CREDIT AND MONETARY POLICIES IN THE USSR: II. SETTLEMENT PAYMENTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP80-00809A000600380203-4
• Release Decision: RIPPUB
• Original Classification: R
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: September 9, 2011
• Sequence Number: 203
• Publication Date: March 2, 1951
• Content Type: REPORT

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CLASSIFICATION RESTRICTED f:ESTE1ICTED
CENTRAL INTELLIGENCE AGENCY REPORT
INFORMATION FROM
FOREIGN DOCUMENTS OR RADIO BROADCASTS CD NO.
SUBJECT
HOW
PUBLISHED
WHERE
PUBLISHED'
DATE
PUBLISHED
LANGUAGE
Economic - Finance, settlement payments
DATE OF
INFORMATION 1947
DATE DIST. .244k1951
NO. OF PAGES 16
SUPPLEMENT TO
REPORT NO.
THIS IS UNEVALUATED INFORMATION
THIS DOCUMENT CONTAINS INFORMATION AFFECTING THE NATIONAL DEFINES
OF THE UNITED STATES WITHIN THE MEANING OF ESPIONAGE ACT LO
U S C.. SI AND 11. AS AMENDED. ITS TRANSMISSION OR THE REVELATION
'My SON TO A
FORMH O15RIZED
FROM SIT LO. IS PRO. ITS
FIA NIUITEO . CORY
MV TLAW. S IN RIFRODUCTION OF TNSEINAUT
Denezhno a Obrashcheni e i Kredit SSSR, edited by Z. V. Atlas,
and E. Ya. Bregel, Gosfinizdat, 1947, pp 250-274.
CREDIT AND MONETARY POLICIES IN THE USSR:
II. SETTLEMENT PAYMENTS
STAT
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Organization of Settlement Payments
and the Significance of Cashless Settlements
One of the principal tasks of Gosbank (State Bank), according to a direc-
tive of the Council of People's Commissars, USSR, dated 20 March 1931, is "to
develop a system of settlement payments which will facilitate the production
and distribution of goods."
? W"
The sale of goods and the rendering of services involve cash settlement
payments between socialist enterprises. In addition, enterprises make settle-
ment payments to higher financial organs (the budget, special banks, and Gos-
bank) through the distribution and redistribution of monetary resources among
enterprises and branches of industry.
Tha principal function of Gosbank as a clearing center consists in the
supervision of settlement payments arising from commercial operations between
production and supply organizations.
In a socialist economy the six principal tasks involved in the organization
of settlement payments are as follows:
1. The insurance of mutual control of economic organizations in matters re-
lating to cost accounting and contract regulations.
2. The assistance of the bank in promoting a more rapid turnover of goods
which, in turn, increases the monetary turnover.
3. The anticipation and liquidation of cases of nonpayment which result
in the redistribution of turnover capital in a manner not foreseen by the cur-
rent plan.
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4. The greatest possible conservation of cash.
5. The acceleration of paper work involved in settlement payments and
the conservation of funds necessary for the uninterrupted payment of such ob-
ligations.
6. The-adaptation of settlement payment techniques to the peculiarities of
the various branches of the national economy and chars teristic transactions of
economic organizations.
Most settlement payments between enterprises are completed without the use
of cash. The bank simply credits the account of the creditor and debits the ac-
count of the debtor, if the sum involved is more than 1,000 rubles (250 rubles
in some cases).
The development of settlement payments without use of cash was made possi-
ble as a result of the credit reform which liquidated commercial credit, and
established direct relations between banks and individual enterprises.
The higher the proportion of noncash settlements to the total volume of
''angc".. hnr-d~
payments, the smaller the amount of actual caoii which c.,u.,e.. , and the
greater the control exercised by the bank over economic organizations. It
should be noted that noncash settlements are not necessarily nonmonetary set-
tlements. Under noncabn settlements, there are placed at the disposal of en-
terprises funds, which may be utilized by the enterprises for payment by means
of transfer, or as cash if the situation seems to warrant it. Noncash settle-
ments are, in effect, monetary settlements.
Settlement Payments and Contracts as Methods of Control by the Ruble
Through its control of settlement payments and credit, Gosbank is in a
position to insure the fulfillment of production and accumulation plans by en-
terprises as well as the observance of contractual obligations and price poli-
cies.
Some enterprises which keep their funds in settlement and current accounts
in Gosbank do not receive bank credits. The only authority the bank exercises
over such enterprises is through its control over their settlement payments and
the funds deposited in their settlement and current accounts.
If the bank's control over an enterprise is based on the fact that credit
was extended to that enterprise, the bank exercises its control over the enter-
prise's settlement payments on a day-to-day basis.
Part of Gosbank's function is to insure prompt payment of all obligations
by the enterprise. To this end the bank hinders the growth of mutual indebted-
ness between economic organizations. On the other hand, it promotes the conser-
vation of turnover capital allotted an enterprise, and the fulfillment of planned
accumulation norms.
Adherence to payment regulations and control over the rapid turnover of
settlement payment funds improves monetary circulation. The bank's control over
the payments of economic organizations is achieved through its control of settle-
ment payments. This is a necessary condition for the effectiveness of the whole
system of economic settlements.
