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 exchange.
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 West realizes.
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 demonetized.
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 disbursements.
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 Independent States.
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 year.
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 senior officials.
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.
Sam Vaknin ( http://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
of Macedonia.
Visit Sam's Web site at http://samvak.tripod.com
