Multinational Firms Turn to Barter as Dollar Shortages Grip Emerging Markets
As dollar liquidity dries up in several emerging economies, multinational companies are increasingly resorting to unconventional methods to repatriate funds, including a modern form of barter – exchanging goods like copper or coffee for local currency. This “in-kind” strategy highlights the growing strain on global trade finance and the potential for fragmentation in the international payment system.
The Rise of ‘Trapped Cash’
Global trade reached a record high of over $35 trillion in 2023, according to the United Nations Conference on Trade and Development (UNCTAD).[1] However, a significant portion of corporate profits is becoming “trapped cash” – funds generated in emerging markets that cannot be remitted to headquarters due to foreign exchange controls, currency shortages, and fluctuating exchange rates. The International Air Transport Association (IATA) reported $1.2 billion in airline funds were unable to be recovered as of October 2023 due to these capital controls, with 93% of this amount concentrated in Africa and the Middle East.[2]
Nigeria as a Case Study
Nigeria exemplifies the severity of this issue. Despite companies exchanging Naira for dollars through the Central Bank of Nigeria, a substantial “FX backlog” – outstanding foreign exchange obligations – has eroded confidence in the economy. In 2024, Nigeria’s central bank governor, Olayemi Cardoso, revealed irregularities in $2.4 billion of a roughly $7 billion backlog.[2]
From Market Withdrawals to In-Kind Exchanges
Faced with blocked dollar remittances, some companies have withdrawn from local markets altogether. GlaxoSmithKline, for example, ended its direct sales operations in Nigeria in 2023 after a 50% drop in sales due to dollar shortages.[2] Others are adapting their supply chains. Unilever has shifted to sourcing raw materials locally, eliminating the need for dollar transactions.[2]
A more sophisticated approach involves “spot conversion,” where companies acquire locally produced commodities – often those priced on international exchanges like the London Metal Exchange or the Chicago Mercantile Exchange – using their trapped local currency. These commodities are then exported, with payment received in dollars or euros.[2]
The Role of Investment Banks and Traders
Global investment banks and trading companies facilitate these transactions, managing the risks associated with price fluctuations through derivatives and earning substantial commissions. The recent surge in commodity prices has further incentivized this practice. International copper prices rose approximately 53% from the 2023 annual average to January 2024, whereas Arabica coffee prices nearly doubled over the same period.[2]
Risks and Concerns
While offering a solution to immediate liquidity problems, the in-kind strategy carries risks. Commodity price volatility can lead to losses, particularly for agricultural products susceptible to climate change. Cocoa futures, for instance, experienced a 50% price drop after peaking in 2024.[2]
There are as well concerns about compliance and sanctions evasion, as physical-based trade can resemble methods used by sanctioned entities. The increased complexity of these transactions – involving physical purchases, shipping, and derivatives hedging – adds to costs and reduces profitability.[2]
Fragmentation of the Global Payment Network
The proliferation of “trapped cash” and in-kind exchanges could fragment the global trading system, creating a divide between countries with ample dollar liquidity and those reliant on barter-like arrangements. This fragmentation limits global trade growth and capital movement and contributes to “geopolitical inflation,” where increased transportation costs, structuring fees, and hedging expenses are passed on to consumers.[2]
Implications for Korea and Global Trade Finance
The Asian Development Bank (ADB) estimates the global trade finance gap at $2.5 trillion as of 2023, indicating the growing difficulty in securing financing for international trade.[2] For export-reliant economies like South Korea, the inability to collect sales proceeds promptly poses a significant risk. The demand for trading companies skilled in navigating these complex situations is expected to rise.
[Global Money X-File provides insights into the world’s money flows. Subscribe to the reporter’s page for essential global economic news.]
[1] https://en.wikipedia.org/wiki/Makoko
[2] https://en.wikipedia.org/wiki/Makoko