At the beginning of each new fiscal year, state and cooperative organizations
are obliged to draw up contracts in conformity to the national economic plan and
the plans of individual enterprises. Plan goals are anticipated in these contracts
which are also essential prerequisites for the effectiveness of cost account-
ing in interenterprise transactions.
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STAT
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The contract usually specifies the method in which the settlement pay-
ments are made. Gosbank keeps a close watch on the methods of settlement
payments specified in contracts, and has the authority to advise the use of
one or another method of payment. However, this authority is only advisory.
Disagreements between economic organizations and breaches of contracts
are not settled by Gosbank. Special governmental arbitration bodies handle
such cases.
Concentration of Resources in Gosbank .
All state cost accounting enterprises and cooperative organizations are
obligated to keep their free funds in the bank (kolkhozes may do so if they
wish, and have the choice of either Gosbank or a savings bank).
Cash receipts of an enterprise (from ...ie sale of goods, etc.) must be de-
posited with Gosbank. The enterprise keeps only a specified amount of cash on
hand. Money withdrawn for wage payments, and for some reason not utilized, must
likewise be returned to Gosbank.
osb1
~-
Special banks maintain correspondent accounts with nwo~~, through vhi ch
their entire monetary turnover passes. State and local budget funds are also
deposited with Gosbank, which implements all budgetary allocations. In towns
possessing communal banks, part of the local budget funds are deposited with the
local bank.
The concentration of monetary resources in a single state bank is possible
only under the socialist system. Gosbank is the center of all financial activ-
ity: it is the only center of settlement payments, and the only center for short-
term credit. Gosbank attracts all monetary resources, and stimulates the rapid
turnover of the funds of the national economy. In this manner it accumulates
large reserve funds which it manipulates on a state-wide scale.
Settlement Accounts and Current Accounts
Enterprise funds are kept in Gosbank in either settlement or current ac-
counts. The balances of these accounts represent the funds available to an en-
terprise or institution in Gosbank. The settlement account is usually maintained
by enterprises engaged in economic activity (with their own turnover capital).Cur-
rent accounts are usually maintained by budget-financed institutions, professional
and socia.L organizations, and kolknozes.
There is a different set of regulations for meeting charges against settle-
ment and current accounts, if the funds of the account are insufficient to cover
them. If a current account has insufficient funds to meet the charges of a cred-
itor, his note is returned to him. If the same problem arises with regard to a
settlement account, the creditor's note is held until such time as the account
funds are replenished. The note is then paid in order of priority. Moreover,
funds can only be withdrawn from current accounts of social organizations (and
kolkhozes) with special written permission (polozhitel'nyy aktsept).
Every indeper.9ent cost-accounting enterprises has one settlement account in
Gosbank. This account is the essential prerequisite for determining the monetary
resources of an enterprise, and for settling its accounts with contractors. The
settlement account also enables Gosbank to control the monetary turnover of an en-
terprise. All amortization deductions, the director's fund, and above-limit cap-
ital construction are handled through the settlement account.
Financial regulations in the USSR draw a sharp distinction between funds al-
located an enterprise for its operational (productive) activities, and funds allo-
cated for capital construction. Funds allocated for one of these purposes cannot
STAT
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be used for the other. Therefore, the enterprise maintains two distinct ac-
counts -- one for operational expenses and one for capital construction. The
latter account is maintained in one of the special banks. The only exception
to this rule concerns above-limit capital construction which enterprises are
authorized to undertake in accordance with the law of 19 September 1935.
In addition to the settlement account, enterprises maintain special ac-
counts in Gosbank for the financing of capital repairs. A part of the funds
accumulated from amortization deductions is transferred to this account from
the enterprise's settlement account. Another Part of these funds is transferred
to one of the special banks for the financing of capital construction.
In addition to the various accounts already listed, economic organizations
and enterprises maintain what are known as transit accounts. Funds accumulated
in these accounts are designated for transfer to higher organizations.
Transit accounts are maintained by a number of trusts and main administra-
tions, and they represent funds realized by enterprises as a result of the dif-
ference between the factory price (raschetnaya tsena) of finished goods ad
their selling price.
The factory price is the price used by trusts, administrations, and their
marketing organizations for settlement with enterprises for goods delivered.
This price represents the planned cost of production and sometimes includes
part of the profits which remain at the disposal of the enterprise. The sell-
ing price of an article includes the factory price, profits, the turnover tax,
price increases, etc. Both factory and selling prices appear in the account-
invoice.
The importance of the transit account is that it permits a centralized use
of all funds which do not belong to Individual enterprises and cannot therefore
be utilized locally. These funds are placed at the disposal of higher authori-
ties.
All funds available for utilization by an enterprise, including loans, are
credited to the enterprise's settlement account through which all the enterprise's
financial transactions pass.
In some cases the receipts of an enterprise are transferred directly to a
special loan account without reference to the settlement account. This practice
is followed when the bank has advanced to the enterprise substantial working cap-
ital. The receipts are then used to insure the prompt repayment of the loan to
the bank. If the bank grants a loan to an enterprise which already owes it money,
the amount of the old loan is deducted from the new loan -- again without refer-
ence to the settlement account. Further, bank loans are not included in the set-
tlement account of an enterprise when they are granted (in the form of a letter
of credit, etc.) for the specific purpose of prolonging the payment period of a
previous loan, or of changing from one type of credit to another. Finally, when
settlements between two enterprises cancel one another, the transaction is not
reflected in their settlement accounts.
