How do insurance and bank guarantees open the way for exporters to foreign markets?
After the start of the full-scale war in Ukraine, the risks of foreign economic activity have increased significantly. Instability, disruption of supply chains, new sales markets, and problems with trust from foreign partners require specialized financial and insurance solutions.
Therefore, the state and banks are implementing mechanisms that allow them to insure contracts, ensure payment under deferred payment conditions, and also guarantee the fulfillment of obligations.
According to Ruslan Gashev, Chairman of the Board of the Export Credit Agency, their ECA instruments cover both insurance of foreign economic contracts and loans attracted by exporters for the purchase of resources.
ECA also works with bank guarantees – refund of advance payments, contract performance, participation in tenders. In addition, the agency is developing products to protect investment loans and direct investments, including new policies for small transactions up to 400 thousand hryvnias.
It is not just about lending, but about a set of secure payment mechanisms – letters of credit, bank guarantees, as well as the EBRD Trade Facilitation Program (TFP). A letter of credit is the most reliable instrument, because the buyer’s bank guarantees payment only after submitting a full package of documents.
If the importer is served by a bank with a low rating, Ukrainian companies often attract confirmation from European financial institutions.
Bank guarantees are used in tenders, during advance payments or to confirm contractual obligations. If necessary, counter-guarantees from European banks are attracted. The EBRD TFP program allows you to minimize risks when cooperating with little-known foreign banks.
In practical application, the tools are effective for both mass and individual needs. Portfolio insurance is suitable for small loans, while individual policies are for large projects worth more than 20 million hryvnias.
In the case of contract insurance, the exporter receives a guarantee of payment even with deferred payment, and the ECA policy can serve as an alternative to collateral, simplifying access to bank financing. Investment insurance covers political and military risks, which is critically important in today’s conditions.
The cost of such services varies. According to Ruslan Gashev, the fixed rate of portfolio insurance is 0.6%, and the average cost of other products is about 1.3%. The price depends on the importing country, the reliability of the partner, the financial condition of the exporter and the terms of the contract.
Commissions for letters of credit and bank guarantees usually range from 1 to 3% per annum, and involvement in international programs such as TFP allows you to reduce overall costs. In addition, the bank offers business loans at a rate of 3.8% per annum in euros, which can complement other financing instruments.
Among the problematic issues, experts name currency restrictions that complicate the development of export factoring and contract insurance. ECA is negotiating with government agencies to mitigate them.
Another barrier is the limited list of risks covered by investment insurance – currently only political and military threats, while banks expect wider coverage. The proposed legislative changes are aimed at expanding this range in the near future.
Also, to scale up its influence, ECA needs additional capitalization at the level of UAH 5 billion. This will allow expanding the scope of insurance obligations and providing a larger number of enterprises with access to financial protection in war conditions.