ArmInfo. The Armenian government in its new and already approved program of own activities for upcoming 5-year term, based on indicative results of 2018 recorded a two-fold increase in insured transactions of "Export Insurance Agency of Armenia" ICJSC- almost up to 4.5 billion AMD. At the same time, as of August 31, 2017, the insurance portfolio of the Agency already amounted AMD 2.594 . Armen Shahnazaryan, the Executive Director of the EIAA ICJSC, spoke in an exclusive interview about the Agency's achievements and tasks, plans and reality.
Export Insurance Agency ICJSC was established in late October 2013 by the decision of the Government of the Republic of Armenia as an effective tool to stimulate exports. Speaking about the results of almost 5-year work, how effective was the Agency in stimulating exports and what is its role?
For today, our assistance to local business - resident-exporters is carried out in two main directions. This is an export insurance and pre-export financing insurance. After all, very often exporting companies sell goods / services on a deferred payment basis when trading with foreign partners, when money is paid within a certain period after the delivery of goods. In such cases, exporting companies cannot be sure that their foreign partner will be able to pay for the delivered goods and services by the final date of deferred payment. To cover this default risk, EIAA provides short-term insurance of deferred payments for RA resident exporters from commercial and political risks of a foreign counterparty.
The second type of services is insurance of pre-export financing, a relatively new product of EIAA, which implies the provision of insurance of financing provided by banks and / or credit organizations to exporters at the production stage in order to ensure the continuity of production and increase exports volume, in particular for the purchase of raw materials and materials transport and customs costs. At the same time, EIAA undertakes to cover up to 95% of the risks of partner banks. The main difference between this service and the current banking products is that, up to a certain level, the borrower will not be required to provide collateral in general, and loans will be issued at lower interest rates due to lower residual risks for banks. This service can be used by companies registered in Armenia, who have at least 1 year of experience in the production of goods.
This year, while maintaining the dynamics of high rates, EIAA has already overcome last year's milestone. So, in 2016, following the results of 116 insurance policies concluded, the Agency portfolio was AMD 2.185 billion (average insurance rate was 0.56%). Meanwhile, in January-August 2017, the figure has already reached AMD 2.594 billion drams and 170 insurance policies (average insurance rate - 0.82%). Until the end of this year, we plan to reach the level of AMD 3 billion. Since 2016, the Agency has shown significant growth in all indicators.
For the entire 2016 year, EIAA received 113 service demand applications, 47 of which were satisfied. As of 31 August 2017, the EIAA has already received 74 applications, 42 applications got positive decisions. The dynamics of insurance premiums has been also fixed. While for the whole of 2016 their volume amounted to 12.290 million drams, then by the results of August 2017 the indicator reached 21.5 million drams.
We should not forget that, originally, EIAA was observed as an instrument for promoting and diversifying exports. According to the results of the first half of 2016, the export growth formed 16.5%, while in the first half of this year it increased to 21.7%. Without false modesty I will say that we have invested a lot of our work into this business and today our customers are able to easily obtain preferential bank lending and use factoring services under the insurance policy issued by EIAA.
The above mentioned inspires a positive. However, I would like to hear your authoritative opinion, how real is the bar set in the government program for 2017-2022, where the results of 2018 are expected to double the insurance portfolio of the Agency?
I think it is quite feasible. As it was already mentioned, as of August 31 of this year, the volume of insured sum reached AMD 2.594 billion, while in hole 2016 the figure reached AMD 2.185 billion. By the end of this year, we plan to bring the level of insurance to 3 billion drams, and by the end of 2018 to increase the portfolio to AMD 4 billion. At a similar pace, the figure set in the government program is certainly achievable.
The client of EIAA ICJSC...who is he? Which sectors of the economy are you most focused at?
If one makes a kind of rating, then in the first position on the use of our services today, just like last year, turned out to be exporters of alcoholic beverages (following the results of 2016 year the insured portfolio totaled AMD 1.153 billion, and 1.161 billion drams form the results of the first 8 months of 2017). They are followed by the export of processed food products - canned food products (insurance policies totaling AMD 337.1 million were concluded from the overall insurance portfolio in 2016, and as of August 31, 2017, the figure reached AMD 701 million). The volume of insured exports through the industry - metal and plastic caps for cans was AMD 480 million in 2016, and AMD 2015.3 million in late August. The sphere of IT in 2017 increased its insurance portfolio from last year's AMD 49.2 million to AMD 256.6 million.
Meanwhile, in addition to our general mission - to support export-oriented industries, we promote business in the matter of providing working capital through an instrument such as pre-export financing insurance. Many exporters have already understood this, as evidenced by the actual data: last year, under the "Pre-export financing insurance" of EIAA, export-oriented enterprises of the country received an insurance package totaling AMD 124 million. At the moment, this figure rose to AMD 663.5 million.