Utilization of Settlement Account Funds
The enterprise has at its disposal all funds which have accumulated in its
settlement account provided that it adheres to its production plan and financial
regulations. It may utilize these funds as it sees fit, and the bank must hon3r
all drafts on settlement accounts.
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However, there are some activities of the enterprise over which the bank
exercises preliminary control. These include wages, overhead expenditures,
amortization deductions, and advance payments and purchases of an enterprise's
goods by the retail trade network. Before delivering-money for wage payments,
the bank makes sure that the amount requesteu corresponds to the amount offi-
cially approved. The sum which the bank actually delivers is in proportion to
the amount of work performed. Sums paid by enterprises and other institutions
for overhead expenses are verified by a special section of the bank with ref-
erence to the legal limits set for such expenses. If an enterprise does not
transfer funds for amortization at the proper time, Gosbank or the special bank
(acting in accord with Gosbank) has the right to transfer such funds to the
amortization account even without the permission of the enterprise. Gosbank
permits economic organizations to make advance payments only to industrial co-
operative artels, and then only within limits sufficient to cover the artel's
shortage in turnover funds. When a noncash settlement is made between an en-
terprise and a trade organization, the bank sees to it that the enterprise does
not receive goods designated for consumer use.
Enterprises must maintain sufficient funds to insure prompt settlement
payments. Reserve funds kept in settlement accounts to guarantee payment by an
enterprise are drawn from its internal resources, from above-plan profits, u?-o-
etary funds, or short-term credit. The fact that an enterprise is not provided
,ith special resources for the formation of a reserve fund, compels it to expe-
dite the turnover of its material funds and mobilize its internal reserves.
Another system is employed for trade organizations: they are obliged to
maintain specified cash funds. The large and continuous turnover resulting from
trade operations necessitates the maintenance of a fixed minimum cash reserve
which constitutes a significant share in the over-all turnover.
Regulations Governing Failure to Meet Obligations
The enterprise has the full right to dispose of the funds in its settlement
account in any manner it sees fit as long as it pays its debts and obligations
in full and on time. If the enterprise should, for any reason, prove unable to
meet its legal obligations, it loses the right to control the disposition of its
settlement account (in banking terminology the account is "arrested"). Until the
enterprise is again able to meet its obligations, payments made from its settle-
ment account follow an obligatory, legally prescribed priority system.
The priority for the satisfaction of claims is as follows:
1. Wages and similar demands (fees, and sickness, accident, and death com-
pensation payments).
2. Tax payments.
3. Amortization deductions, capital construction, and capital repairs.
4. Payments to Gosbank on overdue loans.
5. Payments for goods, and all other payments.
Thus the law gives first priority to wage claims and social insurance over
those of Gosbank and the budget. Gosbank is assigned priority over budgetary
claims in the following cases: if Gosbank itself sells the enterprise's mate-
rial assets which have been deposited with it, Gosbank is entitled to use the
funds received to settle overdue loans after wage claims are met; or if the bank
is recovering a loan made to an organization engaged in procurement of agricul-
tural raw materials. In these instances,. the enterprise's receipts are directly
channeled to Gosbank for the settlement of the obligation without being entered
on the enterprise's settlement account.
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If the debtor enterprise which failed to meet its obligations were de-
prived of all control over the funds in its settlement account, its current
activity would be paralyzed. Therefore, the debtor enterprise (unless it
is a retail trade organization) is allowed to dispense up to 5 percent of
the cash funds coming iato its settlement account for unavoidable expenses
irrespective of current claims. In the case of retail and wholesale
alee trade
if the
organizations, this limit is lower (2 percent of daily income),
monetary turnover is very large, the proportional size of expenses which can-
not be postponed is smaller than in the case of producing enterprises.
The right to spend up to 5 percent of the cash funds coming into the set-
tlement account to meet pressing needs lends a substantial flexibility to the
established system without violating priority payments in principle.
Principles and Classification of Settlement Payments
Organization of settlement payments in the socialist economy is based on
the following principles:
1. Payments are made for economic operations after they have been completed.
2. Payments are made only with the consent of the payer and from free funds
he has on hand.
3. The majority of payments are arranged by noncash settlements through, and
controlled by,Gosbank.
The first of these principles arises from the demand for economic settlement
payments, and the liquidation of commercial credit. The system of central allo-
cation of turnover capital and the dedication of bank credit to the purpose of
guaranteeing the uninterrupted flew of production necessitate prompt monetary com-
pensation for goods furnished or services rendered. Nonpayment disorganizes cost
accounting.
The second principle also has its origin in the demands of cost accounting.
It provides for strict observance by the payer of all obligations due to the supplier
by the terms of the contract.
The third principle is predicated on the bank's control of the flow of pro-
duction and circulation. It has a very important bearing on the improvement of
monetary circulation.
