Circumventing Western sanctions: barter and countertrade in Russia, China, Iran

Belgium (Brussels Morning Newspaper), Western sanctions have effectively cut off Russia, Iran, and North Korea from the financial infrastructure of the West, including the critical interbank SWIFT payments network. Banks, including Chinese ones, are wary of doing business with or within these marked territories.

Increasingly these pariah countries are resorting to cryptocurrencies, alternative tenders such as the Yuan, fringe payment systems, including reactivated Hawala networks, and, predominantly to barter (countertrade) as means to circumvent the West’s stranglehold.

Here is a brief overview of barter and countertrade operations and transactions:

1. Countertrade

A transaction which links exports to imports in place of a financial settlement

1. Reasons

1. Trade financing risky (debt crisis)
2. Tight import credits (because of low exports)
3. Entry into new markets (both the exporter and the importer)
4. Products differentiation and creating competitive advantages
5. Convertibility or political – financial problems

2. Transaction phases

1. Identify target country arrangements / regulations
2. Evaluate their attractiveness and
3. Find the most favored one from the buyer’s perspective
4. Match your strengths with current / potential countertrade (internal / external uses for the goods, distribution network)
5. Consider the accounting / taxation aspects
6. Choose between in – house expertise and outside specialists
7. Beware of risks:
8. Quality and consistency of goods
9. Delivery times
10. Supplier reliability
11. Changes in the value of goods over time
12. Negative attitude of Governments and IFIs (e.g., EXIM bank in USA)

3. Countertrade is a marketing tool:

1. Generating hard currency for clients
2. Helping them to market their products
3. Sharing (information, marketing, technology, production)

4. Countertrade components

1. Piecing together sources of finance, services and supplies in different countries to minimize hard currency net outlays of the importer.
2. Creating FOREX income for the importer through unrelated protects / new investments.
3. Partial payment in soft currencies through reinvestment of the proceeds in the importer’s country.
4. Escrow accounts in foreign banks funded by the importer through export revenues (hedge until counter delivered goods are sold).

5. Arguments in favour of countertrade

1. International commerce – an extension of national (economic) policies.
2. (Leads to) a preference to deal with trade competition through bilateral accommodations favoring domestic exporters.
3. Uneven recovery rates and protective import policies.
4. A hedge against declining trade levels.
5. The growing third world debts.
6. Constraints on credits and debt rescheduling.
7. Dependence of developing countries on import – led growth and export expansion for debt servicing and unemployment.
8. Tool of long term industrial policy and economic planning.

6. Factors affecting the future of countertrade

1. Ability of world markets to accommodate counterdeliveries.
2. Nature of assets offered (raw materials, components, finished goods).
3. Streamlining of bureaucratic bottlenecks.
4. Willingness of western exporters to engage in higher risk trade.

COUNTERTRADE – (B) FORMS

1. Countertrade and offset are reciprocal arrangements.Countertrade is the exchange of goods and services intended mainly to alleviate FOREX shortages of importers.

Offset is intended to advance industrial development objectives.

2. Assets exchanged include physical goods, services (e.g., tourism, engineering or transportation), rights (licenses, leases, etc.), lien instruments (e.g., sovereign promissory notes), or temporary ownership (BOT – built, operate, transfer arrangements).

3. Developed industrialized countries emphasize technology and production processes while developing countries emphasize additional exports.

4. The contractual arrangements include cashless exchange of goods of comparable value, parallel import / export transactions with their own separate finances, production sharing / equity position.

5. Countertrade ratio – percent of the value of export offset by counterdeliveries

DISAGGIO – subsidy paid as a commission / discount by the exporter to a broker responsible for marketing counterdeliveries (in the hands of the broker it is AGGIO).

SWITCH – transfer of rights to countertrade goods to third parties

Protocol / link or framework contracts – side agreement linking the primary and secondary contracts in a countertrade

6. Bilateral Government – To – Government trade agreements

Reciprocal market access privileges (preferential terms)

1. To integrate the economies using clearing units – exporters and domestic currency by their Central bank.
2. Special political / regional trade relations.
3. Trading interests for raw materials sources.

