An introduction to countertrade: Part three of three
September 01, 1993
by Teresa Acklin
This article, the third in a series of three on the subject of countertrade, was prepared for World Grain by John M. Reams, a partner in the Kansas City, Missouri, U.S., office of an international law firm, Bryan Cave. Mr. Reams is a specialist in international trade in commodities.
Countertrade has played an important role in the economies of Eastern and Central Europe and in the former Soviet Union. It is expected to play no less of a role in the future, especially as a means of obtaining the Western technology and equipment these economies must have to be competitive.
The pool of skilled labor and excess industrial capacity throughout the region suggest that buy-back is likely to emerge as the most prevalent form of countertrade. Further, the disruption of Comecon and hard currency shortages have adversely affected procurement of energy and feedstocks by Eastern and Central European enterprises, forcing them to seek countertrade opportunities.
The countries of Eastern and Central Europe and the F.S.U. have adopted different approaches to regulating countertrade.
Eastern and Central Europe.
In the Czech Republic, there are no countertrade regulations. Czech enterprises are required to repatriate export proceeds for conversion into local currency.
Countertrade that involves banking transactions must be approved by the State Bank, and countertrade involving foreign investments must be approved by the Ministry of Finance. Industrial machinery, equipment and consumer goods are preferred items for countertrade export.
In Hungary, the laws governing foreign trade also apply to countertrade. Counter-trade is not officially encouraged in Hungary, but it has allowed the country to rid itself of products that otherwise might be unmarketable.
Until recently, the Hungarian Foreign Trade Bank was required to approve all countertrade transactions. Now, Hungarian enterprises that have export/import licenses may engage in countertrade with some restrictions. Industrial goods and foodstuffs are preferred items for export under countertrade arrangements.
A substantial portion of Poland's foreign trade is done through countertrade, even though Poland discourages it. Countertrade transactions in excess of U.S.$50,000 must be approved by the National Bank. Industrial machinery, equipment, manufactured consumer goods and coal are preferred for countertrade.
Romania has been heavily involved in countertrade during the past 10 years, and that level of involvement is likely to continue. Countertrade requirements were dropped in 1990, and bilateral countertrade deals under government-to-government agreements account for more than half of Romanian foreign trade.
Countertrade deals must be authorized by the Ministry of Trade and Tourism. Industrial machinery, equipment and metals are most commonly subject to countertrade.
There are no Bulgarian laws or regulations requiring countertrade. Major countertrade transactions must be approved by the Bulgarian Council of Ministers. Industrial goods are preferred for export because of limited demand.
The demise of the Soviet Union has forced the former Soviet republics to develop their own banking systems, which at present are undercapitalized and lacking in credit-worthiness. At a time when the need for countertrade is the greatest because the disruption of Comecon has resulted in a shortage of raw materials, the financial institutions needed to support countertrade are lacking in authority and experience.
Many enterprises have turned to barter, the form of countertrade least dependent on the banking system. Some foreign firms, to ensure that sufficient hard currency is protected for payment of their goods, are resorting to offshore escrow accounts. The accounts are funded by sales of goods from the F.S.U. and are established in Western commercial banks. They usually are in the form of irrevocable letters of credit in favor of F.S.U. exporters and payable to foreign suppliers against appropriate documentation.
In Russia, the state no longer allocates material resources between enterprises. As a result, in order to secure supplies of raw materials and consumer goods for their employes, such enterprises have engaged in barter and other countertrade deals. Organs of the state are themselves engaging in counter-trade, for example, by offering consumer goods to farmers in exchange for agricultural commodities. At a recent Moscow farmers' market, a motorcycle was offered in exchange for 500 kg of beef.
A prominent U.S. senator recently proposed that U.S. grain be bartered for oil from the F.S.U. as a solution for its credit problems. The International Wheat Council also proposed barter. The Russian deputy prime minister, however, expressed a disinclination for barter, citing corruption in the distribution system.
In the past, barter transactions were not welcomed by the Soviet government. Enterprises were expected to pay the state a substantial part of their foreign currency earnings from exporting goods; barter transactions allowed enterprises to retain all of their foreign currency earnings.
Countertrade should play a major role in the development of the vast markets of the F.S.U. Government policies, however, could impose serious limitations. Whether countertrade plays the role it is capable of playing or a lesser role will be determined by which political forces prevail: those who believe free market principles should govern development or those who believe it should be centrally planned.