Today, there is a rather high level of interest in respect to local businesses, especially processing enterprises and producers of alcoholic beverages (70-80%). The created toolkit, as well as the shortest terms of consideration of the application for export credit insurance (within 5-7 days), is a good motivation for exporters. With regard to registration of pre-export insurance, the time is a little delayed due to the fact that certain procedures are provided for by bank internal regulations. However, here we are planning a number of changes that will lead to more rapid passage of procedures in banks, including underwriting, after which the application for this type of insurance product in EIAA will be considered within a few days.
Analyzing the data, do you think, at this stage, where to the Armenian exporter’s view is directed?
Russia remains the main export market for Armenia: in 2016, insurance policies for AMD 1.733 billion, or 79% of the total insurance portfolio were issued to exporters in respect to the Russian market. In August this year, again, the vast majority of exports is aimed at the Russian market - 66% of the total portfolio, or AMD 1.714 billion.
Today EIAA ICJSC works with several banks. Thanks to this cooperation, commercial banks increase their credit portfolios with minimal risks. In this regard, how is realistic and, most importantly, is close, the prospect that the banks themselves will increase their interest in working with EIAA? Is it of their interest?
Today the Agency cooperates with 6 banks, Armswissbank is the largest partner, followed by ACBA-Credit Agricole Bank, Armbusinessbank, Ameriabank, Araratbank, Armeconombank. The Agency also cooperates with CJSC "SME Investments UCO".
An important point, however, is that the process of considering the application of a potential client takes place not only in the office of EIAA in Armenia. Our entire insurance portfolio is reinsured in the international Swiss insurance company SWISS REINSURANCE COMPANY (SchweizerischeRuckversicherungs-Gesellschaft AG), Swiss Reinsurance Company, - Ed.), Which has the highest credit rating of AAA. It reinsures 90% of the insurance policy, and 10% is compensated by EIAA. In this regard, insurance applications, as a rule, are agreed with the reinsurer company.
Cooperating with the EIAA - by providing credit funds under the insurance policy, the banks of Armenia are, therefore, insured against all kinds of risks. They do not face the problem of executability of mortgaged property, since we reimburse up to 95% of the loan amount. Plus, knowing that we are cooperating with one of the largest reinsurance companies in the world, banks can safely provide financial resources. In this regard, it would be more justifiable if our clients were provided with credit facilities on more favorable terms than any other borrower.
How do you assess the development of Armenia's export-insurance market and how do you determine its growth? What obstacles could there be in this way?
On August 24, within the framework of the International Exhibition Forum "Eurasian Week" in Astana, the Export-Credit Agencies (ECA) of the countries of the Eurasian Economic Union (EEU) signed a Memorandum of Cooperation. With the signing of the Memorandum, the parties will create an effective system for organizing regular exchange of experience and information in the field of insurance of export credits and investments, as well as on export projects, within which potentially joint support can be provided. Cooperation is also envisaged in the framework of cooperation projects that envisage the export of goods, works and services produced in the EEU to third countries, or within the Union. The EEU countries have just embarked on the development of the export insurance market, and the world knows about it since the 1920s, so there is a long way to go, and much more needs to be done jointly.
At the moment, the problem is the inability to access data, including financial data, on foreign organizations that are contractors of Armenian exporters. We successfully cooperate with Russian information bureaus in this matter, but the situation is different with obtaining data on companies in Europe and a number of other countries, including Belarus and Kazakhstan, as access to data is closed on the regulatory basis.
There are problems related to the lack of state guarantees, despite the fact that we are an Agency with 100% state share (the Agency's shares are evenly distributed among 5 ministries - economic development and investments, finance, energy infrastructures and natural resources, agriculture and foreign affairs). The total capital is AMD 1.950 billion, of which AMD 1.5 billion is the authorized capital, and 450 million is the reserve fund. Simultaneously, since it was intended to involve the Agency as a tool for supporting local business, we work at very low insurance rates. In this situation, the Agency finances its expenses through investment profit. Thanks to the professional asset management - investment activities, we have increased our authorized capital by several million drams to date. Free funds work with such financial instruments as bank deposits and state securities. But the problem is that the Agency works on the same regulatory field as the entire insurance market, and we are limited to fulfilling our main mission, in contrast to private insurance companies that offer a variety of insurance products. Thus, despite the incompatibility of forces, we are looking for new ways of development.
Today, the Agency is considering entering the domestic market for insurance of transactions between domestic producers and buyers, if an agreement has been concluded between them to supply goods and services for which payment by installments is provided. This will solve financial problems in the domestic market, thereby creating prerequisites for the domestic producers to enter foreign markets.
Besides, at the moment the Agency is also taking steps to develop trade relations with the Islamic Republic of Iran. Taking into account the fact that the partner of the Reinsurance Agency provides its services with certain geographical restrictions, namely, reinsurance is not provided for insured transactions concluded for export to specific countries, including Iran, the Agency is working on a draft reinsurance contract with the Iranian export Fund (Export Guarantee Fund of Iran) to obtain the possibility of reinsurance of risks of exporters-residents of RA. The signing of the agreement will allow the Agency to expand its scope of activities and increase the volume of insurance transactions.