Every international negotiator needs to know how to factor currencies into agreements with foreign business partners. This continues on from Part 1: International Forex Currency Risk Agreements.
The other foreign currency challenge that can cause us to scratch our heads while our faces screw up in a perplexed frown is how to manage situations when the foreign currency is not easily convertible. The reason could be a result of the unsteady political climate of the country, or the foreign trading partner has taut policies that deliberately limit the ability of its citizens to use the foreign exchange market. The value of currencies could also be deliberately regulated by a series of regulations called ‘exchange controls’ to regulate the flow of both local and foreign currencies in and out of the country. Other nations may allow their currencies to be only ‘partially convertible’, so they can only be converted for specified transactions. There are some countries where even the mere possession of a foreign currency is considered a criminal act. While the only way in which we cover forex aspects of negotiation contracts during our negotiation training seminars is via our more complex role play exercises, we are glad to share advice in this two part article series.
Example 1: A company that has set up a plant in a foreign country, and has just been paid for the sale of its products in foreign currency, may be legally required to convert these funds into the local currency after depositing it into a local bank. However, if the company wants to convert the local currency into a foreign currency to purchase materials from outside the country, the company will have to make a request to do so through the foreign country’s central bank. The central bank will review the submission. The bank may or may not allow the company to exchange funds. The result is that the foreign based subsidiary would have to seek alternate financing elsewhere to purchase the materials.
Example 2: Similarly, a company located in a foreign country may initially harvest decent profits which they are legally bound to bank in local currency. This negotiation problem occurs when the local currency fluctuates downward causing their profits to shrink. The company may be forced to stand helplessly by because they are prohibited from converting local currency into a more stable foreign currency to offset the losses.
How can we move restricted money in a foreign country?
One age old effective technique when negotiating with organisations that have limited cash flow is to “take it out in trade”. This occurs with countries that have limited foreign exchange at their disposal and seek to barter for the goods or services through a countertrade agreement. There are four types of arrangements:
Countertrade agreements tend to be costly and may also be inefficient. Negotiating the agreement can involve considerable time and the goods involved may be difficult to sell except at a considerable discount. A company normally engages in these agreements with a foreign partner to secure an agreement that might otherwise not materialize.
Some foreign countries require that companies wishing to do business with them must specifically enter into countertrade agreements. However, the upside is that a company may be able to negotiate long term access to materials or components relevant to the products being manufactured either within the foreign country, or for products being manufactured by their plants in other countries.
We must be cautious when negotiating with a foreign country as one common tactic they use is to indicate that the negotiated agreement is for cash, but at the last stages of the negotiation they advise that we will have to enter into a countertrade agreement to seal the deal. A crucial negotiation issue to raise at the outset, is to clarify that they will not want a countertrade as part of the negotiated arrangement. Put the issue on the table immediately.
If a countertrade agreement is required, the agreement will normally entail what is called a “compensation ratio”. This ratio is the percentage that they will expect us to counter-purchase. A foreign government will keep their ratio secret but it will likely be negotiable to a certain extent. Our counterparty will likely initially ask for a high ratio, and here, the negotiations begin. The issues that affect the ratio may be connected to the foreign exchange available to the foreign trading partner. Another key issue is the relative importance of the goods or services we are selling to the country’s development. Other negotiation issues will center on the price of the countertrade goods and the quality of these goods. It is not uncommon for the foreign country to try and flog countertrade goods that they cannot sell because they are of inferior quality.
In considering your negotiation strategy, we have to establish how far we are prepared to go in making countertrade agreements, and what goods we are prepared to agree to.
Goods can be categorised as:
Good preparation and intelligence gathering is absolutely essential before we begin our negotiations. A prepared negotiation strategy must be established beforehand to ensure what we are prepared to accept in making an agreement with a foreign partner. We don’t want it to blow up in our face later. There are many options to consider so each must be examined in relation to the situation.
Jeswald W. Salacuse, ‘The Global Negotiator’ Palgrave MacMillan, (2003).