Russia Needs To Do The Heavy Lifting To Become An Export Nation

Moscow's goal be an exporter of manufactured goods must be done in the face of major political and financial uncertainties.

A Russian ship carrying used cars docks in Japan
A Russian ship carrying used cars docks in Japan
Aleksandra Romanyicheva

MOSCOW — The government has stated on many occasions that manufactured exports, instead of raw materials, should be the engine of economic growth for Russia. But making the leap onto the market for exporting goods is a major challenge.

"One of the most formidable barriers for potential exporters is the colossal amount of work required to secure credit," says Rodion Surkov, whose company Ruselprom is a leading producer of electrical equipment in Russia.

Commercial financial institutions are not prepared to take on the risks associated with supporting exports, citing financial and political unknowns, management difficulties and low profit margins. It doesn’t help that many of Russia’s traditional export markets are in the relatively unstable countries of the Middle East and Latin America.

But at least one of the problems facing exporters was solved when the Russian Export Insurance Agency (REIA) opened two years ago. Most commercial insurance agencies refuse to offer insurance for exporters, so the outfit fills a crucial gap. State-sponsored export insurance agencies are common around the world, since exporting is considered risky not just by Russian insurers, but also by insurers worldwide.

Port of Taganrog - Alexxx1979

But accessibility of export insurance is just one step towards creating a better economic environment for Russian companies. Peter Fradkov, head of REIA, says he has been actively working with banks and regulatory agencies to try to stimulate lending to exporters. The first step was a change to Bank of Russia regulations — in force since Jan. 1 — that allows banks to accept export insurance as loan collateral without having to establish reserves. Previously, banks making loans to exporters had to evaluate the loan risks and have up to 100% of the loan amount in reserve, which made it extremely difficult for exporters to get credit.

Another change Fradkov pushed forward has to do with the way banks evaluate the credit-worthiness of their portfolio, using a coefficient. The lower the coefficient, the better, and Fradkov managed to reduce it to evaluate credit given to exporters.

It is also now easier for exporters to handle deals in foreign currencies without worrying about breaking regulations.

Is it enough?

But will these simple measures stimulate manufactured exports and begin to change the ratio of raw materials exports, which now represent two-thirds of Russia’s total? According to Aleksander Knobel, head of the Laboratory for International Trade at the Gaidar Institute, creating the Russian Export Insurance Agency was critical, but is simply not enough.

“Giving Russian exporters of manufactured goods access to export insurance and guarantees just gives them the same conditions as exporters from other countries who are active in the international market. Without that, there is no way to increase exports,” he says. “There is no universal recipe that would immediately allow us to increase our competitiveness. ... There’s a long global practice that we just need to follow. In that sense, it’s easier for us, because we just have to look at what is being done in other countries, but putting it into practice is harder for us,” Knobel says.

In his view, the highest priority should be removing export barriers within Russia. For example, to export a product, a company has to prove that it could not be used for military purposes. “Exporters have trouble getting to the market because of administrative barriers,” he says. “Plus, at the moment the custom’s service doesn’t work very well, and that is delaying exports. In ratings of effectiveness of the customs system, Russia is in last place.”

The government has prepared a road map of sorts for improving exports, but many outside experts say that even this plan is too “bureaucratic.”

For the moment, is seems that institutional changes are still stalled, and developing Russia’s export market still has institutional hurdles to overcome. Fradkov admits that he often does things that would seem inappropriate for the head of an export agency — for example, personally escorting exporters to meetings with bankers.

“It is not a classic role for an export agency at all, but we are living with the reality that the export market is still in the phase of early development.”

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Air Next: How A Crypto Scam Collapsed On A Single Spelling Mistake

It is today a proven fraud, nailed by the French stock market watchdog: Air Next resorted to a full range of dubious practices to raise money but the simplest of errors exposed the scam and limited the damage to investors.

Sky is the crypto limit

Laurence Boisseau

PARIS — Air Next promised to use blockchain technology to revolutionize passenger transport. Should we have read something into its name? In fact, the company was talking a lot of hot air from the start. Air Next turned out to be a scam, with a fake website, false identities, fake criminal records, counterfeited bank certificates, aggressive marketing … real crooks. Thirty-five employees recruited over the summer ranked among its victims, not to mention the few investors who put money in the business.

Maud (not her real name) had always dreamed of working in a start-up. In July, she spotted an ad on Linkedin and was interviewed by videoconference — hardly unusual in the era of COVID and teleworking. She was hired very quickly and signed a permanent work contract. She resigned from her old job, happy to get started on a new adventure.

Others like Maud fell for the bait. At least ten senior managers, coming from major airlines, airports, large French and American corporations, a former police officer … all firmly believed in this project. Some quit their jobs to join; some French expats even made their way back to France.

Share capital of one billion 

The story began last February, when Air Next registered with the Paris Commercial Court. The new company stated it was developing an application that would allow the purchase of airline tickets by using cryptocurrency, at unbeatable prices and with an automatic guarantee in case of cancellation or delay, via a "smart contract" system (a computer protocol that facilitates, verifies and oversees the handling of a contract).

The firm declared a share capital of one billion euros, with offices under construction at 50, Avenue des Champs Elysées, and a president, Philippe Vincent ... which was probably a usurped identity.

Last summer, Air Next started recruiting. The company also wanted to raise money to have the assets on hand to allow passenger compensation. It organized a fundraiser using an ICO, or "Initial Coin Offering", via the issuance of digital tokens, transacted in cryptocurrencies through the blockchain.

While nothing obliged him to do so, the company owner went as far as setting up a file with the AMF, France's stock market regulator which oversees this type of transaction. Seeking the market regulator stamp is optional, but when issued, it gives guarantees to those buying tokens.

screenshot of the typo that revealed the Air Next scam

The infamous typo that brought the Air Next scam down

compta online

Raising Initial Coin Offering 

Then, on Sept. 30, the AMF issued an alert, by way of a press release, on the risks of fraud associated with the ICO, as it suspected some documents to be forgeries. A few hours before that, Air Next had just brought forward by several days the date of its tokens pre-sale.

For employees of the new company, it was a brutal wake-up call. They quickly understood that they had been duped, that they'd bet on the proverbial house of cards. On the investor side, the CEO didn't get beyond an initial fundraising of 150,000 euros. He was hoping to raise millions, but despite his failure, he didn't lose confidence. Challenged by one of his employees on Telegram, he admitted that "many documents provided were false", that "an error cost the life of this project."

What was the "error" he was referring to? A typo in the name of the would-be bank backing the startup. A very small one, at the bottom of the page of the false bank certificate, where the name "Edmond de Rothschild" is misspelled "Edemond".

Finding culprits 

Before the AMF's public alert, websites specializing in crypto-assets had already noted certain inconsistencies. The company had declared a share capital of 1 billion euros, which is an enormous amount. Air Next's CEO also boasted about having discovered bitcoin at a time when only a few geeks knew about cryptocurrency.

Employees and investors filed a complaint. Failing to find the general manager, Julien Leclerc — which might also be a fake name — they started looking for other culprits. They believe that if the Paris Commercial Court hadn't registered the company, no one would have been defrauded.

Beyond the handful of victims, this case is a plea for the implementation of more secure procedures, in an increasingly digital world, particularly following the pandemic. The much touted ICO market is itself a victim, and may find it hard to recover.

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