Leasing in Russia: A Case Study

• DOI: http://doi.org/10.1111/j.1467-646X.2006.00124.x
• Published date: 01 July 2006
• Author: Darlene Bay,Sergey V. Pakhtusov
• Date: 01 July 2006

Leasing in Russia: A Case Study

Sergey V. Pakhtusov

Samara Optical Cable Company, 9 Kabelnaya, 443022 Samara, Russia

Darlene Bay

Department of Accounting, Brock University, 500 Glenridge St. Catharines, ON, Canada L2N 3C1.

e-mail: darlene.bay@brocku.ca

Abstract

As Russia goes through the process of converting from a command to a market economy,

many old business processes and standards had to be terminated and new methods

implemented. Leasing is an example of a technique long in use in more developed

economies that has been transplanted to Russia, with changes made to reflect the

particular circumstances there. This paper examines the current state of leasing in Russia

by concentrating on the experiences of one leasing company: Volgopromleasing. Interest

rates and inflation rates that fluctuate widely and are sometimes extremely high, as well as

a legislative environment that may be expected to change are some of the challenges faced

by the firm. However, compensating opportunities exist: many Russian firms desperately

need to update their equipment, the government is strongly interested in promoting rapid

economic growth, and the legislation currently in effect favors leasing over other methods

of acquiring fixed assets. Although leasing has the potential to assist Russian firms in

modernizing and growing, and, therefore, to help the Russian economy in its effort to

rapidly move to a new market economy, this can only occur in conjunction with other

economic initiatives that also provide for growth and stabilization.

1. Introduction

The transformation from the command economy of the former USSR to

a market economy has not been without difficulties for Russia. The

government looks to a rapidly growing economy to help alleviate some of

the many problems that have occurred during the transition. However,

not all important elements of a market economy were in place immedi-

ately after the dissolution of the Soviet Union. These practices had to be

developed much more rapidly than similar practices in other countries

that were able to institute a market economy gradually and over a longer

period of time. In addition, the interaction of elements of the market

economy with various governmental institutions, such as taxing autho-

rities and legislative bodies, has affected the manner and speed with

which new business practices have developed.

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One of the notable demands that resulted from this abrupt economic

transition is the need for more sophisticated and complicated financial

instruments. Leasing represents one such financing alternative that has

long been an integral part of most highly developed market economies,

and, it is hoped, can be expected to facilitate the rapid development of

the new market economy in Russia. Leasing, in its most basic form, has

been conducted all over the world for centuries. One of the most

frequently cited reasons for the success of leasing is the flexibility that

it provides. Although this characteristic is generally cited in terms of the

ability of individual firms to structure a transaction in the most

advantageous way, leasing can also provide flexibility to an economy

in achieving macroeconomic ends.

Leasing in Russia, just as in the countries with more developed

markets, is used by individual firms to protect cash flow, increase

operating flexibility, and allocate risks between contracting parties.

However, on a national level, it is hoped that leasing will be able to

assist in rapidly increasing the general level of capital investment, in

updating the level of technology available to most firms, and in

encouraging the development of small- to medium-sized enterprises.

There is also international interest in the success of leasing in Russia as

evidenced by the interest leasing firms outside Russia are showing in

forming partnerships with Russian firms in order to capitalize on the

potential of a growing market.

1

In addition, organizations such as the

International Finance Corporation and the Canadian International

Development Agency have invested substantial amounts of money to

study and encourage the rapid development of the leasing industry in

Russia. Finally, other countries, most notably China, which are also

attempting to rapidly develop their economies are watching the experi-

ence in Russia. This means that the success of leasing in Russia may

speed its implementation in other environments.

In this paper, the process of the growth and development of leasing in

Russia is illustrated by the experience of one leasing firm, Volgoprom-

leasing. This firm has attempted to take advantage of the opportunities

currently available for leasing in Russia. At the same time, the firm has

experienced and continues to experience difficulties that are typical of the

Russian leasing industry and of the Russian economy as a whole. In the

next section, a general comparison of leasing in Russia and the United

States provides a basis for understanding some of the issues facing

leasing in Russia. Following this, a general description of leasing in

Russia is provided. In Section 4, Volgopromleasing is introduced and its

Leasing in Russia 141

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