The various types of settlement payments involving trading operations may
be classified-as follows:
1. Basic types of settlement payments legally established by the credit re-
form and most widely used in the economy (acceptance, letter of credit, or spe-
cial account), and specialized types of settlement payments adapted to ,onditions
i 7 individual branches of the economy (transit, planned, etc.).
2, Settlements between economic organizations not in the same town (inter-
town), end local settlements within the limits of one town (intratown). Intertown
settlements are subdivided into settlements carried out by the bank in the local-
ity of the payer, and those carried out by the bank in the locality of t'te supplier.
3. Settlement payments entirel handled through a bank (this includes the
basic types of settlement payments Llisted above), those frequently handled through
banks (some types of reciprocal settlements), and those handled by direct cash pay-
ments (small payments) without reference to a bank.
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Basic Settlement Payment Documents
Payment demands and bills of lading, presented by the supplier, are
the main documents involved in intertown settlement payments for trading
operations and servi"es. Payment demands contain the minimum data neces-
sary for implementation of the settlement: address, date of shipment of
goods, date and number of transport document, number of the settlement
account, name and address of the branch bank servicing the supplier, and
amount due. A bill of lading contains, in addition to this general in-
formation, a specific description of the goods dispatched -- the catalogue
name, quantity, and price of each item, the total value and its itemization,
etc.
Payment demands are written up on the basis of bills of lading. Orig-
inals of the documents confirming dispatch and receipt of goods are appended
to both types of bill.
Intratown settlement payments are made by settlement checks made out by
the purchaser.
The division of settlement payment uuCuw@nts into ps;Went _--- Aemanfla and
bills of lading is made to facilitate the work of the bank, which executes
its operations chiefly by payment demands (Gosbank receives up to 1.5 mil-
lion of these a day from its branch banks). The bill of lading is an essen-
tial prerequisite for verification by the buyer of the quantity, type, and
price of goods delivered as compared with the specifications of the order.
Acceptance as a Type of Settlement Payment
A decree of the Council of People's Commissars dated 20 March 1931 stated
that, of the three principal types of settlement payments -- acceptance, letter
of credit, and special account -- "acceptance is the preferable type of settle-
ment payment, under given conditions." Acceptance, is at present the principal
type of settlement payment: a large part of intertown settlement payments are
implemented by the use of acceptance; and acceptance is also used in intratown
settlement payments.
Acceptance is intended for use in economic operations (sale of goods and
rendering of services) involving permanent contractual relations. Its essence
lies in the fact that payment is implemented at the buyer's place of business:
with his consent, within a given period, and when he has the necessary funds on
hand. This type of payment and the paper work involved are based on the so-
called bank collection (inkasso) payment documents introduced in 1936.
Until 1936, acceptance type settlement payment documents were sent by the
supplier to the payer and to the branch bank located near the buyer's place of
business. The branch bank servicing the supplier performed only the limited
function of crediting the settlement account of the supplier on receipt of '
word that the payer had honored the demand for payment. The supplier's bank
did not share in checking on the prompt arrival in full of the payment, and its
entry on the settlement account of the supplier. As a result, the supplier was
obliged to have relations with a branch bank in the town of each buyer with whom
he dealt. This situation weakened bank control, worsened the supplier's posi-
tion, and complicated settlement payments.
After the introduction of collection in 1936, payments have been handled in
the following manner: the supplier, on dispatch of goods to the buyer, gives his
own branch bank a payment demand and an account-invoice "on collection." The sup-
plier's branch bank transfers these documents to he branch of Gosbank which serv-
ices the buyer. Here they-are presented the buyer for payment. Within a specified
time aftei p yment, the funds are transferred by the buyer's bank to the supplier's
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bank for entry on the latter's settlement account. The bank handles "on col-
lection" payment demands which involve sums exceeding 1,000 rubles. Payment
for certain types of goods which are usually dispatched in small shipments,
or whose value is relatively low (such as coal, timber, oil products, matches,
cultural goods, etc.), is handled by the bank if the sum involved exceeds 250
rubles.
Collection of payments is not only a technical operation; it is also
closely linked with the functions of control. The branch of Gosbank servic-
ing the supplier sees to it that charges levied were for goods actually de-
livered, that charges were levied not later than 3 days after dispatch of the
goods (to avoid covert extension of commercial credit to the buyer), and also
that the payment was transferred promptly to the supplier's account.
The bank servicing the supplier handles settlement payments from all
branch banks located at the places of business of the buyers with whom the
supplier deals. The bank servicing the buyer sees to it that payment demands
are met promptly by the buyers, ascertains the explanation of a refusal to pay,
and insures prompt transfer of funds to the supplier's account when payment is
made.
Thus, the collection system for the movement of documents insures recipro-
cal control by the bank, streamlines organization of settlement payments, and
insures the work of economic supplier-organizations. The chief advantage of the
acceptance type of settlement payment is that it offers maximum supervision of
contract fulfillment on the part of the buyer.
The predominant use of acceptance does not exclude the necessity of differ-
entiating the types of settlement payments adapted to economic peculiarities,
and settlement payment relations of various branches Zof the economy.
Acceptance (agreement to pay) is given by the buyer in the case of inter-
town settlement payments, on the basis of verification of documents received,
and not on the basis of verification of goods received, since the goods usually
arrive after the'papers.
