Russian exporters ‘taste’ the barter system

Russian exporters have begun to resort to barter deals in an attempt to resolve payment delays caused by Western sanctions over Moscow’s war in Ukraine.

Foreign banks began dropping Russian counterparties after U.S. President Joe Biden threatened in December to impose secondary sanctions on lenders helping Russia in its war efforts. This move undermined Moscow’s efforts to sell raw materials abroad and import foreign goods, prompting the Russian government to promote the barter system as a way to settle international payments.

“Although barter transactions were common at the intergovernmental level, they are now becoming increasingly popular among companies,” said Irina Zasedatel, vice-president of the Association of Exporters and Importers in Moscow. “Direct payments are difficult in the current situation and barter is an excellent alternative.”

The return to a barter system is reminiscent of the inventive ways that Soviet importers, who also had limited access to the US dollar, bought foreign goods, paying for Pepsi imports with cases of Stolichnaya vodka in the 1980s and – on one occasion – warships and submarines sold for scrap.

Last month, Russian agricultural trader Astarta Agrotrading signed a swap deal with two companies in Pakistan to exchange chickpeas for mandarins.

Under the terms of the agreement, the company from Saratov, about 900 kilometers southeast of Moscow, will send 15,000 tons of chickpeas and 10,000 tons of lentils in exchange for 15,000 tons of mandarins and 10,000 tons of potatoes. Another contract will exchange 20,000 tons of chickpeas, worth about $14 million, for an equal volume of rice.

“We are going to send these trial shipments to ‘taste’ this mechanism, so to speak,” Samvel Bagdasaryan, director of international business development at Astarta Agrotrading, told the Financial Times. “In theory, our capacity is much greater.”

A customs department in the Russian city of Yekaterinburg said in October it had signed a swap contract with a Chinese company, agreeing to import household appliances and building materials in exchange for linseed.

Barter is “an alternative form of settlement in today’s reality,” said Alexey Frolov, head of the Urals customs department. He said the system was attractive because it lacked “problems arising from payment delays or banks’ refusal to carry out transactions”.

Many small businesses selling consumer goods have said their transactions have been suspended for months after banks around the world tightened their due diligence when trading with Moscow.

In a survey conducted in early October by the Central Bank of Russia, companies reported an increase in production costs since the beginning of 2024, partly citing an increase in fees for international money transfers.

Daleep Singh, the US deputy national security adviser for international economics, said this week that Washington has “picked up on reports of swap deals resulting from Russia’s payment problems – especially with China”.

He warned that China’s support for Russia risks alienating partners in Europe and Asia and would not be able to “buy its way out of a deflationary slump if it antagonizes its biggest consumers.”

Russian traders have faced heightened scrutiny, even on goods not subject to sanctions.

“Many banks started demanding additional proof that imports (to Russia) have nothing to do with the military,” said Vasily Astrov, an economist at the Vienna Institute for International Economic Studies.

“As the general surveillance increased, the import of many other things, unrelated to the military, was affected by the delays,” Astrov said. Although Russian agricultural exports are not sanctioned, the restrictions on Russia have had a chilling effect, scaring off many banks and potential buyers, industry figures show.

According to data from the country’s Federal Customs Service, total imports to Russia fell by about 8 percent in the first half of 2024, compared to the same period last year. This is in line with data from other countries compiled by Trade Data Monitor, which estimates there was a 9 percent drop in exports to Russia from countries that publish regular trade statistics.

Russia’s Ministry of Economic Development in January issued a 15-page manual on how companies wanting to pursue swap deals should calculate costs and draw up contracts.

Astarta Agrotrading followed the official advice, with Bagdasaryan claiming that its barter deal is more profitable than previous deals because “barter involves paying twice, a commission for both exports and imports.”

Some companies “have seen an opportunity to reduce their costs, in part by avoiding taxes,” said Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center.

VAT on exchanged imports is calculated based on the estimated cost of the exchanged goods. But “this parameter can be manipulated,” Prokopenko said, “because the contract looks in the customs database as if two kilos of oranges cost three chairs.”

While this practice could undermine the Kremlin’s tax revenues, the government is willing to turn a blind eye to ensure that supermarket shelves remain full.

By encouraging barter deals, “Moscow is signaling to companies that they need to be more entrepreneurial,” said John Kennedy, an expert on Russia at the Rand Europe research institute. “It essentially gives them a free hand to do whatever it takes to access the goods and services that Russian consumers need.”

But analysts doubt whether swap programs will be the panacea to Russia’s trade woes. “Barter has many disadvantages for the companies involved, it is so much more difficult to set up,” said Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs.

“It is not really scalable (…) I don’t think it will really change Russian trade flows, but rather it will remain a niche solution for niche trading partners,” he noted.

One pitfall is that the barter system, unlike conventional trade, requires closer coordination – and greater good faith – between Russian companies.

“Why should we trust that the importers, after receiving their product, will pay us?” said President of the Russian Grain Union Arkadiy Zlochenskiy. “We are interested in money for our exports, not in a few mandarins.”

Additional reporting by Chris Cook