16 financial executive | january/february 2011 www.financialexecutives.org

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As developed nations emergefrom the economic down-turn, it is evident that the oldworld economic order is

undergoing a major shift. Brazil, Russia,India and China currently hold morethan 40 percent of the world’s foreignexchange reserves and 15 percent($15.4 trillion) of the total global grossdomestic product.

Reports from The Goldman SachsGroup and others make it clear the so-called BRIC nations will be dominanteconomic leaders by 2050.

What investment and expansionopportunities does this expectationpresent for North American companies?If business plans for 2011 include estab-lishing operations in India, building apartnership in Brazil, buying from Russiaor exploring investment opportunities inChina, here are three points to consider:

1. Learn the BRIC banking systems.Moving funds internationally is very dif-ferent than domestic transfers. Dealingwith BRIC countries can be far morecomplicated than dealing with moredeveloped countries, such as Germanyor Canada. The reason is that BRICbanking is typically highly regulated andgenerally “slow to pay.”

Before transferring funds to a BRICcountry, take the time to learn its bank-ing system. This may require researchingbanking regulations or talking to a foreignexchange (FX) or financial professionalwho's dealt extensively with the country.

This research will provide importantinsights into the costs of transferringmoney, how long payments will take toarrive, the kind of information requiredand the best currency to send.

Consider sending a small test trans-action to a foreign location to addressany potential problems. This can preventany larger issues that may impact client

relationships. For certified treasury pro-fessionals, this type of transaction is sim-ilar to a pre-notification through theautomated clearing house (ACH) system.

2. Understand local currency payment options. Paying in the foreign supplier’s local cur-rency rather than U.S. dollars can becheaper and faster for all parties. Don’tassume that, because the dollar isaccepted overseas, it’s the most cost-effective or convenient payment option.

Once dollars arrive in any BRICcountry, the supplier or partner has toconvert them into local currency. Indoing so, their bank will charge thesupplier or partner a fee and that costwill most likely be passed on in theform of higher prices.

Additionally, with currency volatilitylevels still at all-time highs, there’s a pos-sibility their currency will appreciateagainst the dollar in the short term. Thiscan result in less money for them afterthe conversion. As a result, they willlikely add this price when they invoiceyou. This is one way that foreign suppli-ers hedge their receivables.

Consider working with a financialinstitution that’s sophisticated enoughto send Brazilian real, Indian rupees orother local currencies to your partnersand have them invoice you both in USDand in the currency in question.

Most of the time, the latter price willbe significantly cheaper (expect dis-counts up to 10 percent). Larger foreignexchange and payments providers cansend wires in more than 100 currencies,so sending BRIC currencies is unlikely topose much of a challenge.

That said, it’s not always the casethat local currency is best. Many Chi-nese industries, for example, receive taxbreaks for bringing in USD (China beingthe world’s largest holder of USD

reserves). In these cases, some savingsmay be passed on to you if you pay indollars instead.

Take the time to determine what’smost cost-effective for your supplier,and take action to arrange a paymentsprogram accordingly. This will often alsobe the cheapest.

3. Recognize risk and hedge appropriately.Even pegged currencies can exposeexecutives to market fluctuations. Onceit's determined what currency to send,develop a hedging strategy. This maysimply involve assessing risks or formu-lating a forward structure with the helpof a foreign exchange consultant at thebank or payments provider.

Either way, hedging will ensure thatno matter where the market moves,your bottom line is protected.

The sheer number of American busi-nesses that transact overseas without tak-ing the time to hedge their exposuregives a company with an FX strategy akey competitive advantage. Non-deliver-able forwards (NDFs) are an effectivemethod to hedge against fluctuations inpegged currencies like the Chinese yuan.NDFs function similarly to regular for-wards except that, when the contract isclosed out, the currency in question is notreceived; rather the holder simply realizeswhatever marked-to-market gain or lossoccurred over the course of the contract.

BRIC nations present great invest-ment opportunities, but great opportu-nities often come with great risk.Knowledge and a solid strategy can pro-vide a strong competitive advantage.

Victor Hinojosa is director of StrategicCorporate Solutions for Western UnionBusiness Solutions, which provides inter-national payment and FX services tobusiness clients around the world.

BRIC Banking? Do Your Due DiligenceVictor Hinojosa

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