BGK / Financial security in exports to Ukraine

Over the past year, Poland has become Ukraine's largest trading partner after China. At the same time, the situation of Polish exporters present on that market has become more complicated. New risks have emerged, and one of the most significant is the concern of Polish entrepreneurs about the solvency of Ukrainian business partners. The answer to the problem are bank guarantees and letters of credit offered by Bank Gospodarstwa Krajowego using the Government Programme Financial Support for Exports.

The war has changed the directions of Ukrainian trade, leading to a surge in the importance of Ukraine's EU trading partners. In 2023, the value of EU exports to Ukraine rose to EUR 39 billion, 29.8 percent higher than in 2022. According to Eurostat, the Polish economy benefited the most from the increase in exports to Ukraine, which, with sales of EUR 11.4 billion, became the largest trading partner for the Dnipro economy. On the other hand, Ukraine receives 3.2 percent of the value of Polish exports. Ukraine is therefore an important, but not strategic, direction of expansion for Polish companies. However, the immediate neighborhood, the solid brand of Polish products, or Ukraine's reconstruction needs point to the potential for further increases in the value of Polish exports.

Risks in trade with Ukraine

War is an obvious barrier to increased expansion. However, in Ukraine there are risks present that are much less prevalent in developed countries. A major challenge is the level of corruption. Ukraine ranks only 104th in the Corruption Perceptions Index. In turn, in the Index of Economic Freedom, the efficiency of the courts was rated low. A serious risk from the point of view of exporters is meeting payment deadlines or even insolvency of Ukrainian counterparties related to the intensification of hostilities. According to the OECD risk classification, Ukraine has the highest, seventh level on the risk scale.

The question is whether and how entrepreneurs can secure payment for delivered goods? One possibility is the guarantee instruments launched by the government in the Financial Support for Exports Programme. Using the Programme, Bank Gospodarstwa Krajowego provides export letters of credit insured by the Export Credit Insurance Corporation (KUKE). Since the beginning of the war, BGK has secured a total of 26 export projects to Ukraine for a total amount of more than PLN 23.7 million. BGK's guarantees are most often used by companies specializing in shipping to Ukraine: automotive fuels, plastics and household chemicals, among others.

A new look at export guarantees

The Ukrainian market requires a flexible approach. In order to increase the attractiveness of the offer of export support instruments, a payment guarantee under the reguarantee of Ukrainian banks has been included in BGK's range of products.

"Supplementing the Government Programme Financial Support for Exports with payment guarantees issued at the risk of importers' banks is beneficial for Polish companies operating in the Ukrainian market, but also in Georgia, Kazakhstan or Uzbekistan. These markets are dominated by export settlements based on bank guarantees, and it is difficult to convince importers there to use letters of credit, which are popular in the West. Therefore, including guarantees in BGK's offer will increase the competitiveness of Polish entrepreneurs in these markets. This is especially important for companies previously focused on Russia and Belarus, which are now looking for new directions of expansion" - said Karol Jakubaszek, manager of the Trade Finance Relations Office at Bank Gospodarstwa Krajowego.

The expansion of export security to include guarantees has been well received among Polish entrepreneurs. The first guarantee was provided by Bank Gospodarstwa Krajowego to Vaco Retail, a company sending biocides and repellents for household use to Ukraine, and the value of the guarantee exceeded PLN 2 million.

"As a result of the hostilities and the high aversion to products coming from Russia, there has been an opportunity for new brands to enter in Ukraine. Currently, Ukraine is the most promising foreign market for us. The main challenges we faced were clearing payments, ensuring competitive prices and legal issues related to the new legislation, which have a direct impact on sales in our category. Due to the commencement of commercial activities in high-risk countries, we decided that we needed to secure payments in such a way that the payment guarantor would be a Polish bank and not a bank based in a high-risk country. We considered a guarantee from a Ukrainian bank, but with the current conditions in Ukraine, such collateral is not sufficient for us, if only because of potential blockages of capital outflows from Ukraine and blockages in cash flow between countries. BGK was the only bank willing to support us on this topic. We also benefit from insurance from the Export Credit Insurance Corporation for export transactions" - Aleksandra Dzik, export director at Vaco Retail sp. z o.o., says.

Although there is no quick prospect of an end to the war, Ukraine is a promising market for many companies to make their presence felt, but it is also a market that other countries are vying for. Polish companies have blazed trade paths in the Ukrainian market, but the activity of competitors from other countries is increasing, and supporting exporters in expanding to Ukraine is not just a Polish specialty. In Germany, Euler Hermes runs a government-funded programme called the Export Credit Guarantees Scheme, and in the UK the government guarantees export loans under the UKEF (UK Export Finance support for Ukraine) facility.