УДК 334.01

Alternative finance: the experience of the Russian Federation and lessons for Vietnam

Нгуен Тхи Зоан Ан – студент магистратуры факультета высшей школы управления Финансового университета при Правительстве Российской Федерации.

Abstract: Alternative finance in Russia has been development trending in recent years amidst political and economic fluctuations. Among them, crowdfunding stands out as a prominent alternative finance, attracting significant attention from researchers regarding its development. Vietnam is in the early stages of developing financial innovation, so studying and learning from the experiences of alternative finance in other countries is crucial. Through analyzing the current state of crowdfunding in Russia, the author has proposed several development options for alternative finance in Vietnam.

Keyword: alternative finance, crowdfunding, P2P, capital, investment, Russia, Vietnam.

The financial system plays a crucial role in the economic growth of each country. Alongside technological advancements, financial innovation emerges as a new channel, a new tool for development outside of the traditional financial system and is increasingly being widely adopted in many countries around the world. Vietnam is in the early stages of developing financial innovation, so more theoretical and practical experience is needed to propose suitable strategies for building innovative financial channels. This is considered a pressing issue to ensure the international integration process and enhance Vietnam's economic development capabilities. Through studying documents and analyzing the development of financial innovation in Russia, the article will highlight the prominent features of the issue and propose lessons that can be applied to Vietnam.

1. Overview on alternative finance: definition, roles, classification

Financial innovation is defined by the Cambridge Centre for Alternative Finance (CCA) [9] as platform, processes, and financial tools that have emerged and developed outside of the traditional financial system. Alternative finance includes various models of lending, investing, and non-investing, allowing individuals, businesses, and other entities to raise capital through online markets. The main purpose of alternative financial tools is to support small and medium-sized enterprises facing difficulties in accessing finance due to lack of financial information, transparency, or financial gaps between investors and businesses. Traditional sources of finance for businesses typically include banks, venture capitalists, and non-bank financial sources. However, since 2014, lending by these organizations/individuals has become more cautious [2]. They choose investment projects based on business information and assess their future potential. These objective reasons have stimulated the development of the alternative finance market through online tools [4].

Alternative financial channels are also considered a form of FinTech as they meet the conditions of applying technology platforms in financial development. According to Ferdinando Giglio, Fintech is divided into two groups, including: (i) Consumer-oriented products that improve how individuals borrow, manage money, and provide capital for startups; (ii) Technology "back-office" products that support Fintech activities and financial institutions [3]. Therefore, alternative financial tools fall under the first group of Fintech, belonging to the Finance and Investments sector.

CCAF categorizes alternative finance into groups: lending models, equity models, or non-investment models. Some types of alternative finance include Peer to Peer (P2P), balance sheet lending, invoice financing, securities, and community fundraising. The most common form of alternative finance worldwide that raises policy and legal issues globally, as well as in Vietnam and Russia, is crowdfunding [2, 5] . Crowdfunding belongs to equity or non-investment models - depending on the form of crowdfunding that a business adopts. Therefore, the article will also focus on analyzing the crowdfunding model in Russia to gain a better understanding of the alternative finance landscape in this country.

2. Current status of crowdfunding in Russia

Crowdfunding is divided into 4 types: Crowdfunding is grouped into four distinct models based on the backers' financial interests: donation-based crowdfunding, equity-based crowdfunding, debt-based crowdfunding, and reward-based crowdfunding. Debt-based crowdfunding and equity-based crowdfunding fall under the equity model, while donation-based crowdfunding and reward-based crowdfunding fall under the non-investment model. In Russia, crowdfunding is increasingly being used as an alternative method for raising capital, providing diverse investment opportunities across various sectors. According to the Central Bank, there are 30 trillion rubles in individuals' accounts, and if at least 5% of this amount can generate significant income, utilizing them on community fundraising platforms could be beneficial.

The first crowdfunding platform in Russia appeared in 2012 and operated under donation-based crowdfunding. Currently, there are 17 crowdfunding platforms in operation in Russia, including notable platforms such as InvoiceCafé, Venture Club, Planeta.ru, StartTrack, City of Money, and Penenza. The majority of Russian platforms focus on crowdlending, accounting for 90% of total funding. Loan agreements typically offer interest rates of 20-30% per annum for a duration of 6-12 months. Projects are predominantly invested in IT, retail trade, services, and production sectors.

Picture 1. Transaction value of crowdfunding in Russia from 2017 – 2023

Source: Statista [7]

It can be seen that the crowdfunding market in Russia has shown signs of decline since 2020, reaching its lowest point in 2022 and now showing signs of recovery. The transaction value of crowdfunding peaked in 2019 at 15.4 million USD, dropping to its lowest point in 2022 at 10.1 million USD. The decrease in investment value is believed to be a result of political instability in Russia, as well as the significant exchange rate difference between USD and RUB. It is expected that in 2024 and 2025, the crowdfunding platform will continue to develop in the Russian Federation with transaction values of 11.9 million USD and 12.1 million USD respectively.

