Barter

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Russian: Бартер

This word, the “barter” was perhaps the most popular in the first years of the post-communism Russian life. Under conditions of severe or even hyperinflation the domestic barter transactions were very popular if not the most popular transactions in Russia. Indeed, the most simple and, definitely, old of countertrade arrangements is barter which is often regarded as an old-fashioned means of exchange that was superseded because money is far more efficient [1]. After all, in a monetary system an apple grower who needs shoes simply has to find a cobbler. In a pure barter system the apple grower would have to find not just any cobbler but one who happened to want apples at that time. Thus in virtually all civilizations, except the Incas, money came to play an important role.


Advantages and Disadvantages of Using Barter Arrangements

IMPORTER EXPORTER
Advantages of Using a Letter of Credit Disadvantages of Using a Letter of Credit Advantages of Using a Letter of Credit Disadvantages of Using a Letter of Credit
  • Importer is assured that the Exporter will be paid only if all terms and conditions of the Letter of Credit have been met.
  • Importer is able to negotiate more favourable trade terms with the Exporter when payment by Letter of Credit is offered.
  • A Letter of Credit does not offer protection [2] to the Importer against the Exporter shipping inferior quality goods and/or a lesser quantity of goods. Consequently, it is important that the Importer performs the appropriate due diligence to assess the reputation of the Exporter. If the Exporter acts fraudulently, the only recourse available to the Importer is through legal proceedings.
  • It is necessary for the Importer to have a line of credit with a bank before the bank is able to issue a Letter of Credit. The amount outstanding under each Letter of Credit issued is applied against this line of credit from the date of issuance until final payment.
  • The risk of payment relies upon the creditworthiness of the Issuing Bank and the political risk of the Issuing Bank’s domicile, and not the creditworthiness of the Importer.
  • Exporter agrees in advance to all requirements for payment under the Letter of Credit. If the Letter of Credit is not issued as agreed, the Exporter is not obligated to ship against it.
  • Exporter can further reduce foreign political and bank credit risk by requesting confirmation of the Letter of Credit by his or her domestic bank.
  • Documents must be prepared and presented in strict compliance with the requirements stipulated in the Letter of Credit.
  • Some Importers may not be able to open Letters of Credit due to the lack of credit facilities with their bank which consequently inhibits export growth.

References

  1. Barter – Relevance and Relation to Money: Is barter still relevant in the modern world? // http://projects.exeter.ac.uk/RDavies/arian/barter.html
  2. Added protection to the Importer may be provided by requesting additional documentation in the Letter of Credit, e.g. a Certificate of Inspection. An Inspection Certificate may be requested from a third party or an agent of the Importer located in the country of dispatch, to ensure a certain quality of goods. In this case, they must stipulate the issuer of such a Certificate and, if necessary, the content or wording of the Certificate, otherwise banks will accept such a document as presented. It is recommended that an Inspection Certificate be requested wherever possible.
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