Legal Principles of Countertrade in the Oil and Gas Industry - Essay Example

? Legal Principles of Countertrade in Oil & Gas Industry – An Analysis Introduction During the era of the cold war, there had been unreal foreign exchange rates, exhaustive currency restrictions, organizationally administered trade and other unhealthy commands of economies. Due to these restrictions, there had been the emergence of countertrade and barter trade in the guise of international trade. According to Schmitthof 1 , under the barter system, there is the flow of trade concurrently under spot transaction where there is no association of foreign exchange between two parties or two nations. Buy-back and the countertrade, are long-phase trade agreements with the mutual trade flows happening at varied phases of the period. Where readily viable credit facilities and readily acknowledged forms of money exchange are available, markets eschew inefficient and cumbersome countertrade transactions. However, due to governmental restrictions on operation of markets and due to international liquidity issues have motivated many nonmarket economies ( NMEs) and majority of the less-developed countries and industrially developed nations, to usher “ creative “ business transactions that bypass the normal exchange medium of contemporary markets2. It is estimated that about 25 to 30% of international trade are carried through unofficially by way of countertrade or barter system and various empirical evidence prove that whenever there is a financial or economic crisis, there is an increased practice of these kinds of trade. As per Aggarwal, government may persist on countertrade to safeguard or to kindle the output of domestic industries. This kind of protectionism may kindle counter-purchase or offset deals which in turn may facilitate to purchase much required skills to develop the economy further. According to Lecraw, countertrade practices can be employed to override other guises of protectionists’ trade policies and finally the government policies which attempt to balance and plan its foreign trade, may involve statutory countertrade3. From what has been mentioned above, this research essay, an earnest attempt will be made to find out the legal principles involved in the financing of countertrade transactions in the international oil and gas business with a particular emphasis to whether the present law is adequate to support business in this province with decided cases on the subject, in order to discuss the issue adequately before coming to a conclusion. Legal Principles involved in Countertrade The legal principles in the financing of countertrade transactions 1. Discrimination principle As per IMF estimates , the countertrade is presently employed by half of its members and is viewed as a guise of exchange restriction and trade which is especially condemned in cases of debt rescheduling by a member nation as in the case of Romania in 1982-1983. In the countertrade , the export revenue will not be distributed fairly and hence there is a legal principle of discrimination exists in countertrade. 2. Protection of domestic industries The WTO Anti-Dumping Agreement states that Member nations may levy anti-dumping duties, where dumping is considered to create ‘material damage’ to the domestic industry. countertrade is frequently said to be means of destabilising or evading anti-dumping law, because countertraded goods lack a translucent, arms-length export price. Hence , countertrade has the legal principle of offering no protection to domestic industries . 3. Consultation principle Countertrade like any other export or import transactions includes negotiation of disputes through alternate dispute mechanism like arbitration etc. 4. Stable basis of trade Countertrade helps to maintain stable prices during the period of extreme exchange volatility and also helps to attain a stable export revenue for a nation. 5. Types of letters of credit framework of agreement obligations Letter of Credits are significant in countertrade transactions concerning parallel L/Cs and are also significant to make sure payment on resale of countertrade business transactions. One of the main advantages of the countertrade is that it facilitates members of cartels like OPEC, to undercut any agreed upon price without formally doing so. Further, in the centrally planned economies, it also enables the bureaucrats so busy. It also may minimise the risk witnessed by a nation that establishes a new manufacturing facility4. Different Forms of Countertrade – Fig 15 Figure 1: Different Forms of Countertrade In 1980s, in retort to worsening third-international debt disaster, some nations indulged in substituting merchandises for debt repayment. For instance, in 1985, Peru repaid some part of its international debt with export of shoes, broiler chickens and variety of other merchandises. Mexico also attempted for oil for –debt swap. Thus, by employing countertrade, these nations were able to circumvent the use of convertible currencies, especially when they faced a severe debt payment crisis6. During the cold war regime, Russian rouble was not an exchangeable currency, and the only solution was that Russia could procure a much-wanted commodity like wheat, was to arrange to get it from another nation in a swap for a different commodity. Due to bad harvest in Russia, wheat was in short supply, whereas America had a huge stock. America was at that time had a shortage of oil, which was available in excess in USSR. Thus, Russia despatched oil to U.S.A in a swap for wheat7. Some of the Gulf Arab Nations commenced to use of crude oil in countertrade business deals so as to continue developing their projects. For instance, the government of Qatar engages in the import of technology and merchandises for its natural gas fields with the various leading multinational companies around the world. The WTO panel in the Canada-Autos8 case took a narrow outlook of the implication of unconditionality in Article I of the GATT, which mentioned about conditions unconnected to the national origin of the imported