Over the last year and a half, many small and medium businesses have restructured logistics and built ties with new suppliers to work under sanctions. What role do bank guarantees play in both domestic and foreign markets?
Clients and their partners have endured the pandemic and now face new challenges in 2022 due to restrictions imposed by unfriendly countries. Several foreign suppliers have suspended operations on Russian soil. The goal has been to ensure banking services for businesses, helping them adapt to altered economic conditions while maintaining continuity.
Bank guarantees have long been a powerful instrument for sustaining a healthy business climate. They shield firms from risks, aid recovery during turbulence, support process rebuilding, and help preserve jobs. Guarantees secure commercial obligations in government procurement, under commercial contracts, for rent payments, taxes and customs duties, excise payments, and the enforcement of court judgments. They represent an independent bank obligation to fulfill the client’s commitments and dampen counterparty risk. With a bank guarantee, a buyer can obtain deferred payment without a loan or draining working capital, while the supplier receives guaranteed payment after meeting contract terms.
Bank guarantees replace more expensive and intricate methods of securing liabilities in transactions. They save money for future growth and enable price optimization. Since guarantees are not directly affected by key rate shifts, banks can maintain rates at customer-friendly levels; for example, issuing a remote express guarantee can start at 2% annually. Guarantees also play a crucial role in ensuring the reliability of the public procurement system, supporting timely contract execution even amid market shifts and supply chain disruptions that push up costs across goods and services.
— In which areas do businesses most often turn to banking services to minimize risk?
Guarantees are in demand across all industries. Data shows the strongest usage by infrastructure and transport companies, retail, mechanical engineering, construction and development, and agriculture.
Entrepreneurs increasingly use letters of credit for internal settlements. Traditionally tied to real estate deals and stock purchases, demand for letters of credit in international trade is rising, particularly with markets such as China, India, Vietnam, and the CIS. Letters of credit protect all parties when entering new markets or engaging new suppliers.
The importance of risk minimization for SMEs is evident in VTB’s documentary portfolio, where letters of credit and guarantees rose by 38% in 2023 compared with the previous year. Electronic express guarantees issued remotely have become especially popular for small firms, with exports doubling year over year. When applying for a remote guarantee through a client bank, a minimal document package is required; from this year, a passport suffices for the guarantee, and clients can expect individualized service.
The market for electronic bank guarantees is evolving rapidly. Previously, guarantees were available only for small amounts and short terms; now the guarantee limit under 44-FZ and 223-FZ stands at 75 million rubles for up to 62 months, while an open guarantee limit without financial statements reaches 10 million rubles for the same period.
— How have legislative changes affected access to state procurement for medium and small businesses, and what improvements lie ahead?
Both the government and banks are supporting import substitution and expanding access to bank guarantees for SMEs. Demand continues to grow; this year saw a 1.5x increase in exports for government procurement participation versus the prior year. Collaborative efforts among federal authorities, banks, legal experts, and business circles have produced positive procurement reforms. Standard independent guarantee forms for 44-FZ and 223-FZ have expedited guarantees, and minimum SME procurement quotas have been raised.
Active participation by VTB, including its role in the Association of Russian Banks, fuels ongoing improvements to purchasing mechanisms. A working group on independent guarantees and documentary letters of credit was established to propose legislative changes and submit them to the Ministry of Finance, the Federal Treasury, the Central Bank, and the Federal Tax Service. Regular meetings with public authorities are held, and VTB participates in the banking commission of the Russian National Committee of the International Chamber of Commerce. There is ongoing discussion about extending anti-crisis measures to preserve and grow state procurement involvement of SMEs into 2024.
Digitalization is driving the transition to papersless processes. The aim is full electronic document management in procurement, with laws clarified and end-to-end automation in place. Electronic guarantees require integration between banking systems and the unified information system for public procurement (UIS). Structured electronic documents will standardize warranty formats and allow automatic data transfer to UIS, enabling smart contracts and electronically verified acceptance to reduce warranty amounts as obligations are met.
Linking the independent guarantees register to the electronic contracts register within UIS would support a seamless purchasing workflow, from execution to acceptance. This integration is seen as a key to stronger procurement oversight and control.
— Besides public procurement, what other issues do entrepreneurs solve with bank guarantees?
Commercial contracts frequently use refund guarantees for advance payments, ensuring the return of funds if contractors fail to meet obligations. At VTB, a remote commercial express warranty up to 30 million rubles can be issued within hours for up to 38 months with a minimal document set. Larger amounts and longer terms are possible through an online application in the VTB Business portal, followed by branch visitation for collateral if needed. Tax guarantees help streamline VAT refunds with the tax authority and are used in duties on tobacco and alcohol products. Tax guarantees can be requested remotely for the desired amount and period and are customized to each client’s needs.
Meanwhile, changes to the Tax Code effective April 1, 2024 simplify securing tax and excise obligations via bank guarantees, with guarantor banks filing the guarantee directly with the tax office electronically on the taxpayer’s behalf. This change, long championed by the bank, has been implemented to ease the process.
Customs guarantees support registrations in private registries and are popular for cross-border dealings between exporters and importers. The banking sector also works with government development programs, partnering with regional industrial development funds and supporting public-private partnership projects. Warranties can be submitted online through VTB Business or at a bank branch for consideration.
How has collateral processing changed with digitalization? The aim is to promote electronic guarantees that are fast, simple, and convenient. Pre-scoring models enable pre-approved coverage limits under 44-FZ, 275-FZ, 223-FZ, and 615-PP, with limits up to 10 million rubles per client and a 90-day offer validity. Express guarantees from VTB are obtainable remotely without a current account via the Potential Customer Account portal. The warranty process is streamlined by auto-filling information from open sources and using automated financial statement recognition, scoring, and direct communication between client and bank from the guarantee application. A new account lets agents and partners submit warranty applications for clients directly to VTB, with decisions issued within minutes, turning the bank into a marketplace for business financial products.