, model, the Tu-334, in 2003. Mr. Klebanov added TVneshekonom Bank (VEB) and the Russ- that the Ministry of Finance, Rosaviakosmos ian Development Bank (RBR) have an- and the Ministry of Trade and Economic Devel- nounced their intention to create leasing opment will decide in the near future how much subsidiaries. Another state-owned bank, the federal government will be able to spend on Rosselkhoz, already opened a leasing sub- subsidized loans for Russian aviation purchas- sidiary this February. The combined turnover es. The loans will be issued for periods of 10-12 of Russian leasing companies reached 17.5 bil- years at 13-14% APR in dollar terms. The gov- lion rubles last year. More than half of this sum ernment will also act as guarantor on around was invested in high-tech and manufacturing 85% of the loans. equipment. It is no surprise that state-owned RIA Novosti banks are taking an interest in leasing, since March 29, 2001 several of them, such as VEB, work with high- tech firms in the military-industrial complex and he Agriculture Department of the Tyumen the automobile industry. The chairman of VEB, Tregion has held an auction for agricultur- A. Kostin, announced that his bank intends to al leases to be financed by the regional gov- create a universal leasing company with $10 ernment. The government awarded the con- million in charter capital. The company will likely tracts on the basis of several criteria: delivery be called Vneshekonom Leasing. terms, equipment quality, cost-effectiveness and Rosselkhozbank is planning to launch a new in- service. The winners were the Tyumen Agricul- vestment program this April with funding of up to tural Equipment Supplier (Tyumenoblagroprom- 900 million rubles, much of it earmarked for agri- snab) and the Tyumen Agricultural Leasing cultural leases. RBR has yet to decide how Company. many leasing companies (one or several) it will Tyumenskiye Izvestiya (Tyumen) need in order to participate in the government’s March 30, 2001 investment programs. According to the director of the bank’s development programs, V. Opletin, the bank has already submitted proposals for LEASING NEWS FROM ABROAD medium- and long-term leases to the federal government. The government is expected to re- he Hungarian government has decided to view several development programs for critical Tlease used American F-16 fighter planes Russian industries over the next few months. to replace its aging Mig-29s. Hungary’s Minis- RBR is counting on the government to give the ter of Defense, Szabo Janos, announced that green light to leasing projects. the country would lease and renovate twenty- Vremya Novostey four F-16s over the next ten years at a cost of March 29, 2001 around $560 million. The first planes will be put into action by the year 2004. Last year, a Russo- he Russian government has decided to German joint venture offered to renovate Hun- Tbegin implementing leasing plans for gary’s Mig-29s, and a preliminary agreement Russian aviation technology. Deputy Prime was reached with the Hungarian government, 30 QUESTIONS & ANSWERS March-April 2001 but Hungary was forced to scrap the plan due to ly viable farms and to stimulate competition in the strong opposition from NATO, especially the agricultural equipment market. The government United States. has been given one month to establish a national Sinhua Information Agency leasing company, Ukragroleasing, confirm its char- February 10, 2001 ter and define its principal goals. The cabinet must also compile a list of state property that will serve as yprus Airlines has announced its inten- the leasing company’s collateral. The government Ction to replace its fleet over the next two has been asked to simplify the procedures for leas- years. The company will buy two new aircraft ing agricultural equipment under federal programs. and lease an additional two from Europe’s Airbus UNIAN Information Agency (Kiev) consortium, as well as leasing four new planes February 23, 2001 from Boeing for its subsidiary, Euro Cypria. Two new Airbus A-319-200s are scheduled to arrive in eorgia’s bus lines will use new Swedish Cyprus early next year, followed by two A-330- GTetra buses for their intercity services. The 200s and four Boeing 737-800s under lease in Spanish firm Oriega Brothers will lease six new the year 2003. Cyprus Airlines currently has four buses to the Georgian companies for their long- Airbus A-310-200s, which it plans to lease out distance routes. The specific terms of the leases over the next two years on profitable terms. will be decided later, after the buses have begun ITAR-TASS, to generate profits. The agreement will help Geor- February 20, 2001 gia modernize its bus fleet, improve the quality of its bus service and increase customer safety. krainian president Leonid Kuchma has PRIME NEWS Information Agency (Tbilisi) Usigned a decree on Further Measures for March 9, 2001 the Development of Agricultural Leasing in Ukraine. The decree aims to promote structural re- form in Ukrainian agriculture, to create economical- The press digest was prepared by Viktoria Struts

