Académique Documents
Professionnel Documents
Culture Documents
Management
Methods of
International
Operations [ IIO ]:
COUNTERTRADING
ARRANGEMENTS
October 25,2010
Vitally I. Cherenkov
Countertrade
A generic term that describes various techniques
for the conditional exchange of goods and/or
services between seller and buyer.
Countertrade provides a means of trade with
countries using a blocked currency---currency
that is not readily convertible into other
currencies---or lacking the foreign exchange, thus
removing the difficulties and risks in a trade
financing and paving the way for a successful deal
that otherwise would fail.
Countertrade also provides a means to preserve
foreign exchange reserves by eliminating the
use of hard currency.
Vitally I. Cherenkov
Countertrade
Countertrade is an alternative means of
structuring an international sale when
conventional means of payment are
difficult, costly, or nonexistent.
Countertrade denotes a whole range of
barterlike agreements; its principle is
to trade goods and services for other
goods and services when they cannot be
traded for money
Vitally I. Cherenkov
Countertrade
Countertrade is thriving in modern
international trade. In early 1970's,
countertrade was used by about 20 countries
and after the Soviel blok crush, more than
110 countries are using it.
A wide range of goods and services are
transacted on countertrade, for example, oil,
airplanes, automobiles, mineral, machinery,
agricultural products, shoes, wine, and
advertising time.
Vitally I. Cherenkov
Countertrade
Classification
of
Forms
of
Countertrade
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Does the transaction reciprocal involve
commitments ? (other than cash
payments)
YES NO
STRAIGHT SALES
COUNTERTRADE (CASH OR CREDIT)
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Does the transaction involve the
use of money?
YES NO
BARTER-TYPE
COUNTERPURCHAS
E, BUYBACK OR
OFFSET
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BARTER-TYPE
Does the transaction extend over
long time periods and involve a
basket of goods?
YES NO
CLEARING
ARRANGEMENT SIMPLE BARTER
X*A = Y*B
Vitally I. Cherenkov
SIMPLE BARTER
Barter is the direct exchange of goods and/or services, of
approximately equivalent value, between parties without the
use of money or credit.
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“Non-Pure” Barter
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Barter – Some
Problems
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CLEARING
ARRANGEMENT
Are third parties involved?
YES NO
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CLEARING
ARRANGEMENT
{Xi} ↔ {Yj}
($)
(€)
i≠j
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CLEARING
ARRANGEMENT
Reciprocal Balancing
Non-Convertible
Balance
(NCB)
Delivery at the expense of NCB
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Ст
Clearing
Agreement
Two countries (companies) agree to buy
particular types and quantities of each other's
goods within a period of time, using a
designated clearing currency.
At the end of the period, the country (company)
that buys more may settle the shortfall
either in hard currency and/or goods, or
issue a credit to the other country (company)
in the subsequent clearing agreement, if any.
Vitally I. Cherenkov
Clearinghouses
Balancing export sales and
counterpurchase obligations on a deal-by-
deal basis is often cumbersome.
To facilitate countertrade, firms may
agree to establish clearinghouse
accounts.
Using this approach, as a firm exports
goods and services to another, it incurs a
counterpurchase obligation of an
equivalent value, which is recorded in its
clearinghouse account.
Vitally I. Cherenkov
Clearinghouses
When the firm buys goods from its
partner, its clearinghouse
obligation is reduced.
Thus a firm does not need to balance
any single countertrade transaction,
although it must honor its cumulative
set of obligations by the time its
clearinghouse account expires.
Vitally I. Cherenkov
Switch Trading
Switch trading refers to the use of a specialized
thirdparty trading house in a countertrade
arrangement.
When a firm enters a counterpurchase or offset
agreement with a country, it often ends up with
what are called counterpurchase credits, which
can be used to purchase goods from that country.
Switch trading occurs when a third-party trading
house buys the firm's counterpurchase credits
and sells them to another firm that can better
use them.
Vitally I. Cherenkov
PRODUCT
SWITCH
Hard
Currency
UK EXPORTER
₤
TEA PACKAGING
RUSSIAN
EQUIPMENT
IMPORTER
EDAET
IL
YREV
SRI LANKA
IMPORTER Hard Liquid
Product
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Triangle Trade
Procedure
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Triangle Trade
Procedure
1 - Buyer and seller concludes a sales contract.
Buyer applies to his issuing bank for a
consignor of goods.
