Transforming Treasury Takes on New Urgency in Russia and CIS
In recent years, corporates that operate in Russia and the Commonwealth of Independent States (CIS) have increasingly sought to reshape their organisational structures and change the way their treasuries work. Leading companies from the region, which have long taken a different view than their international peers in terms of efficiency, want to adopt new ways of working in order to lower costs, improve visibility and control, enhance risk management and achieve gains in both efficiency and effectiveness.
There have been numerous requests from corporates in Russia and CIS seeking advice, education and assistance in streamlining and restructuring their treasury functions. For example, Citi responded to a request from one leading natural resources company in Russia – a global leader in its industry – by hosting a treasury advisory workshop in order to evaluate the current treasury operations of the group of companies and to jointly define the high-level ‘end-state’ vision and provide recommendations about how it could be achieved. Treasurers in the region want to overhaul and improve their treasury operations.
Case Study
Having been awarded a mandate to conduct a thorough analysis, the bank used its Citi Treasury Diagnostics proprietary research programme and interviews with treasury staff to identify key challenges and create a roadmap to reach the end goal.
The natural resources company’s goals are ambitious – at the initial workshop the corporate treasury team stated their intention to build the best global treasury in the world within five years. By carefully analysing areas that cause problems for the company’s treasury processes, and adopting and agreeing on a transformation plan, the global natural resources company is on course to achieve its aims. A key focus has been on coming up with new ways to perform the working capital management functions that formerly comprised as much as 90% of the treasury’s workload.
Russian Realities
Companies in Russia and CIS are embarking on radical treasury transformation projects for a number of different reasons that may be specific to the company’s circumstances. However, for many corporates there is a common history that explains the need for reform at the current time.
Russia has only had private companies in the past 20 years, following the end of communism. During the Nineties, the country experienced a series of crises that occupied many companies’ attention. Moreover, growth occurred at an explosive pace so there was little time – and often little immediate need given strong profitability – to seek the best and most efficient ways of managing treasury.
Today, many companies in Russia and CIS have reached a sufficient size and stage of their development that makes it no longer feasible to continue to operate in the same way as in the past two decades. They recognise that they need to centralise not only cash, but information as well if they are to be able to effectively manage their operations as they grow within the region and worldwide.
Furthermore, the financial and economic crisis that has engulfed the world since 2008 has put strong pressure on containing costs and moved the need to improve efficiency further up many companies’ agendas. Liquidity is more scarce and costly than before the crisis, prompting many companies to seek to improve how they manage their working capital so they can become less reliant on external sources of funds.
Identifying New Models: SSCs
In many examples, as much as 90% of treasury work is related to working capital management. To improve efficiency, such tasks should ideally be separated from other treasury functions. The most efficient way to achieve this is to create a payment factory and centralise working capital management, along with other functions such as accounting, human resources and IT, within a shared service centre (SSC).
Using standardised processes, a single platform and a single centre for execution and processing of all payments and collections is an international best practice. Currently, few companies in Russia and the CIS have achieved this goal, although many have made it a priority and established special task forces to advance their ambitions.
There are a number of challenges in convincing stakeholders within companies in Russia and the CIS of the benefits of a SSC model. There can be a disconnect between those at the top of an organisation, who determine strategy, and mid-level managers in various participating departments whose buy-in is essential for any successful restructuring. To overcome this, companies need to establish processes that actively push change downward in the organisation.
There are a few regulatory barriers to the adoption of SSCs that create challenges other than netting. For example, on-behalf-of payments (POBOs), where one or more entities are authorised to pay on behalf of other entities within the group, are not specifically authorised in Russian legislation. However, by appointing employees in the SSC as representatives of different areas of the group, the same functionality and efficiencies offered by POBOs can be achieved.
To date, efforts to restructure corporate treasuries to improve efficiency have been led by the largest companies in Russia and CIS. Mid-sized companies are not yet ready for such sophisticated solutions. Most frequently, SSCs are established in Russia’s regional cities, where costs tend to be lower. Many international companies that operate in the region have also sought to reorganise their treasuries in recent years, with some choosing Ukraine as a centre for their SSC given its geographical proximity to Europe.
It is important to note that in order to gain the benefits of centralisation, it is not necessary for a company to rationalise the number of banks it works with to just one. It is possible to view all accounts, including those with third-party banks, using a resource such as Citi’s Infopool. Similarly, TreasuryVision enables corporates to view their overall positions and forecasts, including those with third-party banks, and more effectively manage global liquidity and risk across the enterprise. The ability to improve forecasting is a major priority for companies in Russia and the CIS given their existing challenges in this area.
Enhancing Connectivity
One trend closely related to increased interest in SSC models is a growing enthusiasm among large companies in Russia and CIS for using SWIFT to standardise bank-to-corporate (B2C) connectivity. Indeed, three of Russia’s largest companies have formed a working group with SWIFT and leading banks to devise a unified approach to SWIFT connectivity and use of formats.
While the use of SWIFT still faces some challenges, such as currency controls in most countries, it is being increasingly considered because of recognition of the benefits of standardised connectivity rather than the use of multiple proprietary channels.