Russian exporters ‘taste’ barter system

Russian exporters have begun to turn to barter deals in a bid to resolve payment delays prompted by western sanctions over Moscow’s war in Ukraine.

Foreign banks started dropping Russian counterparties after US President Joe Biden in December threatened to impose secondary sanctions on lenders assisting Russia in its war efforts. The move dented Moscow’s efforts to sell commodities abroad and import foreign goods, prompting the Russian government to promote the barter system as a way of settling international payments.

“Although barter transactions were common at the intergovernmental level, they are now becoming increasingly popular among businesses,” 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 Soviet importers, who also had limited access to the US dollar, purchased foreign goods, paying for Pepsi imports with crates of Stolichnaya vodka in the 1980s and — on one occasion — warships and submarines resold as scrap metal.

Last month Russian agricultural trader Astarta Agrotrading struck a barter deal with two companies in Pakistan to exchange chickpeas for tangerines.

Under the terms of the agreement, the company based in Saratov, some 900km south-east of Moscow, will send 15,000 tons of chickpeas and 10,000 tons of lentils in exchange for 15,000 tons of tangerines and 10,000 tons of potatoes. Another contract will exchange 20,000 tonnes of chickpeas, worth about $14mn, 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 Ekaterinburg in October said it signed a barter contract with a Chinese company, agreeing to import household appliances and building materials in exchange for flax seeds.

Barter is “one alternative form of settlement in today’s reality” said Alexey Frolov, who heads the Ural customs department. He said the system was attractive as it lacked “issues due to payment delays, or the refusal of banks to carry out transactions”.

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

In a survey conducted by the Central Bank of Russia at the start of October, businesses reported an increase in production costs since the start of 2024, citing in part an increase in fees paid 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 barter arrangements that have resulted from Russia’s payment difficulties — particularly with China”.

He warned that with its support for Russia, China risked alienating partners in Europe and Asia and would not be able to “export its way out of a deflationary slump if it’s antagonising its largest consumers”.

Russian traders have struggled with increased scrutiny even for goods that are not subject to sanctions.

“Many banks started demanding extra 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 general scrutiny increased, imports of many other things, which have nothing to do with the military, were affected because of the delays,” Astrov said. Though Russian agricultural exports are not sanctioned, the restrictions against Russia have had a chilling effect that has scared off many banks and potential buyers, according to senior industry figures.

Total imports to Russia declined by about 8 per cent in the first half of 2024, compared with the same period last year, according to data from the country’s federal customs service. This matches filings from other countries, compiled by Trade Data Monitor, which estimate that there was a 9 per cent decline in exports to Russia from countries that issue regular trade statistics.

Russia’s ministry of economic development in January prepared a 15-page guide on how companies wanting to pursue barter deals should calculate costs and draw up contracts. 

Astarta Agrotrading followed the official advice, with Bagdasaryan claiming its barter arrangement is more profitable than past deals, because “with barter you get paid twice, a commission for both the export and the import”. 

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

VAT on bartered imports is calculated based on the estimated cost of the exchanged goods. But “this parameter can be manipulated”, Prokopenko said, “because in the customs database the contract will look like two kilogrammes of oranges cost three chairs”.

Even as the practice can sap 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 signalling to businesses that they need to be more entrepreneurial”, said John Kennedy, expert on Russia at Rand Europe research institute. “It is basically giving them free rein to do whatever it takes to access the goods and services that the Russian consumer needs.” 

But analysts doubt that barter schemes will become the panacea for Russia’s trade woes. “Barter trade has many disadvantages for the involved companies, it is so much more inconvenient to set up”, said Janis Kluge, an expert on Russia’s economy with the German Institute for International and Security Affairs. 

“It’s not really scaleable [ . . .] I don’t think it will really change Russian trade flows, but it will rather remain a niche solution for niche trading partners”, he noted. 

One pitfall is that, unlike conventional trade, the barter system requires tighter co-ordination — and more good faith — among Russian businesses.

“Why should we trust that the importers, having received their product, will then pay us?” said president of the Russian Grain Union, Arkadiy Zlochenskiy. “We are interested in money for our exports, not some tangerines.” 

 Additional reporting by Chris Cook