20 April 2011
4.7 Challenges facing exporters
Trade financing problems
Not surprisingly, the problem of trade financing remains a major barrier to trade with Russia. In fact, it has long been quite difficult and expensive for ordinary importers to secure trade financing from banks in Russia as they lack a sound financial track record due to their short history. Banks are becoming increasingly cautious about the credit standing of Russian importers especially after the outbreak of the global financial crisis in the second half of 2008. Exacerbated by the high premium charged by banks, letters of credit (L/Cs) are still not commonly used by small- and medium-sized Russian traders. On top of high bank charges, some companies, especially small importers, are often required to have a 100% deposit back-up for their L/C application, practically discouraging them from issuing L/Cs to overseas suppliers.
On the other hand, despite growing acceptance, L/Cs issued by Russian banks are still not very welcome by foreign banks when it comes to confirmation and negotiation, further limiting the application and use of L/Cs in Russia. Against this background, smaller Russian buyers generally accept upfront deposit payment terms for purchases from Asia, while this could be 100% payment upon order confirmation in the extreme. It is also not uncommon for Russian buyers to ask for open credit, but many Asian suppliers refuse to make this available before a long-term relationship is established.
Fragmented distribution landscape
The fragmented distribution landscape in Russia not only results in small orders, but difficulties for Hong Kong exporters or brand owners to penetrate the market. Unlike many years ago when importers sourced goods overseas only once or twice a year, most importers in Russia nowadays place orders with their overseas suppliers according to the demands of different sales seasons. The changing business environment, coupled with the demand for greater assortment, complicates further the problem of small orders, hampering the competitiveness of Hong Kong exports under intensified price competition from indigenous mainland suppliers.
Low awareness of Hong Kong products
Given Russians’ high brand-consciousness and preference for European brands, it is difficult for foreign brands which are not internationally known to penetrate the Russian market. Meanwhile, given the competition from indigenous mainland suppliers, it is increasingly difficult for Hong Kong exports to win the fight for customers who prefer value-for-money products. While product design and branding can definitely be an advantage of and a way out for Hong Kong products in this context, many Hong Kong companies prefer to accept OEM orders, instead of making efforts to find domestic Russian partners (e.g. chain retailers) to cultivate their own branded products for long-term success. The resultant low awareness has resulted in a low level of penetration of Hong Kong products in the vast Russian market, limiting in turn their opportunities to move up the value chain from OEM business.
Bureaucracy and corruption
Although the scale and gravity of the problem of bureaucracy and corruption has improved consistently in Russia over past the decade, it remains a headache for both the Russian government and businesspeople trading with the country. The notoriously cumbersome and bureaucratic Russian customs procedures not only result in clearance delays, but additional demurrage and storage charges. In some extreme cases, importers may have to spend months on preparing and re-submitting customs documents in line with the instructions on import and export customs clearance issued by the Russian customs.