Magazine article The CPA Journal

Establishing Trade Relations in Russia

Magazine article The CPA Journal

Establishing Trade Relations in Russia

Article excerpt

Russia has the potential to become one of the foremost consumer markets during the next century. In addition, as Russia makes the transition from a planned to a market-driven economy, large capital expenditures to rebuild its deteriorated infrastructure provide attractive opportunities for suppliers of capital goods. The large, virtually untapped market potential warrants significant efforts by businesses, large and small, to establish a foothold.

The Russian government views U.S. products and expertise as essential during its transition to a market economy, resulting in a favorable attitude toward U.S. businesses. Russia became a member of the International Monetary Fund (IMF) and the World Bank in 1992. Both organizations made significant loans to Russia and are likely to extend additional credit. Also, the Overseas Private Investment Corporation (OPIC) and the Export-Import Development Bank (EXIM) made guarantee and loan programs available to firms doing business in Russia.

The U.S.-Russian Trade agreement provides most-favored-nation tariff treatment for U.S. products and services. It allows U.S. businesses to conduct market studies, and commercial agents and consultants to operate freely, and provides some protection for U.S. intellectual property rights--including computer software and databases. Russia is also moving forward with legislation to protect copyright and Patent rights.

The U.S.-Russian Federation Income Tax Treaty, which became effective January 1, 1934, reduces instances of double taxation and provides for nondiscriminatory treatment for U.S. companies.

Russia's industrial sectors, particularly those in need of Western products and services that have access to hard currency, include agribusiness, telecommunications, transportation, and health care.

While the market potential suggests that U.S. businesses make inroads in Russia now, they should proceed cautiously. Major uncertainties, such as political problems and currency shortages, accompany the trade opportunities and make tangible investments risky and, perhaps, inadvisable for many U.S. companies. The current Russian economy is characterized by dangerously high inflation, falling real incomes, rising unemployment, increasing crimes against businessmen, and a dearth of legal and market information.

Exporting offers less risk for testing the developing market and establishing future markets that may lead to more tangible investments. Also, while the uncertainty regarding Russian income taxes is particularly acute, changes in tax rates are unpredictable. Exporting also avoids Russian income tax.

How to Proceed

Because the value of the ruble has been fluctuating wildly and may be difficult to convert, U. S. exporters are reluctant to accept Russian money in return for goods and services. While many industrial and governmental sectors can pay in dollars or other stable money, some Russian establishments lack hard currency. In this situation, business cannot take place without a compensatory trade arrangement--sometimes referred to as countertrade.

Compensatory trade arrangements may involve tangible assets (e.g., finished goods or commodities), intangible assets (e.g., know how), or services (e.g., technical assistance). The arrangements take two general forms--bartering and linked transactions, the latter being made up of counterpurchases, buybacks, and offsets.

Bartering. Compensatory trade in which goods or services are exchanged for other goods or services under a single contract is called bartering. Pure barter is uncommon since exchanged goods and services are not usually of equal value. Barter involves a single transaction in which the agreed medium of exchange consists of something other than, or in addition to, money. Instead of selling the goods, the U.S. exporter can use a switch trader to dispose of unwanted items. The switch trader gives the U.S. exporter "clearing currency units" for the goods received. …

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