11.07.2003 07:41
WHY IS "ARMOR" OF UKRAINIAN DEFENSE FIELD WEAK?

Ukraine is gradually forming the "core" of banks ready to service the national defense and industrial complex and to take part in military and technical cooperation as extremely important, if not key, partners. This process is concerned with search for optimal forms of interaction between financial structures, special-item exporters and defense enterprises. Both the companies and the banks are trying to win the most beneficial stands. But this is not the case when the strongest is the winner. There will be simply no winners unless a reasonable compromise is found. In the light of traditional interest of banks to foreign contracts that Ukrainian defense and industrial enterprises run on their own or through special-item exporters, the recent two years in Ukraine were characteristic of cautious interest of banking structures to national innovation projects carried out mostly in hi-tech fields and in the defense and industrial complex. Thus, in late 2002 the Industrial Policy Ministry drew a list of promising innovation projects, in which aircraft construction projects take much space.

According to Defense Express data, Ukrainian commercial banks will set aside a total of nearly UAH450 million in 2003 for national aircraft construction companies to run long-term projects. Nevertheless, according to State Secretary of the Industrial Policy Ministry of Ukraine, "whereas abroad the banks would fight for participation in such projects, in Ukraine they cannot agree on interest rates." In his words, banks are still not willing to get involved into long-term projects and do not understand they would otherwise receive some market for a long time. He also believes the list of innovation projects includes only serial engineering production that has good prospects.

Referring to air field experts' opinions, Ukrinform, the state news agency, reported the interests demanded by commercial banks for granted credits are all-too-high for the majority of Ukrainian air enterprises. Even though the NBU recommended banking establishments not to increase the credit rate by more than 8%, they often raise it to 14-18%. This means they will long restrain the development of the national aviation.

For defense and industrial companies the interest rate alongside with the terms for credit return seem to be the basic factor that denotes availability of credits, which is the ability to use banks' credit resources. An element of trading is naturally a part of the traditional process. The loaner is striving to receive a "cheap" credit. The bank is interested in performing such an operation with the maximal guarantee of credit return. The administration of companies and defense enterprises are traditionally confident banks are trying to shake out the sole from creditors and are getting over-cautious.

Valeriy Muntiyan, aide to the Ukrainian Defense Minister of Ukraine for budget formation and economic and financial activity, commented on the situation with commercial bank's credit this way: The refinancing rate was 6%, now it is 8%, but the risk factor they lad down adds another 20%. The resulting cost of the credit resources 26% or 28%. This is not right since the average profitability of production is 15%. It is clear that in such conditions the producer will not take such a credit, while the commercial bank would not sell because the return factor is not met. Therefore banks prefer investing in trade where circulation is swift, and not into defense complex."

In his turn, executive director of Shkhuna design bureau defined "narrow" places in relations between banks and companies the following way: "Today there is a number of financial companies ready to support introduction of the innovation method when the state or commercial structures grant credit funds on preferential terms, return of credit guaranteed. But to receive $1 million, you have to present a minimum of $2-2.5 million as pawn. The basic problem today is that most of borrowers lack liquid pawn. The practice of granting state guarantees in Ukraine did not work out thanks to the same reasons no guarantee for returning the credit from the side of the borrower."

But the very acuteness of relations between the bankers and industrialists can be specially seen on example of aircraft construction and space field. These are hi-tech directions the very capital-intensive business, and if the current level of finance provision will let companies working in these segments execute the existing contract liabilities for the upcoming decade, then the companies need investments to maintain its competitiveness and leading positions in the field in a more remote outlook. Since research and design account for a great share of company expenditures, investment has to be made today for it to pay back in five years.

Viacheslav Bohuslaev, director general of the open-end JSC Motor Sich, resolutely stated "none of even the most prestigious Ukrainian banks Privatbank, Prominvestbank has such funds to invest today designs of Motor Sich or Progress. They cannot do this." Motor Sich produces air engines that are of constant demand not only in the CIS. They are not only manufactured in Zaporizhia but designed as well. Chief designer of Zaporizhia's Design Bureau Fedir Muravchenko says "none of the banks gives credits for more than 2-3 years. To return this money, we have to run the production cycle, which is no less than 7 years. For example, in France the zero balance happens 13-15 years since the start of elaboration. Just imagine, only after this period is over, credits are returned. Besides, an interest rate on credits in Ukraine is too high. Today credits are granted under liquid goods only trade. For example, I want to take a credit but I will receive it only for two or three years under the pawn of design bureau. In this case I will never return a credit. All this is done only to "pinch" our property."

