here Cash Isn't King:
Barter Lines Pockets in Ex-Soviet States.

May, 1997

About 50 miles southwest of Kiev, a few vendors hawk tires on the highway's soft shoulder. Approaching the town of Bila Tserkva, the stacks of black tires grow denser and higher until they seem to line both sides of the road like thick rubber walls.

It must be payday at Bila Tserkva Tire Plant.

Those who say the U.S. dollar is the unofficial currency in the former Soviet Union should take a trip out to the thousands of one-industry towns where just about everything changes hands except money. And those who think barter is only for the cash poor should think again. Widespread swapping of goods is making a lot of people rich, from small middlemen to huge companies, often at the expense of enterprises and state coffers.

Two Eggs for a Movie Ticket.

In Altai, Siberia, two eggs buy one admission to a local showing of a Sylvester Stallone movie. In Volgograd, locally made brassieres are the coin of the realm. Customers of Ukraine's Chernobyl nuclear power plant pay in sausages and milk. And in Tatarstan, truck maker Kamaz recently settled part of its tax bill by leaving 600 new trucks on the front lawn of the local administration building.

Barter has grown so much that some observers say it defies the traditional view that it's an unofficial index of a nation's pauperization. "People are making fortunes on barter," says Alexander Bazarov, director of Credit Suisse First Boston in Kiev. "Especially those who are in a position to control several links in the chain of transactions."

Barter's beauty, says Mr. Bazarov, is that it is complex, off the books and opaque. The valuation of goods exchanged is easy to artificially raise or lower.

During a recent strike in Tula, Russia, coal miners protested that the foodstuffs they received as pay were valued by the coal mine at twice the rate identical items sold for in local grocery stores. In other words, the mine was halving its labor costs. But the savings won't appear on the books the tax man sees.

"Flows of goods, instead of cash, are very difficult to track," admits Vladimir Popov, a former banker who heads Russia's Tax Enforcement Agency. "It's an easy way of avoiding taxes because it's hard for tax inspectors to assess profits on such deals. And besides, there is no money in the bank for accountants to seize."

Rampant inflation, which first sparked the necessity to swap goods for debt, is slowing. But according to several studies, about 50% of industry sales in Russia are conducted through barter. Why should barter balloon just as countries emerge from their economic tailspin?

Cash Crunch.

One view holds that barter is a natural result of the collapse of central planning. "Marketing and distribution skills were low priorities" under the old system, says Anders Aslund, an economist and senior associate at the Carnegie Endowment for Peace in Moscow. Today that's no longer the case, and managers don't know how to cope, he says.

The second frequent explanation is a shortage of cash. Liquidity crises throughout the region are held up as the main reason enterprises can't afford to buy raw or semifinished materials or to pay their utility bills.

Others argue that the cash crunch creates opportunities for middlemen to force enterprises into accepting ruinous terms for raw materials in exchange for delivery of finished goods. A U.S. trader in the region says factory directors often are bribed to agree to the damaging terms.

"What intermediaries are doing, in effect, is charging exorbitant short-term financing rates," says First Boston's Mr. Bazarov. How high? As much as 20% to 30% a month in dollar terms, say people who follow barter.

Energy distribution, among the most lucrative sectors in the former Soviet Union, is done almost entirely with barter transactions. Russia's electricity monopoly RAO UES collects only 6% of its Russian revenue in cash, according to UES Chairman Boris Brevnov. He says about 300 intermediaries go between the company and its biggest customers.

Ukraine's largest company, United Energy Systems of Ukraine, is also big in barter. Under a government concession, it imports about half of the country's natural-gas requirements from Gazprom, the Russian natural-gas giant. The private company, which chalked up sales of $11 billion last year, according to President Julia Timoshenko, pays Gazprom with goods ranging from military uniforms to steel tubing it receives from local textile and steel mills. Gazprom, in turn, uses the tubing for its pipelines and gives the uniforms to Russia's Ministry of Defense in lieu of taxes.

So where does all this leave many enterprises? In deeper and deeper trouble, observers grouse.

"Some people are making piles of money, but they are ruining most of the factories," complains Mr. Bazarov. "If nothing changes, there won't be any left in a few years to ruin."

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