QUESTIONS & ANSWERS

f a trucking Subleases are fully subject to Russian leasing company has laws unless otherwise stipulated by current leg- Itrouble meeting islation. One such exception is Article 615 of the its lease pay- Russian Civil Code, which stipulates that a sub- ments, can it sublease may not exceed the term of the primary lease its trucks to lease agreement. another trucking If you are planning to sublease a motor vehi- company? If so, cle, you need to give special thought to the mat- how? ter of vehicle registration. According to the GIB- DD’s Procedures for Registering a Leased Mo- According to our tor Vehicle (05/24/00), a subleased vehicle must interpretation of be registered in the name of either the lessor or Stanislav Kovynyov, Attorney Russian law, there the lessee. This means that the registered party IFC Leasing Development Group are two ways for a will have to grant the sublessee power of attor- lessee to transfer ney over the leased vehicle. his rights and oblig- Remember that if the lessee does sublease a ations under a lease agreement to a third party: vehicle to a third party, he still remains fully li- subleasing and lease transfer. able to the lessor under the terms of the prima- In either case, the lessee must first obtain the ry lease agreement. lessor’s permission before transferring the If the lessee actually transfers his lease to a leased asset. third party, that party acquires all the rights and March-April 2001 QUESTIONS & ANSWERS 31 responsibilities stipulated under the lease basis in such cases for applying Article 9 of the agreement. The agreement itself remains un- Law on State Support for Small Enterprise. changed. Motor vehicles may be registered in Nevertheless, in certain cases disallowing the the name of either the lessor or the new lessee. VAT exemption may increase the tax burden for some small enterprises. These enterprises nder the new Tax Code, will small enter- have every right to claim protection under Arti- Uprises still be able to claim the VAT ex- cle 9 of the Federal Law on State Support for emptions stipulated under Article 9 of the Small Enterprise. That is, enterprises that were Federal Law on State Support for Small En- incorporated before Chapter 21 of the new Tax terprise? Code went into effect would have the right to claim the VAT exemption stipulated under the According to Article 9, Clause 1, Part 2 of Fed- Law on Value-added Tax until the fourth an- eral Law 88-FZ on State Support for Small En- niversary of their incorporation. terprise (06/14/95), if any change in Russian tax In short, small enterprises may continue to law increases the tax burden for small enterpris- claim the VAT exemption in accordance with the es, these enterprises may continue to observe Federal Law on State Support for Small Enter- the regulations that were in place at the time of prise only if abolishing this exemption has in- their incorporation for four years (from the time of creased their overall tax burden. incorporation). Neither the Tax Code nor any other tax law has abrogated this right.1 Since the «tax break» in question (the VAT examption) stipulated under the Law on Value-added Tax (Article 5, Clause 1, Subclause “Ya”) nearly al- 1 According to Article 11, Clause 1 of Federal Law 148-FZ on 2 the Single Imputed Income Tax for Certain Types of Business, ways raises the actual costs of leasing, one can- Article 9 of the Law on State Support for Small Enterprise does not say that annulling the exemption will raise not apply to certain enterprises that pay imputed income tax. the tax burden. Consequently, there is no legal 2 See the January-February 2001 issue of the Leasing Courier (#13).

hat are the The sale should be recorded under account 47 accounting «Sale or Transfer of Fixed Assets:» Wproce- D51 K62 (300): Payment for Property dures for a lease- D62 K47 (300): Sale of Property back agreement? D47 K01 (540): Deduction for Original Value of Property Because the D02 K47 (360): Deduction for Wear and Tear lessee takes on the D47 K68 (50): Deduction for VAT function and status D47 K80 (70): Total of a vendor under a In all other ways, the lessee should record the Elena Degtiareva leaseback agree- leaseback agreement exactly as he would an or- Financial Analyst IFC Leasing Development ment, he must dinary lease. The property transfer, current op- Group record the sale of erations and termination of the agreement are the leased asset to all recorded in the same way. the leasing compa- As for the leasing company, the bookkeeping ny in his account- procedures for a leaseback agreement are iden- ing records. As a rule, the assets leased un- tical to those for an ordinary lease, including the der leaseback agreements have already purchase of the leased asset. been used by the lessee. Selling such assets at any price other than their residual value ow should lessors record the difference will give the lessee either a positive or a neg- Hbetween the value of the lease agree- ative balance. ment and the value of the leased asset de- CHIEF EDITOR: Viktoria Struts ducted under account 83 «Income for Future Periods» (assuming that the leased asset is ARTICLES PREPARED BY: recorded on the lessor’s balance sheet)? Elena Degtiareva Natalia Kichko The difference that the lessor records under ac- Stanislav Kovynyov count 83 should correspond to account 46 «Sale Alan Moseley of Goods, Labor or Service.» Viktoria Struts This is based on Clause 5 of Accounting Stan- Olga Shishlyannikova dard (PBU) 9/99 «Entities’ Income», confirmed Veronica Shtelmakh by the Ministry of Finance’s Order of May 6, 1999 Alexei Trepykhalin (12/30/99 edition). According to this regulation, Eleonora Veitsman lessors should record lease payments as income from ordinary business activities. TRANSLATION BY: According to the Accounting Plan for the Com- Daniel Kohn mercial Activities of Enterprises and its accompa- nying Instruction (confirmed by USSR Ministry of Comments, proposals, questions and Finance Order 56 of 11/01/91, 02/17/97 edition), submissions may be sent to: this revenue should be credited to account 46 «Sale of Goods.» IFC Leasing Development Group However, we should add that according to Moscow 103009, ul. Bolshaya Clause 6 of Ministry of Finance Order #15 of Dmitrovka, d. 7/5, str. 2. e-mail: [email protected] 02/17/97 on Accounting Procedures for Leasing Transactions, the difference recorded under ac- http://www.ifc.org/russianleasing count 83 «Income for Future Periods» should be deducted in accordance with the amount of prof- Telephone: (095) 755-8818 fax: (095) 755-8292/8299 it from lease payments credited to account 80 «Profits and Losses.» Articles from the Leasing Courier may be Since both of these regulations were passed by reprinted in full or part if credited to the IFC Leasing Development Group the same agency, the more recent one (Account- ing Standard 9/99 «Entities’ Income») takes The Leasing Courier information bulletin is dis- precedence. tributed free of charge as a part of the Leasing Development Project, implemented by the In- Therefore, the difference recorded under ac- ternational Finance Corporation with financial count 83 should be recorded as follows: support from the Canadian International Devel- D83 K46: Deduction for the difference between opment Agency (CIDA) the value of the lease agreement and the value of the leased asset included in the lease payment D46 K80: Total

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