To break into the Soviet Union, Pepsi swapped its soft drink for vodka and even warships
Bartering is one of the oldest ways of doing business in the world.
The exchange of goods and services predates the use of money and is believed to have developed in the first human societies. Today, bartering is usually associated with countries in turmoil.
Take fisherman in Venezuela who now swap their catch for other food stuffs or medicines, because after years of hyperinflation the country’s currency is now nearly worthless.
Or the bartering networks that emerged in Greece at the height of its financial crisis eight or so years ago.
However, it is not just individuals who continue to engage in bartering, it is also used by governments. And again, this is often the case when a country is facing financial woes and isolation on the world stage, such as Venezuela or Iran.
Iran has been swapping its oil for Indian rice – a key foodstuff for Iranians
For both countries bartering has enabled them to get around US-led economic blockades.
Bartering also continues to occasionally be used by companies, such as Indonesian aircraft maker Industri Pesawat Terbang Nusantara (IPTN) agreeing to trade two of its transport aircraft for 110,000 tonnes of Thai sticky rice back in 1996. That was all the Thai buyer had to offer.
And in an even more eye-opening historic example, back in the 1970s US giant Pepsi traded its soft drink for Soviet tomato paste, so it could enter the USSR market. Pepsi, which owned Pizza Hut at the time, spread the tomato paste across its pizzas in western Europe. It also bartered its fizzy drink for Russian vodka, and even Soviet warships, which it sold on for scrap.
Swedish chart-toppers Abba did something similar in the Soviet Union, where they earned royalties in the form of fruit, vegetables and crude oil, which were then sold on the global market.
Venezuela and Cuba’s close ties were put in place by Hugo Chavez and Fidel Castro
Back in Iran, it has used bartering to support its economy ever since the US first imposed sanctions after the Iranian revolution of 1979. The Iranians then had to start bartering even more when tough curbs were imposed by the United Nations between 2010 and 2015.
With the UN sanctions making it impossible for Iran to buy goods on the international markets with its own currency, Tehran started offering crude oil, and gold held in vaults abroad, in exchange for basic staples like rice, cooking oil and tea.
After the 2015 nuclear deal between Iran and the five permanent members of the UN Security Council – China, France, Russia, the UK, the US – as well as Germany and the European Union, Iran was able to start trading normally again.
But last year President Trump pulled the US out of the so-called Joint Comprehensive Plan of Action, and re-imposed sanctions. This has forced Iran to return to bartering, such as reviving its old agreement with India, whereby it exchanges its oil for rice.
Using a method that is bit more complicated than a straight swap, Iran agrees to accept payment for its oil in Indian rupees. The money is paid into an Indian bank account operated by an Indian state-owned bank.
Iran then uses this to pay for rice and other Indian imports such as pharmaceuticals, with no money crossing banks or borders. It’s a moot point whether this bartering violates sanctions or not, but until the US removed special waivers for Iran’s main oil exporters, it had become a common way to do business.
Venezuela swaps oil for Cuban workers
France, Germany and the UK set up a similar scheme earlier this year to allow companies in their countries to trade with Iran. The initiative is called the Instrument in Support of Trade Exchange, and it is limited to humanitarian goods, such as medicines and food items.
In Venezuela, it is not just goods that are bartered – it can be workers too. It sends 50,000 barrels of oil every day to Cuba. In return Cuba sends its highly trained doctors, teachers and economic advisors to work in Venezuela.
Most barter deals are struck when conventional avenues are blocked. says Michael Czinkota, an associate professor of international business at Georgetown University in Washington.
He says this is also the case for other trade deals that are not straight cash payments, which are known collectively as “countertrades”. These can include a simple mix of barter and money, to pledges of future investment or purchases.
“The starting point for countertrades is always that something is wrong with the traditional system,” he says. “The companies I talk to who do countertrade say if they could do everything they do for money that would always be their first preference.”
Iran’s Hassan Rouhani (left) and India’s Narendra Modi (right) maintain close ties
Meanwhile, Shirley Mustafa, an economist at the UN’s Food and Agricultural Organisation, says such deals became more common after the 2008 financial crisis.
“Some countries lost confidence in the international trading system [so they took action],” she says.
Trading goods for other goods or services also helps governments to save precious foreign currency reserves. For this reason some countries actively seek barter or other countertrade deals, says Lindsey Shanson, editor of Countertrade and Offset magazine.
More from the BBC’s series taking an international perspective on trade:
- How a ‘low class’ coconut spirit went upmarket
- How damaging is the Huawei row for the US and China?
- Feeling the impact of Trump’s foreign worker squeeze
- The pistachios that need police protection
One such nation is Malaysia, which back in the 1990s swapped some of its abundant palm oil crop for Russian fighter aircraft. Earlier this year, it proposed doing the same thing again as it wants to modernise its defence forces, but has little spare cash.
Regarding the decision of Indonesian aircraft mater IPTN to accept Thai sticky rice as payment, economist Travis Taylor says the company simply wanted to get a deal done.
Abba were sellers of crude oil
“In that case it was really about building reputational capital [in a new market],” says Mr Taylor, who is an associate professor of economics at Christopher Newport University in Virginia.
“No-one wants to be stuck with tonnes of sticky rice. But this company also wanted evidence that the aircraft could be sold. So they couldn’t be picky.”
Prof Taylor adds that a specific type of countertrade deal called “offset agreements” continue to be prevalent in the global defence sector. Under these agreements defence firms agree to generate economic activity within a country over a period of time, such as buying or making components there.
Overall, he says that bartering and the other types of countertrade are here to stay, “particularly among developing countries and during times of instability”.