Cash & Liquidity ManagementFXRussia-Ukraine War: Corporates assess exposures and act to mitigate risks

Russia-Ukraine War: Corporates assess exposures and act to mitigate risks

Corporate treasurers take action to mitigate risks amid escalating Ukraine crisis

As the geopolitical crisis surrounding Russia’s invasion of Ukraine grows, and tensions mount between the Western world and Russian President Vladimir Putin, corporates are examining their exposures.

For those treasurers whose companies have strong Russian trade links, customers and a reliance the countries energy supplies, an ever-growing list of economic sanctions imposed by the west brings huge financial risks.

Sanctions placed on Russian banks, restrictions on trade and investment, as well as Germany’s suspension of the Nord Stream II gas pipeline, all bode badly for corporates with business links to Russia.

Moreover, an agreement between Western powers to block certain Russian banks from the international banking system SWIFT, represents a major move that will hamper payments and business between Russia and the West.

“Banning Russia from SWIFT will have a massive impact, but given European reliance on Russian energy, the effect would work both ways,” says Simon Ring, global head of maritime and trade technologies and ESG at intelligence company Pole Star.

“The Russians would not get paid, but that would block access to Russian gas, oil, and other commodities. SWIFT is orchestrated from Belgium and does not in theory have to listen to other organisations, but banks do,” adding that the sanctions will also have major consequences for trade between Russia and the West.

“When it comes to exporting goods or commodities from Russia, banks and shipping companies will have to screen any transaction to be certain there are no links to sanctioned oligarchs or financial institutions. It may be hard for companies operating in Russia to prove that. But if banks or carriers get it wrong, the US authorities and other international regulators may come down hard on them with penalties.”

Energy price shock

With the prospect of further sanctions imposed on Russia energy price volatility has soared in recent weeks, with Brent crude rising above $105 a barrel for the first time in seven years – something that bodes poorly for all corporates reliant on Russian oil and gas.

“Considering how rapidly this has evolved and how volatile the markets have been for weeks, I wouldn’t be surprised to see sentiment continue to bounce back and forth,” says Craig Erlam, senior market analyst for UK and EMEA at Oanda. “There’s nothing stable about this situation and that will likely continue to be reflected in the markets.

“I expect we will continue to see plenty of volatility in oil markets for some time, with plenty of interest in the dips as geopolitical tensions remain so high.”

Exposed corporates face major risks

The imposition of financial sanctions on Russian banks and the halting of the Nord Stream II project have added significant layers of risk for companies operating in sectors such as manufacturing and industrials, says Frank Rust, group treasurer at Bucher Industries.

“Treasury is highly responsible for risk management as a whole and we have to both quantify and eliminate all risks,” says Rust. “In treasury, we have to look at all the risks facing the company as a whole at any point in time, and this includes any geopolitical challenges that create additional financial risks for us.”

Bucher Municipal, specialises in the supply of municipal vehicles and equipment in Kaluga, Russia, and operates a number of production sites throughout the country.  Escalating tensions between the West and Russia, has placed a degree of uncertainty on these operations, says Rust.

“It is very difficult to make strategic decisions as to what we can do right now,” says Rust. “We built up our production sites in Russia five years ago, and we cannot do that much to change the situation now. At the very most, we can only shut them down if Western world tensions increase with Russia.

“If further sanctions are placed on Russia, then Russia will place similar sanctions on Europe and the rest of the world. This will impact our people, our products and the markets in which we operate.”

Conservative approach

Rust explains that the greater risks to which Bucher Industries is now exposed has led the company’s treasury department to tighten up its wider risk management and become even more risk adverse in relation to all exposures.

“Our policy is a very highly conservative one and calls for no risk-taking and keeping the company’s liquidity always in excess,” he says. “Our approach is one of safety first – we don’t want to lose money on any investment. A lot of other industrial companies are following a similar conservative approach.”

“This is all very challenging and core to a company’s treasury function. It has implications for our wider investment strategies, and our cash,” he adds.  “There are now wider financial risks and we have to keep that risk transparent – and take steps to eliminate it.”

Prior to the Russian invasion of Ukraine, Bucher Industries analysed all its cash positions in Russia and began withdrawing cash held in Russian banks.

“We are also translating cash held in the Russian Rouble into either US or Swiss dollars,” explains Rust.

According to a report by Danske Bank, market reactions to Russia’s invasion of Ukraine have significantly impacted Russian Rouble-linked assets, with the currency losing value against other global currencies.

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