Cash & Liquidity ManagementCash ManagementCash Management RegionalHow Aeroflot Improved its Corporate Cash Position

How Aeroflot Improved its Corporate Cash Position

The reorganization of the Russian economy at the end of the twentieth century opened the doors for international approaches to financial management. Most of them were altered to comply with the individuality of the Russian economy and current situation in the market. The first to respond to this change were the Russian transnational, or multinational, companies (TNKs). These companies participate in the global market and operate in a highly competitive environment, which leads them to continuously seek to do business more effectively and efficiently.

It is now widely accepted that cash is the lifeblood of any organization, and efficient cash management is a vital part of a company’s financial stability and success. The necessity to manage the imbalances between cash inflows and outflows, the uncertainty of the future exchange rates and interest rates, and the constant search for self-funding projects require close attention to cash management. Russian TNKs are no exception.

Treasury, a New Business Unit

In the past, managing cash was a complementary function of a Russian TNK’s finance division as the maximization of shareholders’ wealth was believed to be possible through profit making only. In today’s Russia it is becoming increasingly evident that transparency and controllability of the company’s cash flows are crucial for accurate decision-making, which, in turn, is directly linked to the value creation for companies’ stakeholders.

This is especially topical for Aeroflot-Russian Airlines, one of the largest Russian TNKs, which operates over 100 offices worldwide, which leads to dispersal of the most liquid of all assets in petty cash to its locations. This process entails dealing with multiple currencies; cultural, economic and regulatory environments; and banking practices. In this context the picture of a corporate cash position could be seen as a three-factor model of time, money and locations.

As such the role of a treasurer is substantial. Accumulating and managing cash centrally helps not only to improve the overall liquidity, but also to minimize capital expenditures by better utilization of the current assets globally. Ideally the core purpose of a treasurer is to achieve total control of the company’s cash position.

In the case of Aeroflot, the following tasks were set for its treasury division:

  1. Visibility – timely and complete access to the account information around the world
  2. Interest optimization – efficient management of cash surpluses and deficits
  3. Self-funding – squeezing maximum amount of cash for redistribution among different business units

In trying to achieve the above objectives, the company was faced with major challenges.

Managing Bank Relationships all over the World

It is well known that there are two opposite sides to this problem. To create a transparent and universal information tool, and an efficient cash pooling mechanism for the whole company, it is reasonable to consolidate corporate bank relationships. On the other hand, there was the issue of bank exposure – the risk of dealing with only a few banks.

The solution was found in regionalization – diversifying global banking exposure through partner selection according to region. The networks and facilities of different bank partners added value to this choice as cash management banks with the strongest advantages were chosen for each region. In addition, in Aeroflot’s case, the increased volume of operations improved its negotiating power with the banking institutions while providing access to additional credit resources.

Cash Management Solutions Outside the Russian Federation

To improve the controllability of the corporate cash position throughout the world, treasury used several techniques. The choice of each was made under the pressure of external and internal factors, among them: Russian legislation, local banking practice and regulatory environment, presence and facilities of the relationship banks in each chosen region/country, the number of offices per country.

According to Russian financial legislation, the cross-border financing of the offices outside of Russia was prohibited, so zero-balancing solutions were implemented only on a country basis and with respect to local specificity. This technique allowed the selection of the best local or relationship bank, which met most of the corporate expectations. This was introduced in countries where Aeroflot has multiple offices.

Another technique was used for Aeroflot’s East European locations, which have a “single office- single country” model. This technique was the notional pooling solution – a system of efficient interest and information pooling. This system was introduced in 10 countries, which made the activities more transparent for the central office.

Similar results were achieved in regionalizing bank relationships in other regions and countries in the absence of notional or zero-balancing pooling facilities, but by improving the transparency of banking processes and cash flows.

For the countries that for some reason fell out of the regionalization process, an electronic banking platform of a relationship bank was used to gather the account information. This allowed finalizing the described phase in creating a central information pool in Moscow.

 

In addition, the expansion of the International Air Transport Association (IATA) Currency Clearing Services (ICCS) has not left Aeroflot’s treasury unaffected. This system allows the consolidation and transferal of agencies’ sales into the headquarters’ accounts. The ICCS has contributed to centralizing cash inflows throughout the world. It has brought tremendous efficiencies in terms of sales control and collection to the company.

Russian Offices Under Control

Having a number of domestic offices, Aeroflot was highly interested in organizing single cash and information pooling for the entire country.

The specifics of the Russian banking system made it difficult to organize a real tender for cash management banks. Namely, the main banking activities were concentrated in the two largest cities, Moscow and St. Petersburg. Consequently, there was no cash management platform that could either cover all of Aeroflot’s offices or consolidate the information from the local banks, apart from the platform of the Savings Bank of the Russian Federation (Sberbank). Thus the best solution was found with the largest Russian bank network, Sberbank.

 

The sales account balances were physically swept to the master account in Moscow on a daily basis. With regard to time zones, the master account was funded hourly starting at the end of day in Petropavlovsk-Kamchatskiy, the eastern region of the country and ending in Kaliningrad, the western region. At the same time financing was provided into the offices’ sub accounts strictly according to the centrally approved budget.

In addition to the centralized cash management solution, this agreement helped treasury provide offices with unified electronic banking, simplify the tariffs within Russia, and shorten the float time.

New Challenges

Nevertheless, the Russian TNKs are only half way to achieving the primary goals in seeking global cash management solutions. There is plenty of room to move forward with increasing efficiency of treasury performance.

The recent changes in Russian currency regulation slowed the process of regionalization of the bank relationships, but there is still some space for further consolidation. The organized zero-balancing and notional pooling schemes for international offices are working while TNK’s licences that were issued by the Russian Central Bank are active – mostly until the beginning of 2007. From that time onwards, it is most likely to be done in a new way. The general requirements that were set for the Russian companies force them to consolidate all international sales directly into the central offices’ accounts. Thus the entire treasury cash management system must be reconsidered to ensure that it meets the requirements of a new regulatory environment.

With regard to domestic cash management, the main issue in managing cash in the Russian Federation is finding an adequate electronic banking platform, which will enable decision-making with timely and accurate information. The main advantage of such a platform is advanced functionalities such as real-time information, multi-bank reporting, etc. The expected further expansion of foreign bank activity in the Russian Federation might bring alternative cash management solutions to the market, which may, in turn, lead to a re-evaluation of current domestic systems.

What to Expect in 2005-2007

The 2004 liberalization of the currency regulation opens new horizons for cash management in Russia and the rest of the world. Further developments of cash management facilities in the Russian Federation are expected in the near future. Russia is looking forward to a new cash management environment.

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