Cash & Liquidity ManagementCash ManagementCash Management RegionalRussia: Still a Challenge for Corporate Treasurers?

Russia: Still a Challenge for Corporate Treasurers?

The Russian banking sector came through the financial crisis of 2008-2010 relatively unscathed. The number of banking sector liquidations was relatively small, and none of the systemic banks were reported to have collapsed. However, this does not mean that there were no difficulties in the banking sector. The approach to managing the challenges this time was different to previous crises. The Central Bank of the Russian Federation (CBR) had decided, in co-operation with the government, to use a significant share of its reserves on keeping the banking sector afloat, hoping to avoid agitated queues outside the banks, a liquidity crisis and bankrupted banks.

Banks that were identified as being in distress were quietly taken under the government’s wing, with the general public often not even realising that their bank’s ownership had changed. This was obviously an expensive operation and the final costs are yet to be seen, if they are ever published. Restructuring and consolidation – and, most importantly, the development of operations and client services – are still some way off in the future.

It appears as though the banking sector still needs to focus on the problematic loans on their balance sheets, and the financing operations have not yet seen the volumes wished for, and encouraged by, the government. Therefore, the expected boost to the economy from the banking sector may still be some way off.

Despite the events in the banking sector, the general business climate has improved and growth forecasts for the next few years are positive due to increased oil prices, although with some contextual concerns.

Figure 1: Stock Index MICEX and RTS 8/2008-11/2010

Source: Reuters
Figure 2: Oil Price and CBR Reserves

Source: Reuters

It is important for the normal operational activities of corporate treasuries that the economy is doing well and that things are developing smoothly in Russia. In times of distress, liquidity traditionally becomes quickly hidden under a cloak of laws and CBR regulations that are interpreted to prevent liquidity from flowing out of the country. Short-term portfolio investments are the first to disappear, but at the operational level the regulations can cause headaches and inefficient cash management even in connection with the transfer of small amounts of money.

Currency Control and Transaction Passports: A Barrier to Overcome

For some corporate treasuries, the phenomenon of currency control is still new or not yet fully understood. Basically the Russian ruble (RUB) is said to be a freely-convertible currency, but when transferring currencies between resident and non-resident accounts (normally abroad from Russia) the transactions must pass through currency control procedures.

The banks act as agents of the CBR and have to check all commercial payments exceeding US$5,000 or equivalent before releasing payment. To execute a payment, the company needs a transaction passport under which payments with numerous transaction codes are carried out. It is understandable that some arrangement needs to be in place in order to maintain payment statistics for the CBR, although, if needed, the system already exists for other purposes. The need to use currency passports in Russia means high additional annual expenses for companies involved in foreign trade and with a need to receive or send money abroad.

Payments under the currency control system also take longer compared to straight-through processed (STP) payments, and these delays may occasionally be quite long if the documents to be checked under the transaction passport are complicated or not readily understandable to non-English speaking staff at the banks. Banks with internationally-oriented staff and proficient language skills are naturally able to offer better quality services to their clients compared to locally focused banks. Once the bank understands the client’s detailed business needs, it is also able to bring benefits to the client such as faster document processing that saves the client time.

From the western European point of view, this currency control might be seen as an extra cash management cost and nothing more than a source of extra income for the banking sector. So-called statistical issues could be catered for in many other ways, if desired. It will be interesting to see how long this phenomenon lasts in a country that wishes its currency to become fully internationally recognised. “Well lobbied, it could last pretty long,” said a Russian banker once when asked for his opinion. Personally, I do not support this interpretation.

Cash Pooling Possible, but ….

The other local cash management challenge is the unclear or almost non-existent opportunities to efficiently manage excess liquidity within the group. Relatively simple western European cross-border cash pooling solutions are, in practice, impossible in Russia. The attitudes of the authorities and different (mis)interpretations of the regulations and tax laws prevent the establishment of efficient solutions for companies wishing to optimise the usage of group liquidity.

Excess funds transferred from a subsidiary to another group unit must be regarded as loans between companies, meaning a need to show the relevant documents to the tax authorities should the company be subject to a tax inspection. The legal opinion of the law offices supports solutions for zero balancing arrangements for corporates, but this is only applicable within Russia. Lawyers also strongly suggest that groups should have a clear holding company structure, with the operational companies whose money is ‘pooled’ to the master account under it.

An argument often heard is that cash pooling would be used in Russia to hide money from the authorities and to avoid paying taxes. Difficult to comment on this, but the authorities may have some past experience on which their opinions and arguments are based. We do not see this problem at Danske Bank Russia.

Banks that belong to international groups, and that have clients already using these services in other countries, have a clear advantage in bringing their understanding and solution-seeking attitude to their clients in Russia. However, local requirements may require considerable explaining before the most suitable and feasible solution for the client’s needs can be implemented in accordance with local requirements. In short, it is worth remembering that the environment does not support companies that plan to ‘plug ‘n’ play’ their Russian units into their existing group cash pooling systems.