As a rule, the legal period for acceptance is three working days, This is
the time necessary to the buyer to verify the contents of the documents presented
to see that they are fully and correctly made out as to quantity and price Iof
the good], the sum due, and to compare the assortment, date of shipment, etc.,
with the terms of the contract.
In the vast majority of cases, the buyer agrees to accept the payment de-
mand. Therefore, to insure maximum possible simplification of acceptance, there
has been established the so-called negative acceptance.
When the negative acceptance is used, the economic organization must notify
the bank in writing only of its refusal to pay, that is, in the event it refuses
to accept part or al.l of the charges. If the bank dc3s not receive such a re-
fusal to pay, it is assumed that the payer has accepted the charges levied.. This
practice simplifies the work of the bank and the payer. Written positive accep-
tance for every payment demand presented is required only of kolkhozes, sovkhozes,
and trade-union and party organizations.
If the supplier violates the terms of the contract, the buyer is empowered
to refuse the charges presented. In practice, at least part of the account-in-
voice is frequently illegal, although the total charges presented may be correct.
Therefore, the right to refuse acceptance is established in two forms: complete
refusal, and partial refusal.
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Full refusal to accept charges is permissible only in the following
cases: if payment demands are illegal, if the goods have been paid'for pre-
viously, or if legal or contractual provisions have been directly violated.
Partial refusal to accept charges is permissible in the following cases: if
the supplier raises the contract prices, if part of the goods are of a type
not ordered, if the shipments exceed the volume contracted. for in a given
quartile or month, or if a mistake has been made in arithmetic on the account-
invoice.
The buyer is not empowered completely to refuse payment if there exists
a possibility of partial refusal to pay. Neither is he empowered to refuse
payment if he has previously used the goods received. The bank servicing the
buyer promptly notifies the bank servicing the supplier of all the facts in-
volved in a refusal to accept charges, or in a case of delayed payment, so
that the proper measures may be taken.
If a payer does not pay a bill in the allotted period of time owing to
lack of funds, but does not refuse acceptance of Vie charges, the unpaid bill
is paid in accordance with the legally established priority. Penalty for over-
due payment is exacted from the buyer in these cases by the bank. The system
nt documents in the bank fart 1 i tates the task of
of keeping E.. .. cttlc:"..?.. nt paym..e..
control. One group consists of all incoming documents not yet overdue, and
not refused acceptance (the so-called card index No 1). A second group con-
sists of payment demands accepted, but not paid in full on time (the so-called
card index No 2, which indicates the volume of nonpayment, and is especially
valuable in operational relations). A third group consists of payment demands
which the buyer has refused to accept.
The right to refuse acceptance is a powerful weapon, and therefore every
refusal must be well-founded. The buyer is materially responsible for losses
caused tri supplier by the unwarranted use of this right. The bank checks the
basis of every refusal by a buyer to ar.cept charges, and will not recognize the
refusal if it is not well-founded, or ii the basis for refusal is clearly con-
trary to those permitted by law.
Neither buyer nor supplier is prevented by acceptance or refusal from press-
ing further legal claims by arbitration or lawsuit, For example, if, after ac-
ceptance and payment, the goods upon arrival fail to correspond quantitatively
or qualitatively to their description in the account-invoice or contractual spec-
ifications, the buyer makes claims (and if they are not satisfied, brings suit)
against the supplier or railroad. On the other hand, the supplier may bring suit
against the buyer if the buyer has refused acceptance without good cause.
Compulsory payment Literally, payment without acceptanc7 is used in some
operations which are by nature not liable to claims; that is, the buyer is de-
nied the privilege of refusing acceptance. This system is used in settlement
payments involving electrical energy, use of communal services, telephone or ra-
dio, if the payment is subject to a heavy tariff. Justification of compulsory
payment in these cases lies in the fact that the services or energy supplied have
already been used by the payer, and also that the sum demanded cannot be disputed.
When compulsory payment ia used, payment must be made on the day following receipt
of the payment demand from the bank.
It was established by a decree of the Council of People's Commissars USSR
dated 4 June 1936 that payment must follow acceptance within 7 days; and accept-
ance had to follow receipt of the payment demand within 3 days. The bank is em-
powered further to extend the acceptance deadline up to 7 days for economic or-
ganizations located at some distance from the branch bank servicing them. In gen-
eral, however, 10 days is the legal limit for payment after receipt of the payment
demand.
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payment deferment was introduced to give economic organizations time
in pay-
and opportunity to regulate their expenses) andodsetnup aoso-called
allednpad
ment schedule with information enenside payment , and income expected on the
in the approaching 10-day y period on o
other.
Payment deferment necessitated a change in the right to utilize goods
arriving in the meantime. When the period of acceptance and payment defer-
ment coincide, the buyer legally cannot use the goods until payment is made;
when this period is prolonged prompt use of the goods on arrival may be eco-
nomically expedient in many cases. Delay may tie up a considerable volume of
goods. Consequently, the buyer may decide to use the goods before payment.
Legally the goods belong to him as soon as he declares acceptance.
