3 - The financing of East-West trade

Summary

The balance of payments difficulties of the Eastern European countries in the 1970s which culminated in the debt crisis in 1981 have considerably influenced the forms of financing East-West trade during the 1980s. Disruptions of external financing in the early 1980s were an important cause of the surge in countertrade agreements. The economic reforms and the plans for modernization of the industrial stocks in most of the CMEA countries in the mid and late 1980s gave an impetus to joint ventures and cooperation agreements. New forms of financing became important, for example, international financial institutions’ funds, leasing, and funds raised on the international securities markets. This chapter is concerned with the impact of the external debt difficulties of the Eastern European countries and the impact of the economic reforms on the forms of financing East-West trade in the late 1980s and in the 1990s.

Overview

There are a variety of forms of East-West trade financing. Scholars, bankers and businessmen differ in their classification of these forms. It is not a goal of my analysis to go into detail in discussing the differences. The present section is an attempt to systematize and clarify the relevant terminology used. Special attention is given to the trade settlement techniques.

The special trade settlement techniques found increasing acceptance with the Soviet Union and the other Eastern European countries in their trade with the industrialized nations during the 1980s. They were developed because of the recurring shortages of foreign exchange in Eastern Europe. The CMEA countries have increasingly linked the supplier's sales to his purchase of their goods in order (among other things) to minimize outflow of limited convertible currency reserves.