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Triangle Trade
Procedure
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Triangle Trade
Procedure
3 - Third party ships the goods directly
to the buyer.
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Triangle Trade
Procedure
5 - Seller substitutes his draft and
documents for those presented by the third
party, but uses the same bill of lading.
Seller presents the draft and documents to
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FINANCIAL
SWITCH
$$$$$$$$$$$$$$$$$$$$$$$$$$
U.S.
EXPORTER
EQUIPMENT
$$$$$$$$$$
SWITH TRADER
MINING
Or $$$ UKRANIAN
CLEARING BROKER IMPORTER
GRIVNA
CHILI
EXPORTER LOW LIQUIDITY PRODUCT (Cu Ore)
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COUNTERPURCHASE,
BUYBACK OR OFFSET
Reciprocal commitment limited to
purchase of goods?
•YES •NO
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OFFSET
Offset is found most often in the large-scale
capital goods, such as commercial aircrafts and
military hardwares.
In a direct offset, part of the cost of the export
product is offset by buying the agreed amount
of goods---components or materials---from the
importing country, which the exporter
incorporates in the export product.
Other direct offsets include coproduction,
licensing, subcontracting, and joint ventures.
In an indirect offset, the import goods are not
used in the export product.
Vitally I. Cherenkov
OFFSET
MAIN CONTRACT:
EXPORT DELIVERY A→B
Non-Contractual Agreement
OFFSET RESULT:
Diminishing
Стра
Payments in
accordance with Offset Investments
the main contract
A→B
Relevant Services
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Offset with Triangular
Full Compensation
Assessment of
Products to be
Exchanged
Страна
Compensation
disagio
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Offset with Triangular
Partial Compensation
Assessment of
Products to be
Exchanged
$$
Страна А
Final Settlement
Compensation
Duty
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BUY BACK AND
COUNTERPURCHA
SE
Are the goods taken back by the
exporter the resultant output of
the equipment sold?
•YES •NO
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COUNTERPURCHA
SE
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Paralleled Deal
Counterpurchasing Contract
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Advanced
Purchasing
Exporter from Country A
3rd PARTY
Option
Threshhold – up to
100% Revenue as
Export Delivery
a result of
Goods selling
from A to B
ESCROW ACCOUNT
BANK
(acceptable for the both Parties)
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Buyback
Production
Turnkey Project to be paid by
Buyback Arrangement И
НВ
Consumption of
Goods Produced on GOODS/SERVICES DELIVERIES
the Constructed Plant
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Shortcomings of
Countertrade
No "in-house" use for goods offered by
customers. Exporters often face the problem of
what to do with the goods they are offered.
Goods that cannot be used in-house need to be resold.
Some firms will rely on specialist brokers to sell their
goods.
Timely and costly negotiations. Arranging a
countertrade deal requires a time-consuming and
complex bargaining process. A prospective customer
with a long track record usually has a tremendous
edge over an exporter with little negotiation skills.
Vitally I. Cherenkov
Shortcomings of
Countertrade
Uncertainty and lack of information on future prices.
When part of the traded goods involve commodities, firms
run the risk that the price sinks before the goods can be
sold. Apart from price uncertainty, there is uncertainty
about the quality of the goods.
Transaction costs. Costs flowing from countertrade quickly
add up:
cost of finding buyers for the goods (if there is no in-
house use),
commissions to middlemen (if any),
insurance costs to cover risk of faulty or nondelivery,
hedging costs to protect against sinking commodity
prices.
Vitally I. Cherenkov
a few words of
advice
Always evaluate the pros and cons of
countertrade against other options.
Minimize the ratio of compensation goods to
cash.
Strive for goods that can be used in-house.
Assess the relative merits of relying on
middlemen versus an in-house staff.
Check whether the goods are subject to any
import restrictions.
Assess the quality of the goods.
Vitally I. Cherenkov
QUESTIONS FOR
DISCUSSION
Explain why countertrade is often viewed as
a necessary evil.
Compare and contrast the alternative
techniques for countertrade. Is there one
best form for a seller and one best form for
a buyer? Explain.
To what extent are the objectives of sellers
and buyers in countertrade transactions in
conflict with each other and to what extent
are they in harmony with each other?
Vitally I. Cherenkov
OTHER
QUESTIONS??
?
Vitally I. Cherenkov
THANKS FOR YOUR
PARTICIPATION TODAY!
Vitally I. Cherenkov