7. SWING – margin of credit allowed on a bilateral clearing account (beyond which all trading stops ) – usually 30%.

Clearing SWITCH – DISAGGIO driven financial operations. Bilateral imbalances are monetarised by brokerage networks through final sale products sourced from the country with the clearing arrears (or rights to products).

8. Forms of compensatory trade arrangements

OFFSET – in cases of purchases of military / (high cost) civilian equipment, counter – purchases are demanded as compensation.

Usually in the form of expansion of industrial capacity: coproduction, licensed production, subcontracting, overseas
investment, technology transfer, countertrade.

(IN) DIRECT OFFSET – articles (not) related to the sale.

BARTER – one time exchange of goods / services of equivalent value.

[examples: US – Jamaica, the dissolution of COMECON, Brokers’ swaps]

BUYBACK (Compensation) – exporter receives products derived from the export.

Each leg is regulated by a separate contract.

COUNTERPURCHASE – exporter receives products unrelated to the export.

Exporter not allowed to transfer his credits and some advance purchases by exporters qualify.

UMBRELLA (Countertrade agreement) – includes multiple trading partners.

Between Western exporters and Government entity (Evidence account)

Between Governments concerning specific products (Bilateral clearing)

Countertrade used to release blocked currencies / funds

(Expatriation of profits against compensation)

OFFSHORE ESCROW ACCOUNTS – insulation from local banks ensure timely payments to exporters

Allowance for insufficient cash flows (production / marketing slippage)

COUNTERTRADE – (C) ANALYSIS AND PLANNING

1. BENEFITS (mainly intangible)

1. Locking in foreign market shares
2. Circumventing export restrictions
3. Supporting subsidiaries /affiliates
4. Depleting surplus inventory
5. Preserving production / employment levels

2. COSTS (mainly tangible)

1. General and administrative (handling, documentation)
2. Subsidy (DISAGGIO)
3. Financing and insurance (including holding & escrow accounts)
4. Performance / completion guarantees

3. RISKS

1. Expensive and partial insurance
2. Political risks and bureaucratic delays
3. Liability claims (personnel, product)
4. Property risks (direct damage or time dependent)
5. Lack of standardization
6. Shortfalls in delivery and marketing of the products
7. Losses due to delays: changes in production / export priorities

• sudden unavailability of raw materials
• crop failures
• inadequate transportation
• quality problems
• non-competitive pricing
• (arbitrary) marketing restrictions
• protectionist shifts
• contract failures of brokers / end users

4. COUNTERMEASURES

1. Analysis and viable pricing (maybe inflation of export prices)
2. The right contract
3. An insurance policy
4. Information about the importer, the markets and potential competitors brokers / end users
5. Recognizing anticipatory purchases and additionality requirements (transferable)
6. Separate the contracts to insulate performance and to facilitate financing, guarantees and insurance

5. The CONTRACTS

1. Primary sale – standard export contract + countertrade clause
2. Link contract – the countertrade contract includes:
3. amount and period of obligation
4. type, standards, pricing criteria of counterdeliveries
5. names of companies providing counterdeliveries or: free choice clause
6. transferability clause
7. currency of payments
8. notification and remittance procedures
9. rights or restrictions affecting the marketing of goods
10. non-performance penalties and damages
11. disputes, termination, unavailability of goods
12. Counterpurchase (buyback) contract includes:
13. reference to primary contract
14. standards, specifications, pricing, handling
15. disputes, force majeure, arbitration, law, indemnities

COUNTERTRADE – (D) SUPPORT SERVICES

1. TRADING HOUSES have:

1. Specialists and experience
2. Financial resources
3. Positions in markets and / or marketing networks

Can help with:

1. Marketing and representation
2. Transportation, warehousing, insurance
3. Finance: credits and investment management
4. Manufacturing, upgrading

2. BANKS – advisory services and matchmaking, switch trading of clearing currencies and debt conversions

3. INSURANCE – state and private (LLOYDS, CHUBB, AIG)

4. OTHERS – law firms, trade consultants and information firms, export management companies, government agencies, industrial giants.