Speaking of the potential of national banking structures for crediting of hi-tech projects, Pavlo Naumenko, director general of Kharkiv State Aviation Production Amalgamation, believes: "The situation is not the best. Money is expensive. Money is short. Therefore it is purely the issue of management how to attract banking capital in today's legal market field to develop aviation industry. We have a solid credit portfolio. Because to have the volumes of production increased they grow 2.5-3 times year-on-year we need capital. We work with Ukrainian banks very closely. We have full mutual understanding. First of all, these are Prominvestbank and Ukreximbank. We also wrk with Creditprombank and the First International Ukrainian Bank. I would be happy to work with European banks. But European banks are not working with us yet."

Director general of Yuzhmash State Company Yuriy Alekseyev believes "national banks are not capable of financing rocket and aviation industry of Ukraine. We are trying to take "foreign" credits there are more preference there. Here a forex credit from 12% to 15%. 12% is only through good connections. And the money can be taken for a year or two. And if we make a rocket, for example, for two and a half years, while my assembler prepares a set of units during three years. And I have to finance and pay advance on his work. That is why our banks cannot execute such tasks."

Several years ago Yuzhmash took a $30 million credit under the Sea Launch project in the Japanese bank. "We paid back the credit in full swing of the Asian economic crisis. Now we hired a legal firm that is searching banking structures in the U.S. to finance several our projects. This legal firm is a guarantor of such cooperation. American banks go for this, even though today Ukraine is a black hole for them. Nevertheless, such cooperation is developing Sea Launch is an example. Since Ukraine may give state guarantees under the project, this somehow effects the "loyalty" of foreign banks," he underlines. Yuzhmash, in his words, cooperates with Russian banks in running the Sea Launch project. "As to Russian banks, we work hard with Mostprivatbank, for example. The bank knows what products we buy in Russia and gives our Russian allies credits, considering our contract and under our guarantees. Mostprivatbank cooperates with out Privatbank thus there is a small financial industrial group."

Contacts of Ukrainian companies with Russian banks is a very indicative tendency. Capitalization of the Russian banking system greatly exceeds that of the Ukrainian one, which allows for Ukrainian companies to expect bigger resources to be drawn in. This is one side.

On the other hand, Russia is facing a new stage of capitalization of banks engaged in defense project financing. Thus, director general of the research and design center of Aviaprom JV Olexandr Batkov said Moscow Industrial Bank came up with the initiative to create a consortium of Russian commercial banks to finance design and production of promising aircraft. In his words, Moscow Industrial Bank addressed Russian President Vladimir Putin and Rosaviakosmos with such a proposition. "Domestic banking system of Russia is at present strong enough to go for long-term crediting of aviation enterprises. It goes of crediting the creation of a new aviation equipment during no less than 5-10 years," he believes. In his opinion, involvement of big commercial banking structures in financing of design and production of promising aircraft will result in the need to enhance demands to the aviation industry, particularly to marketing and creation of terms for utmost reduction of risk for investors.

Though bankers do not agree to the criticism of directors, nevertheless it is clear there are discrepancies in approaches between the banks and companies to crediting terms in the defense and industrial complex. If banks do not reduce the rates on the given credits in future, the initial bad financial condition of companies caused by high interest rates will grow into refusal from expensive credit resources, which, subsequently, will undoubtedly slow down the industrial growth. Possibly, the ongoing extension of crediting of the industry in terms when rates are formally high than admissible is the sign of upcoming tension in relations between the real and banking sectors.

Serhiy Zgurets, Center for Army Conversion and Disarmament Studies

Full data on relations between the banking sector and defense and industrial companies will be available in the upcoming analytical editions of Defense Express.