If, owing to insufficient funds, payment is delayed beyond 10 days after
receipt of the bill, the payment demand is filed in card index No 2, and paid
by the bank as funds accrue in the buyer's settlement account according to the
legally established priority. The pofathe by per
overdue e commitments s is s 0.05 percent
,per l_
Payment regulations call for payment of a bill within 10 days of receipt
of goods. However, a buyer may pay a bill before the appointed time if he so
wishes (and if he has no outstanding overdue obligations). Often this takes
the form of a partial payment.
If acceptance is refused and the goods have arrived, the buyer, though
unable to dispose of them, is made responsible for their custody until such
time as they are resold or reshipped on instructions from the supplier. If
it is established that refusal to accept the charges was without good cause,
regulations provide that responsible custody be automatically terminated, and
that the bank must withdraw the amount of the charges from the buyer's account
and place the goods at his disposal. In the case of partial refusal to accept
charges, regulations provide that responsibl custody be established for that
portion of the goods which the buyer has refused to accept. In practice, Gos-
bank has not yet established adequate control over regulations providing for
responsible custody.
Payment deferment is not used in regard to some types of goods, for ex-
ample, grain and oil products and grain wines, because of the rapid turnover
and owing to budgetary considerations (acceleration of turnover tax receipts).
Payment deferment is not applied to settlement payments of budgetary and
social organizations, industrial marketing organizations, and clients contract-
ing for construction work. Budgetary and social organizations (and to a consid-
erable extent clients contracting for construction work) do not require payment
deferment, since they settle accounts with the supplier on the basis of fixed
budget allowances.
Industrial marketing organizations do not need payment deferment because
they settle accounts chiefly with bank credit, and short payment periods cur-
tail the volume of credit tied up in settlement payments in progress at one
time.
When the acceptance type of settlement payment is uecsd, payment is made
after the goods are already sent off to the buyer. Consequently, nonpayment
is a frequent result. However, thin cannot be attributed to any inherent short-
coming of the acceptance as a type of settlement payment.
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Letter of Credit and Special Account
Letters of credit and the special account were introduced as'types of
settlement payments by a decree of the Council of People's Commissars dated
20 March 1931. Settlement payments implemented by use of these two forms
are characterized by the fact that payment takes place at the supplier's
place of business. The purpose of this type of settlement payment is to in-
sure payment immediately after shipment.
The letter of credit is an order from the bank servicing the buyer to
the bank servicing the supplier (given on instructions by the buyer) which
provides payment to a single specified supplier for specified goods or serv-
ices; these specifications usually reflect contract provisions. The minimum
sum for which a letter of credit is drawn is 1,000 rubles. The letter of
credit is backed either by a previous deposit by the buyer or by bank credit.
Depcsit of funds for settlement payments by letter of credit does not consti-
tute extension of credit to the supplier, since payment is not made until the
goods are actually shipped. The letter of credit is valid only for a definite
period, 25 days. (The bank is empowered to lengthen this period to 45 days on
necessity.) This is an essential condition for stimulating prompt shipment
by Lhe supplier. Further, it limits the period that the sum involved is tied
up in the settlement. The letter of credit and the special account differ
from acceptance in that when they are used, all movement of documents is ini-
tiated and concluded by the buyer.
In the absence of the payer, his interests are defended by the bank serv-
icing the supplier: it pays for freight only after verifying dispatch of the
goods, and after checking to see that the supplier has fulfilled all conditions
called for in the letter of credit (certificate of inspection of quality, use
of stipulated means of transportation, etc.).
Use of the letter of credit may be adjudged expedient as a result of va-
rious economic circumstances:
1. When it is necessary to insure prompt payment from an organization
with which it is undesirable to establish payment relations on the basis of ac-
ceptance; for example, settlements with the machine building industry for ma-
chines and individual pieces of equipment, and settlements for fuel, timber,
capital construction, etc.
2. In the case of absence of regular commercial relations between the
contracting parties and the consequent absence of contracts.
3. When preliminary control over the quality of goods to be shipped is
essential.
4. As a form of sanctions against a chronic nonpayer.
The relative proportion of settlements made by letter of credit is insuf-
ficient at present, and its use may be expanded both for other types of accounts
(for example, capital construction) and in the capacity of normal sanctions
against an undependable payer.
The special account is organized in the same manner as the letter of credit
insofar as the paper work involved and the purpose are concerned- Settlement
bey the special account is distinguished from the letter of credit in that it is
not applied sporadically, but used for systematic payment to one or several sup-
pliers located in one town with whom a buyer has consistent business relations.
In view of its expected permanent nature, and the relatively large sums of money
involved, a special account may only be opened when the buyer installs a repre-
sentative authorized to receive and pay for goods in the town where the supplier
is located.
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 Regulations governing special accounts are more flexible than those con-
trolling letters of credit. Special accounts may be used to pay several sup-
pliers. They have no time limit on their validity, and they may be regularly
replenished by the buyer. Payments made from a special account may be used not
only to pay for Lne goods themselves, but also for expenses involved in their
shipment. Within certain limits indicated by the buyer, cash settlements may
be made from the special account. The special account, like the letter of
credit, may be recalled on demand by the buyer. At present special accounts
are used principally in connection with the centralization of settlement pay-
ments through industrial marketing organizations.
