Ocean traders of North America is a firm based in Mobile, Alabama, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Ocean Traders has an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16,00 tons of fish to a Russian firm. This bank backed out of its obligation, however, stating that it was not authorized to guarantee commercial transactions.
a. Explain how an irrevocable L/C would normally facilitate the business transaction between the Russian importer and Ocean Traders of North America (the U.S. exporter).
b. Explain how the cancellation of the L/C could create a trade crisis between the U.S. and Russian firms.
c. Why do you think situations like this (cancellation of the L/C) are rare in industrialized countries?
d. Can you think of any alternative strategy that the U.S. exporter could have used to protect itself better when dealing with a Russian importer?