Soviet payment delays now require that companies use caution in arranging terms - includes related article on recent Soviet contacts

Business America, July 2, 1990

Soviet Payment Delays Now Require That Companies Use Caution in Arranging Terms

While opportunities for trade with the Soviet Union are increasing with the signing of a bilateral Commercial Agreement and steps to decentralize the Soviet economy, U.S. companies need to use caution in arranging payment terms when signing sales contracts with Soviet organizations.

In late 1989, U.S. and other Western companies began reporting instances of significant delays in receiving payments on invoices for deliveries to Soviet organizations. Estimates of payments arrears range from several hundred million dollars to more than $2 billion, out of total annual Soviet hard currency goods imports of $30-35 billion.

Assistant Secretary of Commerce for International Economic Policy Thomas J. Duesterberg held meetings in Moscow in May with officials at the Ministry of Finance and the Ministry of Foreign Economic Relations to discuss the payments problem and to ask Soviet assistance in resolving their debts to U.S. companies.

Soviet officials have expressed hopes that they can resolve the problem within a few months. Foreign Economic Commission Chairman Stepan Sitaryan, the senior Soviet trade official, said in May that the Soviets had begun repayment of outstanding bills and had instituted a weekly review of current as well as overdue payments. He also said that in May more than a billion rubles worth (about $1.5 billion) of goods had been assembled for export to provide additional revenue for settling outstanding bills. The Soviet Union also obtained a $300 million medium-term credit from Kuwait, and reported settling with grain companies by paying some cash and agreeing on deferral of other payments.

Sitaryan said that the Soviet Union will develop new ways of attracting foreign capital, including opening international banks as well as financial and insurance funds, and allowing foreign capital in a planned Soviet financial paper market. To seek repayment of money owned to the Soviet Union, the Soviet company "Sovfintrade" will engage in talks with banks and firms of debtor countries.

The Reason for Payments Delays

Long payments delays are new in the Soviet Union, where in the past many companies sold on open account and the Soviet Government carefully controlled foreign trade operations and, in effect, stood behind each transaction. A number of factors apparently are contributing to the delays.

After running hard currency trade surpluses since the mid-1970s, the Soviet Union last year ran a deficit estimated at about $1.5 billion, when imports increased by almost one quarter. Soviet officials say that the national export and import plan for 1990 may also have been too tightly balanced. In addition, the fall of world prices for energy and materials, which make up the bulk of Soviet exports to the West, have hurt hard currency earnings.

The Soviet debt service ratio is estimated at 23 percent. Gross hard currency debt stood at about $48 billion at the end of 1989, while net debt (gross debt, minus deposits in Western banks and other assets) was estimated at about $33 billion.

In recent months, Western bankers have adjusted Soviet credit ratings downward, and stiffened lending terms. Soviet officials have reported that some bankers have begun to demand repayment of 3-6 month credits that the Soviets previously were able to renew routinely.

Decentralization and other economic reforms also have contributed to the payments problem. During the last year, 17,000 enterprises have registered to trade directly with foreign companies for the first time, and a number of ministries have taken over foreign trade organizations (FTOs) previously operated by the Ministry of Foreign Economic Relations. Most of these enterprises and ministries have little or no commercial experience. In many cases, they are being forced, also for the first time, to depend on export earnings for hard currency rather than central government allocations. The share of hard currency earnings which they are entitled to use varies, as do the procedures used to gain access to their earnings. Reportedly, enterprises have often not obtained access to export earnings which they thought they were entitled to use.

Care Advised in Arranging Payment Terms

While Soviet payments arrears are fairly new and Soviet authorities have begun efforts to resolve them, U.S. companies signing sales contracts with Soviet organizations clearly should use caution in arranging payment terms. Soviet organizations should be assessed more closely than in the past, and commercial protection should be considered.

Since Soviet policymakers are trying to make enterprises responsible for balancing their books and for generating their own sources of hard currency, companies would do well to seek information on the facilities, foreign trade experience, and hard currency exports and other indicators of the reliability, especially financial, of potential partners.

New-to-market companies and others as well should consult closely with Western financial institutions experienced in Soviet trade. This should be done at an early stage of negotiations, since financing options can affect profit margins. Possible alternatives include the use of letters of credit, purchasing commercial insurance, or linking shipping schedules to payment performance or advance confirmation by the purchaser that funds are in their account.