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Intratown ',ettlement Payments
Intratown payments are made between economic organizations which have
settlement accounts in the same town -- in the same branch bank, or in two
branches of the bank in the same town. Intratown settlements were, not satis-
factorily organized until 1936: the bank did not participate in control over
payment, and the supplier's interests were not adequately protected. This sit-
uation resulted in obstacles to commercial operations and settlement payments.
A collection ntcm involving positive accept_'~=c? for every shipment was
sy 1?
established in 1936 for intratown settlement payments. However, this system
proved complicated and unsatisfactory. A special decree of the Council of
People's Commissars dated 31 August 1937 established for intratown settlements
a new set of regulations which corrected these shortcomings.
The following types of settlement payments were established: settlement
checks, promissory notes, and acceptance through the collection system.
In addition, the use of planned settlement payments was anticipated in
intratown commercial operations.
Economic organizations engaging in intratown commercial operations are
allowed to make cash settlement payments. However, such cash settlements are
more limited by restrictions than similar settlements in intertown operations.
Payment of all settlements of less than 100 rubles may be made in cash. The
bank is empowered to extend this limit to 500 rubles.
Payment checks and promissory notes are orders from the buyer to his bank
to withdraw the sum involved from his settlement account to pay the supplier.
They facilitate the implementation of settlement payment turnover without col-
lection and bank control.
If a buyer has insufficient funds to back a promissory note he has given
in return for a shipment of goods, the note is held by the bank and paid off
in accordance with established priority regulations. Settlement checks are
used less widely as a method of settlement payment because if the funds in the
buyer's settlement account are insufficient to cover such a check, the bank
simply returns it to the supplier. Settlement checks are valid only for 10
days, and this ft'rther aggravates their inconvenience for the supplier.
Payment of sums over 1,000 rubles Lin intratown commercial operation
may also be accomplished by use of acceptance and the usual collection regula-
tions and control by the bank. However, the period of acceptance is 2 days,
and the period allowed for payment 2 days more. Payment deferment is not used
in intratown commercial operations, since the buyer may arrange payment to coin-
cide with delivery of goods by direct contact with the supplier. The buyer main-
tains the right of full or partial refusal of acceptance in accordance with the
usual regulations.
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If an enterprise ships its products directly to the warehouse of its mar-
keting organization instead of directly to the buyer, settlement between the
enterprise and the marketing organization is based on the usual acceptance pro-
cedure, and the marketing organization acts as buyer. But such a system leads
to an increase in the number of links involved in rcial opc ratfons, im-
pedes the realization of merchandise, and increases the cost of marketing.
It is the bank's function to see to it that the type of settlement pay-
ment chosen by an economic organization engaged in intratown commercial oper-
ations is best suited to its economic peculiarities and that it holds nonpay-
ment to a minimum.
Marketing Organizations and Transit Shipments
The basic types of settlement payments presuppose direct, mutual rela-
tions between buyer and supplier. Still there are many branches of the econ-
omy in which a third link is necessary in these relations -- marketing organ-
izations.
The marketing organizations maintain local sales offices which plan and
regulate the marketing of enterprises' products. They are linked by contracts
to both supplier and buyer.
Therefore the so-called transit shipment plays an important role in mar-
keting operations. Under this system, the enterprise ships goods directly to
the buyer, using the facilities of the marketing organization, but by-passing
the warehouse. The transit shipment is economically expedient, and is used in
all cases when delivery of goods to the warehouse is not mandatory (for purposes
of sorting, etc.). It is especially widely used in heavy industry (metal, coal,
coke, cement, chemical products, etc.) where a large quantity of one type of
goods is involved. Transit shipments minimize transportation and storage costs
and hasten trade turnover. To insure its control over the movement of goods and
the regulation of their exchange, the marketing organization combines organiza-
tion of movement of merchandise and implementation of settlement payments between
buyer and supplier when transit shipment is used.
Local Sales Organizations
Settlement payments for transit shipments in the food, light, and textile
industries are made with participation of marketing organizations. These set-
tlements are implemented on the basis of acceptance.
The oblast sales office of the marketing organization located at the buyer's
place of business organizes the settlement. It enters into relations with the
buyer as supplier, and acts as buyer in relation to the supplier enterprise (even
though the goods themselves go by transit without delivery co the market's ware-
house).
Payment demands are written out by the supplier enterprise in the name of
the oblast sales office, which is given disposition of the goods, and which is to
receive payment from the buyer. These payment demands are sent by the bank serv-
icing the supplier enterprise to the banks servicing the buyer and the local sales
office. The local sales office collects the amount involved from the buyer in
accordance with the usual conditions of acceptance. Simultaneously, the supplier
enterprise sends the local sales office identical payment demands and an account
invoice. The local sales office settles with the supplier enterprise on the ba-
sis of these documents -- also through acceptance procedures.
The supplier enterprise is credited by the bank in accordance with the usual
routine for settlement documents in process. The local sales office receives the
same credit in the period between payment to the supplier enterprise and receipt
of payment from the buyer.
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Settlement payments for transit shipments implemented by marketing or-
ganizations offer the following advantages:
1. They hasten settlement payments. Accounts are written up directly
by a small number of large local sales offices and this frees the supplier
enterprise from the paper wcrk involved in settling accounts with the many
buyers of its products.
