On the wagon: Russia's factoring ban.
Subsequently, in July this year, Medvedev’s government announced new measures to govern the sale of alcohol in the country, in an attempt to reduce its availability to the public. However, while Mevedev’s amendments to the law "On regulation of the alcohol market” include such measures as the reclassification of beer from a ‘foodstuff’ to an alcoholic product and restrictions on the where and when alcohol can be sold to the public, the law has also had an unforeseen affect on Russia’s factoring industry.
Paragraph 22 of Art.1 voids all of the "contracts of sale with the condition of execution of the contractual obligations to a third party, contracts of barter, contracts for the assignment of a claim and to transfer the debt, if such transactions are made with respect to ethyl alcohol and alcohol products"; legislation that affectively bans the factoring of alcohol related invoices within the country.
According to Ilya Pokamestov, General Manager of FACTORing PRO and FFC Executive Secretary, this ban could rob the factoring industry of a significant portion of its existing market, with factoring related to alcohol sales contributing around $3 billion of Russia’s $30 billion annual turnover.
“The law covers all domestic transactions,” explains Pokamestov, “and while international transactions are not stipulated in the law, they are also being avoided so as not to risk any trouble. Metro Cash and Carry has already started to send its suppliers letters stating that they will no longer be making any payments for alcoholic drinks through factoring schemes.”
Even more worryingly for factors, the legislation does not just concern alcoholic beverages; suppliers of any product containing ethyl alcohol, from car windscreen wash to household products, will no longer be eligible for factoring finance, potentially making a further dent in the Russian factors’ annual turnover.
Although it forms part of the wider reaching measures to curb alcoholism in the nation, the official reason for this particular section of the law is related to the separate issue of tax avoidance.
According to an employee of the alcoholic beverages regulation authority (Rosalkogolregulirovaniya), who took part in drafting the law, the authority has faced situations “where a manufacturer, without paying excise duty, produced and shipped products to an affiliated distributor who supplied it to regional contractors and each of them subsequently concluded agreement on assignment of a right of claim to any third party. As such, money for supply fell to different accounts of the organisation, formally unrelated to any manufacturer or distributor.”
Yet to factors in Russia, this reason for the ban is not entirely clear. While this amendment is intended to target "grey" schemes, it also affects factoring services to legitimate suppliers.
“I feel that this reason is a curtain covering the real reasons for the law,” states FACTORing PRO's cheif. “It’s not clear to us how factoring can be used to avoid taxation and excise duty. The real reasoning behind this part of the law could be because the government wants to see the factoring market consolidated in the big banks. It could also because the Russian State Corporation of the Production of Alcoholic Drinks would like to have their own company inside the corporation, providing a reverse factoring product and taking this significant share of the factoring market.”
However, the law may not be entirely watertight, as Pokamestov explains. “It is a Presidential initiative that contradicts with the Russian civil code, which is more powerful that the federal law. As the civil code does not stipulate any limitations on the financing of accounts receivables for special areas of the economy, there may be an argument against it.”
The two associations that represent factors in Russia, the Federation of Factoring Companies (FFC) and the Association of Factoring Companies (AFC) both intend to lobby against the stipulations of the bill.
“The AFC have announced that they are going to gather the participants of the factoring market to discuss the implications of the law, while the FFC are also going to provide the government with reports that highlights the disparity between the different laws – both federal and civil code – on the alcohol industry. For instance a special law regarding beer trading was brought into effect [a move intended to discourage consumption of high-percentage vodka in favour of beer], which this latest initiative contradicts.”
“It is a very fresh initiative,” adds Pokamestov, “and the factoring industry are still hoping that this initiative can be re-structured or reformed. However, alcohol is a big part of factoring portfolios, so it could be a significant influence on the industry, particularly for smaller factors who are already operating under tight margins.”
Source: FACTORing PRO