Russia and its trading partners are mulling the use of a barter trade system to ease payment bottlenecks caused by US sanctions, yet experts warn Russian firms will likely be exposed to significant transaction risks.
Last month, Pakistan’s Prime Minister Shehbaz Sharif “emphasised the need to overcome financial and other banking issues” during a meeting with Russian President Vladimir Putin and suggested they expand barter trade.
Sharif recalled how historically Pakistan and the Soviet Union swapped goods such as machinery, textiles and leather, and urged the two nations to “enhance” their overall trade volumes of nearly US$1bn, a July 3 statement from Pakistan’s Ministry of Information and Broadcast shows.
In recent weeks, Reuters reported that Moscow is developing regulations for barter trading and that Russian and Chinese companies may begin bartering goods – initially agricultural products – by as early as Q4 this year.
Moscow’s renewed focus on barter trade, popular during the 1990s until Russian banks were drawn into the global financial system, comes amid heightened payment difficulties for Russian exporters and importers, which are battling the effects of secondary US sanctions first imposed in late 2023.
Fearful of losing access to the US dollar system, many foreign lenders who had continued to finance trade with Russia after the invasion of Ukraine, notably in China, have stopped facilitating Russian imports and exports.
Experts flag that Russia may seek to use barter trade to obtain products it requires for its war on Ukraine, while Beijing may use the arrangement to obtain natural resources such as oil and grain.
“The fundamental issue which has got us here is an overall reluctance on the part of Chinese banks to accept Russian trade-related payments,” James Willn, a partner at law firm Reed Smith, tells GTR.
Pointing to the impact of secondary US sanctions, he says the avenues for Russian firms to receive or send payments have “become sparse” and so a “goods for goods” arrangement with China would “not be unusual”.
“China is a net importer of crude and petroleum products where Russia has an abundance of both. It is an easy trade.”
Ajay Kuntamukkala, co-director of Hogan Lovells’ international trade and investment practice, says “what Russia wants is machinery, electronics, products that are necessary for its war machine”.
“I think [barter trading] will apply to not just state-owned entities, but also private companies in Russia would be interested in this as well.”
Russia’s trade with China has boomed since its full-scale invasion of Ukraine in 2022, surging by over 26% to a record US$240bn last year. Russia also overtook Saudi Arabia as Beijing’s largest source of crude oil.
Willn says that Russia may look to engage in barter trade with state-owned entities in countries beyond China, nations that are “not concerned as to any impact of Western sanctions”.
“The likes of Iran and North Korea come to mind, given they are heavily sanctioned by the US anyway and North Korea, much like China, is a net importer of oil.”
Potential scale?
Question marks remain over the potential scale of Russia’s mooted barter trading system and its efficacy as a sanctions-busting tool.
According to Willn, barter trade will “likely be more effective” for state-owned companies as opposed to commercial entities.
Before private firms can engage in barter trading, Russia will have to devise a complex regulatory framework likely covering the collection of taxes on imports, valuation of stamp duties and dispute processes, Kuntamukkala notes.
But he says there are various “practical difficulties” that Russian importers and exporters may struggle with.
“Maybe for a transaction here and there,” Kuntamukkala tells GTR. “But the idea the private sector is going to adopt barter trading, I’m sceptical. You’ll likely see some state-sponsored transactions and then some encouragement to companies to engage in that sort of trade. But I do not think it will scale very quickly.”
Meanwhile, there could be issues over the valuation of goods or the allocation of risk, should there be any instances of non-delivery or non-payment.
“Usually, one party sells an item and gets currency in return, there is a whole system of trade financing to allow for the transaction, whether it is letter of credit or another form of financing. There is a way to mitigate the risk of non-payment.”
To circumvent US secondary sanctions, Russian companies have increasingly sought new payment methods. Crypto and stablecoins are also being used to settle cross-border trade payments.
However, in May, the Russian Central Bank said US secondary sanctions are taking their toll on local firms, forcing “counterparties from friendly states to mitigate their risks”.
“More complicated supply chains and payment schemes are making imports more expensive, increasing input costs and disrupting supplies, which is reducing the profit margin on Russian companies’ products and their competitiveness in international markets,” the central bank said.
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