merchandises which need not infringe Article I. Thus, a regulation or law that specified countertrade binding but in no way restricted the option of foreign parties for countertrade transactions footed on their national origin or the national origin of their products would not be likely to infringe the GATT provisions. Is the law adequate to support business in this area? After analysing the above fact, one can come into a conclusion that in international trade, countertrade is no longer a new phrase. However, very restricted attention has been offered to establish a generally acknowledged definition of countertrade and also for differentiation of its various forms. Further, the scope of legal inferences of countertrade under national laws of nations involved and GATT is still in vague. We have already seen that both private companies and public sector companies are engaged in countertrade transactions despite the absence of specific regulations or laws to administer the countertrade as yet. Except with a provision in the Civil Code No.5 of 1985, there are no specific laws in UAE to regulate the countertrade deals. Under English law, the rules governing a contract of barter are not well delineated. In Re Westminster Property Group Plc9 , it was held that if the contract specifies for an exchange of services or goods, then under the legal sense, it is barter and not a contract of sale of goods. However, the American concept of contract of sale is broader than that of English concept. As per U.C.C s.2-304(1), under a contract of sale, the value can be paid either in money or otherwise. Thus, under American law, a contract of barter is a contract of sale10. As per World Trade Organization (WTO), countertrade results in a distortion of the free trade process. Thus, it does not mirror the true value of transactions, or it is impossible to establish the true value of the products exchanged between nations. There exist a large number of unsolved issues with which the Codes and the GATT cannot interpret aptly as they were framed while countertrade was in puppetry phase in global trade. There is a necessity to frame a broader countertrade law on the international basis which should include the state immunity cannon, the selection of law principles and implementation of international or foreign arbitral awards that emanate from issues regarding counter trade transactions. Due to the absence of uniformity of countertrade agreements, it is suggested to frame a model countertrade agreement to bypass the issues of costs and time in drafting countertrade agreements. It is suggested to espouse the legal guides on international countertrade transactions drafted by UNICITRAL. Countertrade in Oil & Gas Industry Volkswagen as early as in 1977 successfully accomplished a countertrade transaction with East German government to purchase oil, coal, machines and machines in barter for 10,000 cars. As per Carter & Gagne11, Saudi purchased 10 Boeing 747 jets in barter for oil that too at a discounted price of 10% less than global prices existed at that time. According to Khoury,12Colombia purchased oil from Libya and made payment in US$, which were supplied by Hungary, who in turn imported coffee from Columbia. Thus Columbia would give due credit to Hungary’s clearing account for the price of the oil together with any further costs debited by Hungary for the provision of such services. BAE system played the role of the lead contractor in the UK-Saudi Arabia Al-Yamamah “oil” for weapons. This countertrade contract between Saudi Arabia and UK governments made sure that the supply of military aircraft with necessary technical support and training, helicopters, civil aircraft, construction projects and naval ships by UK companies in a swap for oil from Saudi Arabia13. In 1986, about ?14 bn countertrade contract was signed by Shell and BP, renowned multinational companies as the contractors to dispose off the oil payment on global markets14. Abu Dhabi engages in the countertrade by exporting crude oils for importing of jet aircraft. Kuwait engages in countertrade with Taiwan by supplying crude oil in exchange of about half of its value for import of Taiwanese products. For instance, Saudi Arabia imported combat aircraft from U.K, Italy and Switzerland in exchange for crude oil15. Majority of countertrade business transactions is carried over mainly due to importing nation inability to get necessary finance in the international markets and which do not have adequate currency reserves. Limited access or the lack of access, to the credit markets may be due to curbs on the nation, placed as a stipulation for particular new lending by foreign commercial banks or IMF. Thus, countertrade is considered by the LDC government as a way of involving in trade without the cost of entering the international finance markets. Countertrade exists when respective governments put a restriction on exchange of hard currencies as Indonesia have bartered their palm oil for Russian jet fighters ,oil rich Libya bartered its oil to Zimbabwe for coffee ,tea and beef. China had established the Yangpu Oil Barter Exchange, the globe’s first of such barter exchange for oil and gas16. As per Oriental Morning Post out of Beijing, China has established the Yangpu Oil Barter Exchange, which is being regarded as the globe’s first and premier barter exchange for oil and gas. Since its set up, the Yangpu oil exchange has facilitated Chinese businessmen to swap with businessmen from Thailand and Russia and about US$1.2 billion worth of contract value has been successfully accomplished as of date. The exchange facilitates Chinese businessmen to swap for oil and gas products with the Chinese products and to make further investment in oil exploration ventures17. According to Jorge Pinon, the annals of Cuba’s oil industry have been perpetually dependent on foreign nation’s supply starting with the Cuban revolution that encouraged sugar-for-oil by Cuba's barter exchange with the USSR as early as 1960. Due to its recent bilateral trade agreement with Venezuela in 2000, Cuba’s oil dependency had been