Offset and Barter Transactions
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Offset and Barter Transactions
By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"
In December 2002, Poland decided to purchase 48 F-16 Falcons from
Lockheed Martin Corporation - an American defense contractor. Pegged
at $3.5 billion, this is the biggest defense order ever issued by an
east or central European country. The financial package includes
soft loans and a massive offset program - purchases from Polish
manufacturers that more than erase the costs of the deal in foreign
Offset in all its forms - including co-production, licensing,
subcontracting, and joint ventures - is not uncommon in the defense
industry. It is being offered even to far richer clients such as
Israel. But in central and east Europe it is more prevalent than the
According to numerous studies, barter-like arrangements (known
throughout the region as "compensation") constitute between 20 and
40 percent of all transactions in the economies of the former Soviet
bloc. Corporate debts to suppliers, payments for goods and services,
even taxes - all have a non-cash component or are entirely
The implosion of communism led to a rapid shrinking of the
manufacturing base and the evaporation of the agricultural and
mining sectors in many countries in transition. Export-derived
earnings in hard currency collapsed even as millions lost their jobs
and their purchasing power. Unemployment affects one fifth of the
population in Poland, one third in Macedonia and three fifths in
Kosovo, for instance.
Rather than remonetize these cash-bleeding economies, the IMF
imposed strict austerity programs on the entire area, further
eroding disposable incomes and intra-regional trade. Countertrade,
barter, buyback, offset, clearing, technology transfer and other non-
cash dealings flourished.
Moreover, the clearing system of the now defunct eastern trade bloc,
COMECON - the Council of Mutual Economic Assistance (CMEA), was
based on effective barter and the use of a fictitious "wooden"
ruble. From Hungary to Cuba, communist countries were coerced into
outlandish terms of trade, often beneficial to the Soviet Union or
to a member in need. Mounting debts led to the disintegration of the
entire edifice and Russia was reduced to giving east European
countries aircraft and other weapons systems in lieu of cash
Russia reimburses Kazakhstan with (shoddy) goods for leasing the
Baikonur Cosmodrome. Until 2000, it was common practice in the
Russian Federation to pay wage arrears, inter-enterprise debt and
back taxes in kind. Russia and Turkmenistan accept food and other
commodities, semi-finished products and construction services from
Ukraine, Armenia and Belarus in exchange for their gas debts and, in
Russia's case, for disposing of Ukraine's nuclear waste.
The recipients often complain of the quality of the products or
services they receive - and of recurrent breaches of delivery
schedules and quantities. But they have little choice. Ukraine is
one of Turkmenistan's major export clients, for instance. Nor are
these exchanges post-communist phenomena. Canadian firms, led by
AECL - Atomic Energy of Canada Limited - were forced to accept
Romanian goods for their nuclear reactors throughout the late 1980s.
There is a general misconception that barter is a thing of the past.
Far from it. In the last six months of 2002, payments-in-kind to
Gazprom, the Russian energy behemoth, have tripled due to an
increase in its tariffs. The use of "veksels" (mostly corporate
promissory notes) surged 60 percent. Hence the rise to prominence of
barter experts, such as Igor Makarov, who, as general manager of
Itera, oversaw Gazprom's sales of gas throughout the Commonwealth of
As prices are adjusted to reflect waning state subsidies, consumers'
purchasing power diminishes and countertrade transactions burgeon. A
global recession coupled with the woes specific to transition from
communism to capitalism herald an era of unmanageable inter-
corporate debt. In tiny Macedonia, it is thought to have surpassed
$600 million in 2001 - close to one fifth of GDP. The bulk of such
debt is ultimately settled by barter.
Proponents of barter trade - mainly a proliferation of Western
consultancies, financial boutiques and trading companies - count
their advantages thus (from the Export911.com Web site):
"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."
The US Embassy in Moscow counters by describing the nefarious
effects of barter on the Russian economy:
"In Russia, the barter system is used for various reasons: monetary
risk, lack of money, illicit enrichment, tax evasion and to continue
business operations beyond viable economic life. The system creates
numerous negative effects, namely: low tax receipts, price
distortions, oversupply of products, ineffective monetary policy
instruments, imprecise economic measurements, and, as a consequence,
poor public policy decisions. Barter is tolerated and sustained
because of short-term management perspectives, its value as a social
safety valve and poor application of bankruptcy laws."
The demonetization of the economy and the distortion of the price
signal (which ensures the proper allocation of economic resources)
are not the only pernicious effects of non-cash business.
Barter transactions tend to enhance the militarization of the
region. No one wants Russian TV sets or Ukrainian stockings. But MiG
fighter planes and Kalkan and Grif patrol boats are in great demand.
Turkmenistan, for instance, has built an entire Caspian Sea coast
guard out of its gas-for-goods agreement with Ukraine signed last
Non-cash transactions are an integral part of the informal sector of
the economy, estimated to constitute at least one third of the
region's total gross domestic product. They are impossible to track,
let alone tax. They are conducive to capital flight and offshore
stashing of export proceeds. Technically, barter deals are a kind of
non-tariff barrier as they interfere with the free market by binding
specific buyers to given sellers. Hence the recent Russian-Chinese
agreement to ban non-cash transactions in their border areas.
Countertrade deals are complex and multi-phased. If improperly
structured, they leave a lot of space for corruption and worse.
Radio Free Europe/Radio Liberty reported that the military court of
the Moscow garrison sentenced in April 2002 the former head of the
Defense Ministry's Main Directorate of Military Budget and Finances,
Colonel-General Georgi Oleinik, to three years in prison.
In a typical scam - oft-repeated in Chechnya - Oleinik absconded in
1996-1997 with some $450 million. The money belonged to Ukrainian
firms and was paid out in the framework of a multistage barter deal.
It was earmarked for the purchase of materiel for the Russian army.
Interestingly, in his defense, Oleinik insisted that the deal was
authorized by former Finance Minister Andrei Vavilov and other
Still, in the long-run, barter is doomed. As more former Soviet
satellites either divert their trade towards the European Union or
join it as members, countertrade will be restricted to the
financially backward economies of the former Soviet Bloc. In time,
even these laggards will have to face market realities - especially
the use of cash as the foundation of the price mechanism and the
optimal allocation of scarce economic resources.
Put vernacularly, the citizens of barter-addicted countries will
inevitably grow disenchanted with shoddy and shabby goods delivered
late. Imports from and exports to cash paying destinations will
surge. "Ghost" factories will close down, releasing capacity to more
productive entrants. Cash-starved governments will deepen and widen
tax collection. A foreign-owned banking system will do a better job
of matching savings to investments. Barter will be reduced to a
marginal, last resort, activity.
AUTHOR BIO (must be included with the article)
Sam Vaknin ( samvak.tripod.com ) is the author of Malignant
Self Love - Narcissism Revisited and After the Rain - How the West
Lost the East. He served as a columnist for Global Politician,
Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a
United Press International (UPI) Senior Business Correspondent, and
the editor of mental health and Central East Europe categories in
The Open Directory and Suite101.
Until recently, he served as the Economic Advisor to the Government
Visit Sam's Web site at samvak.tripod.com