The Use of Warehouse Receipts to Assure Title, Control and Value of Commodity Collateral

1. The Use of Warehouse Receipts to Assure Title, Control and Value of Commodity Collateral Partners for Development--Lyon, France--9-12 October 1998

2. The Importance of Warehouse Receipts • The World’s Oldest Form of Capital Formation • Grain Receipts in the Code of Hammurabi (13th Century BC) • Gold Receipts the earliest form of English Paper Currency • Storage Bills the earliest form of tradable Commercial Paper • Sugar Warehouse Receipts and LME warrants are still the only form of Developing Country Securities freely tradable for full value on International Commodity Exchanges

3. Warehouse Receipts are a Monetary Substitute in any Society with an Undeveloped Financial Infrastructure • When Banks and Currencies are Unreliable and Credit is Limited, Goods are the Sole Reliable Unit of Trade & Investment, but…… • Warehouse Receipts, like money, are only valuable if……. • The Issuance of Warehouse Receipts is controlled; • The rights of the holders are clear and easily realised; • The goods covered by warehouse receipts have intrinsic value; and • There is minimum governmental interference in either the rights of holders or the value of the warehoused goods.

4. What are the Consequences of a Lack of Reliable Warehouse Receipts? • No Agrarian Society can Prosper • No Farm Credit System can Develop • Government Intervention cannot be avoided in order to maintain small farmers, but must ultimately fail due to the enormous costs • The possibilites for external financing are vastly reduced • The possibilites for commodity risk management are vastly reduced • The possibilites for the development of local markets are vastly reduced, resulting in enormous waste

5. A Modern Example of Warehouse Receipt Reform • One Legal and Financial System has Undergone More Concentrated Scrutiny and Reform during the past eight years than doubtless any other in the History of the World. The result is the new Civil Code of the Russian Federation, which was written in two parts between 1994 and 1996, and is a combination of German Law, Roman Civil Law, Common Law and and US Commercial and Constitution Law concepts. • The effort has been to create a workable financial system to accommodate the needs of a country which is not unlike many developing countries. Russia had, in 1989: • A largely rural and agrarian population; • and undeveloped and largely irrelevant domestic banking system.

6. Classifications of Warehouses and Warehouse Documents under the Russian Civil Code • Double Warehouse Certificates (CC 913) • Simple Warehouse Certificates (CC 917) • Warehouse Receipts (CC 912) • Public and Private Warehouses (CC 908) • Customs Bonded Warehouses (Customs Committee Orders 314 and 18)

7. Utility of Warehouse Receipts in Import and Export Financing Transactions • Warehouse Receipts are Securities under Russian Law (CC 912) • Absolute Cut-Off of Third Party Claims (CC 302 (3)) • Collateral Easily Liquidated (Delivery of Document and endorsement CC 146) • Collateral Easily Insured and Controlled

8. Negotiability of Warehouse Documents • Double Warehouse Certificates are transferred by endorsement • Single Warehouse Certificates are transferred by delivery • Warehouse Receipts are not negotiable but the rights of the depositor may be assigned • Any company may issue warehouse receipts as long as they are in the prescribed form • Field Warehousing is authorised under Russian warehousing regulations.

9. Advantages in comparison to other Security Devices • Simple Warehouse Certificates are Bearer Securities--Absolute Bar to Third Party Claims • Loans and Security Easily Transferred by Endorsement • Warehouse Certificates can be used to Create Eligible Bankers Acceptances under Federal Reserve and Bank of England Regulations (no reserve requirements)

10. Advantages (Continued) • Warehouses can easily be customs bonded on a temporary basis to delay payment of import duties and VAT • Russian insurance companies can insure warehouses in US dollars and pay claims offshore free of exhange controls

11. Advantages (Continued) • Collateral may be sold by non-judicial sale (CC 349 (2)) • Certain types of warehouse operators are subject to government supervision (oil and gas tank farms and pipelines) and the scope for warehouse licensing is expanding (RF Decision 02-94 (April 24, 1994)

12. Tangible Project Applications • Well-known international companies are investing in Russian port and inland warehouse facilities. • Port financing of Export Commodities is now common.

13. Tangible Projects (Continued) • Russia is a substantial exporter of certain soft commodities such as rye, barley and tobacco and of precious metals which are customarly warehoused prior to export. • The devalued rouble means more leveraged import transactions. All of these commodites are heavily taxed and can rarely be prepaid in bulk. Bonded warehousing is an obvious financing solution and cost effective.

14. Funding Advantages • The U.S. bankers acceptance and U.K. Acceptance markets are each huge sources of highly efficient liquidity and warehouse receipts are one means of fulfilling eligibility requirements • Secured loans using double warehouse receipts are easily transferred by endorsement.

15. Making full use of local bank investments and relationships • Secured financing is labor intensive, but safe and profitable when managed diligently • Local banks, particularly in the agricultural areas and ports, can provide useful guidance and support • Until the capital markets work develops, why not create market share in certain product areas?

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