substituted by Venezuelan dependence instead of USSR. As of today, Cuba is consuming about 150,000 barrels of oil per day out of which about 100,000 barrel is being supplied by Venezuela. Under the countertrade agreement between Venezuela and Cuba, Cuba has to pay about sixty percent of its oil imports from Venezuela within 3 month of purchase in the guise of bartered merchandises and services, like the technical assistance and medical services that involve deputation about 40,000 Cuban professionals to Venezuela., The balance forty percent of Cuban oil imports are to be paid at the expiry of 25 years at an interest rate of 1% per annum18. A MOU ( Memorandum of Understanding ) was signed between Russian gas company namely Lukoil , which is one of the globe’s largest oil companies with Mayor of Sofia , a Municipality in Russia for the building up of homes for the needy Russians in a swap for land for Lukoil gas stations19. A government owned Energy Company in a developed economy can export to a western oil company, and a developing nation may export energy merchandise and commits itself to import products from the associate nation in return. By tying an infrastructure import with that of an energy export may lessen transaction costs and result in efficiency benefits. Thus, countertrade can offer a solution to political and contractual issues, which may happen in imperfect capital markets, which would hamper the realisation of the import or export proceeds otherwise. There is a maxim in the professional countertraders that when there is collateral trade in the oil and then there exists everything else. For several reasons, oil & gas play a dominant role in countertrade. As a basic necessary, the supply of oil has to be locked. It is estimated that oil is being countertraded at about on the order of around two million barrels per day, especially in the third world20. The specialised countertrade market is an essential part of global political economy. About 20 percent of global trade is comprised of oil or a quantum about to analogues to all the countertrade occurring in global oil industry. The quantum of cash value of the major countertrade depends upon a larger magnitude in oil. Thus, the quantum of oil is higher than the trade in any other goods or merchandise. In the majority of the nations, petroleum products, crude oil and gas are either the major import or export merchandise of the world’s major countries. Hence, the energy products play a vital role in the trade both for global economy and for individual nations as well21. Regardless of the prices on the global markets, oil & gas industry buttress countertrade as a sales mechanism. When the oil prices soared to peak, as was evidenced before the financial crisis that commenced in September 2008, then importing countries have started to employ collateral oil trade to secure petroleum for their nation. These nations also employed the imported petroleum as a way to attempt and stem the hemorrhage of hard currencies exchanged for the purchase of oil. When the oil price fell down as witnessed immediately after the economic recession commenced at the close of 2008, and there has been a surplus, and oil producing countries have started to offer a special incentive for collateral oil trades. Thus, oil manufacturing nations so as to obtain imports to alleviate their economy, especially during diminishing oil revenues and to match up the budget mismatch, these nations have started to engage in countertrade by financing their essential imports through the oil exports22. Conclusion This research wishes to conclude that multinational companies have occasionally employed the countertrade process in their business transactions neither as a means of internationalisation nor as a feature of their normal trading practice. The main reason for averting countertrade is due to enhanced visibility of the market price in the era of the Internet, the new hypothesis of business ethics and the intricacy involved in arranging countertrade deals. However, multinational companies in the aerospace and defence sector which are the suppliers to the government often use countertrade practices. The quantum and political mileage of business deals are driving the usage of countertrade, where the value of primary contract is in equilibrium either indirectly or directly, by other guises of inward investment managed by the supplier23. No economy can survive without oil as they run short of motorized transport , lack of electric power , plastics ,petrochemical products and most vital for many Countries , clean water and fertilizer. Because of the skyrocketing oil prices, if oil import or export is not viable then agriculture will rake up as giant as finance in the Third World. Since the position of major oil producers like Saudi Arabia , Russia and Brazil or in case of major importing nations like India or China , the value of oil itself , has become as a medium of exchange as of now. Thus, in the process of countertrade, as of date, the oil, coal, gas, pet coke and biomass have become a barter currency in the world foreign exchange market24. Hence, there is a necessity to frame a broader countertrade law on the international basis which should include the state immunity cannon, the selection of law principles and implementation of international or foreign arbitral awards that emanate from issues regarding counter trade transactions. Due to the absence of uniformity of countertrade agreements, it is suggested to frame a model countertrade agreement to bypass the issues of costs and time in drafting countertrade agreements. It is suggested to espouse the legal guides on international countertrade transactions drafted by UNICITRAL. Bibliography Books Al-Suwaidi A. Finance of International Trade in the Gulf, 1st edition, (New York: BRILL, 1994) Cateora. International Marketing, 13th edition, (New Delhi: Tata McGraw-Hill Education, 2008) Cherunilam. International Economics, 1st edition, (New Delhi: Tata McGraw-Hill Education, 2008) Eun C S& Resnick, B G. 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