Product Switch

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Russian: Товарный свитч

The product switch arrangement is one of the product compensation transactions in the frame of the Countertrading. This transaction is related to but less sophisticated than the Clearing and, in the same time, more sophisticated than the simple Barter. The main item to be resolved in this type of countertrading is finding the compensating product that is at the disposal of the importer under the first barter contract (where the main subject for the importer could be equipment/technologies from developed countries) necessary/acceptable and simultaneously necessary/acceptable for the third party who has to pay an importer’s debt under the said first contract. The third party (that could be, in principle, one of manufacturing or service companies) playing a role of switch trader cold have the following interests to be involved into this switch transaction. The simplest option is to use the said compensating product in its own production process and/or consumption. Another option is reselling/speculation on one of product markets in expecting a good margin after subtracting all necessary transaction costs.

Product Switch (Simplified Flow Chart)[1]

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LEGEND:

In case of the product switch (participants: Company А = United Kingdom; Company В = Sri Lanka; Company С = Russia) the switch is developed as following:

  • 1) Company В has found a seller, Company A, of the tea processing and packaging equipment in United Kingdom, but the Company А, prepared an appropriate contract agrees to receive a payment in hard currency only (in UK pounds, preferably).
  • 2) Company В has found a buyer, Company С, for a compensating product (Ceylon tea) to pay the export contract prepared by Company A. In Russia, where after the USSR collapse (the main tea consumption in the USSR was provided by the Georgian tea) the tea became a rather high liquid product. Besides, due to exporting oil, gas, and weapons they buy hard currency in Russia without problems,
  • 3) Russian Company С pays the export contract prepared by Company A delivering the tea processing and packaging equipment from United Kingdom and, as the compensating product, receives the Ceylon tea delivery from Company В (Sri Lanka). Settlements for such transactions are often effectuated using an intermediary playing a role of a transaction guarantor.


References

  1. Черенков В.И. Внешнеэкономическая деятельность предприятия: основные операции (серия «Высшее образование»). Ростов-на-Дону «ФЕНИКС», 2007 - с. 97-102. (с авторским изменением дизайна)
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