Local Payments and Clearing

The Russian clearing system within the country works well. Standard commercial RUB payments are normally cleared from one account to another the same day. Despite having nine time zones, the country manages things fairly well but it could be more co-ordinated. The bulk of the payment volumes are settled within the Moscow region and if the payments are initiated or end in other regions, the intra-country payment system works well here, too. For years plans have existed to create a single online clearing system for the entire country, but it seems that the big banks are not yet sufficiently convinced of the proposed solution and are therefore not willing to subscribe to such a system as of yet. It would a considerable improvement if the CBR implemented this new online clearing system in Russia.

A small but important detail to bear in mind when considering RUB payments in Russia is that one should either have a local user(s) of the banking software, or the non-Russian user(s) should have at least a basic understanding of the Cyrillic alphabets and preferably also some skills in the Russian language, as the local SWIFT messaging requires information in Cyrillic letters in order to be processed as a STP payment.
Some banks provide banking software in English as well as in Russian language, and some even help their clients to key in or monitor payments in English in the software.

The RUB has quickly assumed a much larger role in the economy and particularly in trade. Russian companies want to receive offers and do deals with their trading partners in RUB. This helps them to develop and focus on their own core businesses rather than struggle with potential currency losses – particularly when they have no experience of using derivatives for hedging and their banks have no experience or even access to such markets. This means the currency risk lies with their counterpart.

The importance of the RUB will grow due to this competitive aspect and it is also supported by the fact that in deals between resident companies payments must be made in RUB.

Ruble Hedging and Financing

The uncertainty during the banking crisis also had an impact on the RUB. When interest rates hit the roof, the RUB was quite severely devalued. The ‘managed devaluation’, as it was called, slowed the drop but couldn’t prevent it. Hedging costs were already high as the global crisis was affecting Russia despite the government claiming the opposite. As the crisis eased, the RUB has regained a significant share of its lost value, but this year has also shown that volatility remains, as does the need for hedging. The nominal changes in the value of the RUB against, for example, the euro in 2010 alone have been within the range of +/- 15%. Therefore, when drawing up the budget for next year, it might useful to spend a moment or two considering what RUB hedging should be included in operational plans when setting targets for next year’s income from Russian operations.

Figure 3: RUB IRS – Projected Interest Rates for Five Years

Source: Bloomberg

Standard forward deals are available from most international banks in Russia, as well as from some bigger Russian banks. It might, however, prove more flexible to set up schemes for these operations with subsidiaries of international banks with which the company has had dealing in other markets and currencies beforehand. It has been mentioned that the documentation connected with establishing trading lines can be surprisingly cumbersome in some local institutions.

If using RUB loans for financing investments or working capital, then hedging is also worth considering. RUB interest rates are currently record-low because of large amounts of liquidity in the market. The general reluctance of local banks to lend money, or their tendency to reduce lending capacity for other reasons, keeps liquidity in the money market and the CBR has not yet focused sufficiently on inflation to affect interest rates. However, this may change later. Relatively low RUB interest rates, combined with the longer maturities currently available plus inflation, could result in low real interest rates for companies going forward.

When looking at average interest rates on new loans, both in hard currency and in RUB, the average margins show that the margin environment is fairly high compared to western standards.

Table 1: Average Credit Interest Rates in Russia

Source: CBR

Companies using their international banks as their partners in Russia are able to discuss group solutions and agree on terms applicable in all markets, including Russia, and in that way achieve savings on their interest expenses. Moreover, negotiations and agreements will be conducted in ways that are already familiar to companies in their home market.


Despite all its peculiarities, Russia has moved forward in many areas. When looking at the financial sector, its stability, services, suppliers, etc over the past three years, the Russian banking sector has clearly suffered from the consequences of the global financial crisis. Before that, the banking sector’s position was undermined by poor risk management by certain Russian banks. However, the banking sector did not require international reserves for bail-out operations, as the national reserves were more than sufficient to rescue the sector.

Given this, one could argue that things were fairly sound and are fairly sound even today. The system may be suitable for this country’s general needs at the moment.

It is evident, however, that foreign companies used to efficient and modern solutions, outstanding service and partner-type banks in their home markets would benefit from having such a partner in Russia, too. Competition is also tough among international banks in Russia. The main products do not differ much, not even here in Russia. Top quality service combined with a solid understanding of clients’ needs in the Russian market, as well as an active partnership-type approach in servicing clients and developing suitable solutions, are key to mutual satisfaction.

Russia is still a challenge for corporate treasurers. The tough rules and regulations will remain for quite a while yet, but with patience and tolerance it is possible to navigate in this huge market in co-operation with solid partners.

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