So far this year, Russia has managed to annex Crimea and apply considerable influence with rebels in eastern Ukraine without too much damage being inflicted in return by an outraged but largely helpless group of Western industrial countries. Certain sanctions have been applied, which may be followed by others of escalating severity, and Russia has been suspended from the G8 group of industrialized nations; however, it was telling that the reaction of many of the other developing nations that make up the wider G20 was much less anti-Russian. Remember, the G20 includes the other original members of the BRICs nations (Brazil, India and China), all of which abstained in a recent UN General Assembly vote that was implicitly critical of Russia in its stance over Ukraine. One consequence for western financial institutions already invested in Russia is that it may in future look more to the east for partnerships.

As far as the global economy is concerned, such tension has not helped the tentative recovery from recession, particularly in the EU, a major trading partner with Russia. The Russian economy itself had already suffered in the first quarter of the year, before the onset of the situation in Ukraine, being over-reliant on its vast reserves of natural resources and with a weak currency further pressurized by worries about the effect of the tapering of quantitative easing in the US. Growth in Russian GDP had been slowing for some time, and already high levels of capital outflow were exacerbated by the currency problems.

All this has led to forecasts of growth in Russia being reduced to near zero. The question now is how to get out of a vicious cycle, as the slowdown in the economy has led to a further reduction in state investment, with a subsequent lowering of orders and funding requirements, and the state remains the major influence in all areas.

Add to this the prospect of sanctions and increased constraints on access to foreign funding, and one would expect extra downward pressure on the leasing industry and increasing negative sentiment among independent lessors.

Guarded optimism for leasing

A period of stasis in the economy could actually work in favour of alternative methods of finance, as it forces businesses to be more discerning with resources and encourages them to seek to diversify funding sources.

There are undoubted challenges to overcome. Latest figures from the Russian Leasing Association (ULA) show a decline in the first nine months of 2013 of around 3%. The consensus for this year is for there to be no growth overall. A large proportion of leasing in Russia involves big-ticket deals, which more often than not involve state-owned agencies with finance provided by state-run banks. State-run projects in the vast oil & gas sector and for infrastructure account for a high proportion of construction and equipment leasing contracts.

In addition to the challenge of the economy remaining unbalanced in favour of the natural resources sector, lack of proper regulation of the leasing industry, poor customer payment discipline, difficulties with credit and risk assessment, tax regulation, and corruption.

However, the leasing market has been hit before by economic headwinds, but has shown resilience. In 2012 the Russian leasing industry was ranked in seventh place globally and fourth in Europe by size of market. Nonetheless, despite performing poorly, forecasts for 2013 make it likely that Russia will have overtaken France and moved to sixth and third place respectively.

Leasing penetration remains low in Russia compared with more mature western economies. This means there is greater opportunity than in the more mature markets for further development, given long-term forecast growth levels of capital expenditure and a high demand for replacement and upgrading of fixed assets suffering from extra wear and tear due to being sweated through the period of stagnation.

Auto leasing, especially of passenger cars, is low, with bank loans being the primary source of finance, but the fleet segment is seeing signs of growth in leasing and there are increasing prospects for operating leasing.

In the aftermath of the global financial crisis many small and medium-sized enterprises (SMEs) went bankrupt. Leasing companies were hit as well, both big and smaller players suffering cutbacks and closures. However, a positive outcome from this should be that independent leasing companies and captives will grow their share of the market. Opportunities will grow for manufacturers to set up financial services through captive subsidiaries as part of the product offering, which could be particularly effective for those with a wide coverage across Russia – remembering the value of local services in such a geographically enormous country.

In the face of the potentially seismic disruptions that could affect the market, Russian lessors are realistic in their view that the short-term prospects are lacklustre, but have grounds for optimism for a return to growth. The market still has much to offer in terms of attractive margins and volumes.

These and many other issues are covered in the White Clarke Group Russia Asset and Auto Finance Country Survey, which provides in-depth background, comment and analysis. It is free to download here