2. They facilitate the work of local sales offices. Implementation of
settlement payments provides them with the opportunity to control movement
of merchandise, to study consi-ier needs, and tc supervise the quality and
variety of goods dispatched.
3.. Concentration of settlement payments in local sales offices close to
the buyer permits closer control of nonpayment and application of sanctions.
The buyer's adherence to contractual regulations is maintained by accept-
ance regulations. The bank's control over the supplier is maintained through
the extension of credit for settlement payment Documents in process. The local
sales office is materially interested in prompt payment by the buyer so that
it may seine with the surr~.. __l c..- r on time. . Failure to meet - . Failure to its obligations re-
sults in fines and forfeits.
Centralization of Settlements by Marketing Organizations
Settlement payments for transit shipments through marketing organizations
in heavy industries are centralized. The central section or administration of
the marketing organization acts as a buying unit for all the products of its en-
terprises.. Settlements between central administrations of the marketing organ-
ization and supplier enterprises are implemented through special accounts opened
by the marketing organization (on bank credit) at the supplier's place of busi-
ness.
Settlement payments between supplier, local sales office, and buyer are
implemented in the manner described previously with regard to transit shipments
but the supplier receives payment promptly after shipment of goods. The bank
servicing the supplier promptly pays him the sum involved, charging it to the
special account which is opened and replenished by the central administration
of the marketing organization in accordance with the planned volume of ship-
ments by the supplier enterprise. Oblast sales offices located at the buyer's
place of business conduct all settlements with the latter. Therefore, when
settlement payments are centralized by marketing organizations, local sales of-
fices do not act as buyer in relation to the supplier enterprise, which has al-
ready received payment for the goods shipped. It does act as supplier in rela-
tion to the buyer, and is linked to him and to the central section of the market-
ing organization with regard to settlement payments -- acting as a mediate link
between them.
The exact sums received are added to the oblast sales office's settlement
account by the bank, and periodically transferred to the account of the central
administration of the marketing organization. With these sums, the central ad-
ministration of the marketing organization replenishes special accounts located
at the supplier enterprises' places of business.
This system preserves the buyer's right to refuse acceptance of goods in
accordance with the customary regulations, even though the supplier has already
received payment. If such refusal is justified, the oblast sales office orders
the bank servicing the supplier enterprise to recover the sum unjustly received
(full and partial refund); these sums are restored to the special account.
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Centralization of settlement payments for transit shipments by marketing
organizations offers basically the same advantages as thoss provided by settle-
ment payments which are implemented through oblast sales offices. They are
particularly advantageous to the supplier, since they guarantee Min quick set-
tlement for goods dispatched. However, this system has the following short-
comings:
1. The c' _ast sales office is not materially interested in prompt and
exact payment by the buyer, since its financial position is in no way affected
by nonpayment.
2. Control by the bank and the local sales office over supplier's ship-
ments is weakened, since the local sales office is excluded from settlement
payment relations between supplier and buyer, and the bank under this system
does not credit the supplier for settlement payment documents in process.
3. The turnover of funds tied up in settlement payments is somewhat
slowed as the result of the introduction of an extra link (the central office
of the marketing organization).
Planned Settle Rua Payments 0"
All types of settlement payments examined previously are based on the as-
sumption of separate and exact payment for each shipment of goods. However, it
is possible to base payment on planned shipments with subsequent readjustment.
When planned payments are used, the buyer gives the bank authorization for
periodic withdrawal of sums in favor of the supplier in accordance with planned
shipments of goods, Every several days (not less than once a month) readjust-
ment is made: underpayment for goods delivered is corrected, and overpayment is
returned or credited against further supply. If necessary, the size of the
planned payment is reviewed and adjusted.
Planned settlement payments are expedient, given two conditions: systematic
shipments and consistently equal volume of shipments in a given time period. There-
fore, planned settlement payments are used between trading organizations and sup-
pliers dealing in a consistently equal quantity of goods such as bread, meat, veg-
etables, milk products, beer, finished linen goods, and leather goods; that is,
chiefly in settlement payments for goods in the food and light industries. They
are also used in settlements between industrial enterprises, and between indus-
trial enterprises and suppliers regularly furnishing raw materials. Planned set-
tlement payments are also used in settlem?snts between marketing organizations and
industries if the products of the indus'ry are completely and regularly marketed
by the marketing organization.
Planned settlement payments offer the following advantages:
1. The buyer's payment schedule is regularized, since he knows in advance
the size of payments that will be due.
2. The process of settlement is hastened and funds of economic organiza-
tions tied up in settlement payments are curtailed.
3. The paper work and technical aspects of settlement payments are con-
siderably simplified.
At present planned settlement payments are used principally in intratown
commercial operations (chiefly in large towns), because it is easier to organize
them, and advantageous to use them as a consequence of the rapid turnover of goods
and direct contacts between supplier and buyer.
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The application of planned settlement payments must be broadened to
include intertown commercial operations. The more equitable disposition of
industry in relation to raw materials and centers of demand will make feasi-
ble a broader application of planned settlement payments.
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