Letters of credit. Channel Traders (UK) is a firm based in Grimsby, that specializes in seafood exports and commonly uses letters of credit (L/Cs) to ensure payment. It recently experienced a problem, however. Channel Traders had an irrevocable L/C issued by a Russian bank to ensure that it would receive payment upon shipment of 16 000 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 Channel Traders (the UK exporter).

b Explain how the cancellation of the L/C could create a trade crisis between the UK and Russian firms.

c Why do you think situations like this (the cancellation of the L/C) are rare in industrialized countries?
d Can you think of any alternative strategy that the UK exporter could have used to protect itself better when dealing with a Russian importer?