Picture 2. Number of crowdfunding campaigns in Russia (2017 - 2025)

Source: Statista [7]

The number of crowdfunding campaigns in Russia has a slight downward trend while the total amount of investment is increasing, indicating an improvement in the amount of investment per project. The development of this alternative financial model in Russia is driven by the following reasons:

- Customer preferences: Crowdfunding fundraising procedures are less stringent compared to traditional lending methods, making it easier for individuals and businesses to access a large group of potential investors.

- Trends in the market: Reward-based crowdfunding and equity-based crowdfunding are two forms of fundraising that are growing rapidly in Russia. This trend is driven by the desire to receive something in return for their investment from investors. It is also an effective way for businesses to validate their ideas and generate pre-sales before launching their products or services.

- Country characteristics: Historically, Russia has been known for its significant achievements in science and technology. As a result, there is a considerable number of tech-savvy individuals familiar with financial platforms. This has contributed to the development of the crowdfunding market domestically, as individuals are willing to participate in community fundraising campaigns and invest their money online.

- Underlying macroeconomic factors: The Russian economy has faced various challenges in recent years, including declining oil prices and economic sanctions imposed by Western countries. This has led to tightening credit conditions and limited access to traditional financial options for individuals and businesses. Community fundraising is an attractive option for those who cannot secure loans from traditional lenders.

- Government support: Federal Law No. 259-FZ dated August 2, 2019, "On attracting investment using investment platforms and amending certain legislative acts of the Russian Federation" came into effect in 2020 [1]. This has created a safer and more transparent environment for community fundraising activities, increasing investor confidence and encouraging more individuals and businesses to participate in community fundraising campaigns.

Picture 3. Average funding of alternative finance per campaign in Russia

Source: Statista [8]

The chart depicting the amount of investment in projects through alternative financial tools is aligning with the development of crowdfunding in Russia. It is evident that crowdfunding has a significant influence on shaping the trends of alternative finance in Russia.

3. Problem of crowdfunding in Russia

Although Russia's financial landscape is moving towards positive development, there are still some underlying issues:

- Legal challenges: The legal framework for alternative finance, including crowdfunding, is not yet fully developed. According to financial and tax policy 289 1, Russian law restricts a large number of investors from investing in a project and lacks legal guarantees regarding dividend payments. Additionally, there are no tax benefits for investors to stimulate investment.

- Preference for low-risk funding options such as bank deposits, real estate, and mutual funds.

- Few significant success stories in alternative finance. It is seen as a catalyst for investment decisions by investors and fundraising decisions by businesses.

- Community awareness: Public understanding of venture investment is still limited. Many individuals believe that alternative financial platforms are only for wealthy investors, which contradicts the essence of micro-investment. [6]

4. Lessons for Vietnam about alternative finance

Base on the advantages and challenges of alternative finance in Russia, specifically crowdfunding, the author suggests some recommendations for Vietnam:

- Accelerate the completion of the crowdfunding regulatory framework to protect investors entering the market. The first legal document should accurately define "crowdfunding," specify the scope of activities, participants, conflict resolution mechanisms, investor rights, and fundraising businesses. This will make accessing platforms more transparent and clear.

- Increase public awareness of venture investment, alternative finance concepts, and crowdfunding through media channels and educational programs. Transform crowdfunding into an investment opportunity for the community.

- Invest in developing FinTech-based financial networks.

- The State Bank and State Securities Commission should plan and implement pilot activities for alternative financial platforms to gain a better understanding of market trends. Initially, pilot projects can be conducted with leading alternative finance entities in recent years with significant market share. Implementing pilots with some businesses will help the State Bank and State Securities Commission grasp trends, assess impacts to formulate appropriate risk management measures, and promote the development of alternative finance activities in general and crowdfunding in particular.

References

1. Federal Law about investment attraction with use of investment platforms and about modification of separate legal acts of the Russian Federation, August 2, 2019, No. 259-FZ
2. Chebukhanova, L., & Blokhina, T. (2020). Problems of Alternative Financing for Innovative SME in Russia. Proceedings of INTCESS. (4)
3. Giglio, F. (2021). Fintech: A literature review. European Research Studies Journal, 24(2B), 600-627. (2)
4. Mills, K., & McCarthy, B. (2014). The state of small business lending: Credit access during the recovery and how technology may change the game. Harvard Business School General Management Unit Working Paper, (15-004). (6)
5. Nguyet, L.A. & Lanh, Đ.T. (2022), Development trends of alternative finance and issues facing Vietnam. Vietnam Economic and Finance Journal, 2. (3)
6. Petrenko, A. S., & Prokopova, A. S. (2017). Development of alternative financing in Russia. Current Issues in Economic Sciences, (57), 286-290. (10)
7. Statista (2024). Crowdfunding – Russia. URL: https://s.net.vn/GKEb (Date of access: 25/03/2024)
8. Statista (2024). Average funding of alternative finance per campaign in Russia from 2018 to 2028, by segment. URL: https://s.net.vn/B2r3 (Date of access: 25/03/2024)
9. T et al. (2020), The Global Alternative Finance Market Benchmarking Report, Cambridge Centre for Alternative Finance;