Currency risks in foreign trade and how to limit them

A foreign trade deal is stretched out over time. Weeks or even months pass between signing the contract and the last payment. During that time the exchange rate changes, the counterparty’s circumstances change, and a payment route that worked in the spring closes by the fall. Below are the main risks and the instruments companies use in practice.

Exchange rate risk

The contract price is in foreign currency, but the company’s money is in roubles. The importer loses if the rouble weakens between signing and payment. The exporter loses if the rouble strengthens before the proceeds arrive. This is currency risk in its purest form.

What helps:

• Contract currency. A price in roubles shifts the risk to the foreign party, but not everyone agrees to that. A price in the currency of the supplier’s country, for example in yuan for China, removes an extra conversion through the dollar.
• Currency clause. A condition under which the price is recalculated if the rate moves outside an agreed corridor. The risk is shared between the parties.
• A short gap between fixing the price and paying.
• Forward contract. The bank fixes the rate for a future date today. This is hedging: it has a price, and it is not available for every currency pair.
• Offsetting flows. If a company has both proceeds and payments in the same currency, they are matched by timing and not converted unnecessarily.

Conversion cost risk

Exchange rate risk comes from the market. This risk comes from the intermediary. The final cost of a payment is made up of the conversion rate, the FX markup and the fee. Two offers with the same fee can differ by a noticeable amount because of the rate.

What helps. Compare not the fee percentage but the total in roubles for the same amount of foreign currency on the same date. And get the rate and fee in writing before the money is debited, instead of learning them from the report afterwards.

Look at cross rates separately. If you pay in yuan or dirhams and the intermediary calculates through the dollar, there are two conversions, and each has its own markup. It does not always show in the report, but it always shows in the total.

Counterparty risk

The supplier took an advance and did not ship. The buyer received the goods and does not pay. Recovering a debt from a foreign company is slow and expensive, even if the court is on your side.

What helps:

• checking the counterparty before the deal: registration, history, actual address, business profile;
• splitting the prepayment: an advance, then the balance after shipment or against shipping documents;
• a letter of credit or a documentary collection where the parties’ banks support them;
• for exports: prepayment or partial prepayment from new buyers.

Payment route risk

Since 2022, this has been a separate and very tangible risk. A correspondent bank returns the payment. The beneficiary’s bank does not accept money from certain payers. A route that worked yesterday is closed today. Money can be stuck in the chain for a long time, and meanwhile the supplier does not ship.

It hits hardest for payments with a fixed date: the balance before shipment, freight that must be paid before the cargo is released, a scheduled payment with a penalty for delay. For an exporter, a buyer’s stuck payment also means a risk of missing the repatriation deadline.

What helps:

• not relying on a single channel;
• knowing before the payment which agent and which jurisdiction the money will go through;
• understanding where your roubles are before execution and what will happen to them if the payment does not go through.

Regulatory and documentary risk

Currency control rules and special measures change. An error in the documents, the transaction code or the deadlines leads to bank inquiries, delays and fines. More in the article on what currency control fines are imposed for.

What helps: realistic deadlines in the contract, a calendar of obligations, reconciling the bank control statement, and a complete set of documents for each payment.

A risk map for a single deal

Before signing the contract, it helps to answer a few questions in writing. The answers take half a page and show where the deal is vulnerable.

1. What currency is the price in, and what currency will the payment be in?
2. When is the price fixed, and how much time will pass before payment?
3. What has been checked about the counterparty, and how much are you prepared to risk as an advance?
4. Which bank or agent will the money go through, and what happens if that path closes?
5. Where are your roubles between the debit and the execution of the payment?
6. Which documents does the bank need, and who prepares them?

If a question has no answer, that is the main risk of the deal.

Which risks a broker covers

A broker does not remove exchange rate risk: the market rate does not depend on us. But some risks are covered by the working model itself:

• Route. We have a pool of agents, not a single channel. If a destination closes for one agent, we’ll look for another agent in the pool.
• Cost. You name your current rate, and we’ll look for a lower rate. If we can’t find one, we’ll say so.
• Terms. The execution term is set in the agency agreement, and the rate and fee in the payment order for each payment. Everything is known before the roubles are debited.
• Money before execution. If you need a guarantee, the roubles wait for execution in a special escrow account at a Russian bank: this scheme is available on request, for an additional fee.

You can compare your current terms with offers from the pool on the Compare your rate page. How money is protected before execution is described on the Payment protection page. The client does not pay VEDmost separately: our fee is paid by the executing agent. This is a general overview, not financial advice. We will give you an answer on your deal after reviewing the documents and before the roubles are transferred.