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The Resource for the Global Finance Profession

Turmoil in Ukraine is Wreaking Havoc on Treasury and Finance

  • By Maria Korolov
  • Published: 2014-05-16

Treasury and finance executives whose companies do business in Russia, the Ukraine, and other former Soviet republics are already feeling the effects of the Crimean crisis on their bottom lines.

The turmoil has caused the ruble’s exchange rate to plummet, making it more expensive for companies to import goods into Russia and to service existing debts. The crisis is also making it more difficult for companies to borrow money. In addition, sanctions against individual banks are complicating cross-border payments.

Devaluation Woes

Although January was a “pretty good month” for the Russian operations of Sika, a Swiss construction chemicals manufacturer, “February and March got worse,” said CFO Sergey Berezovka in a phone interview from Moscow. “By the end of the first quarter, growth came to zero.”

The biggest reason? The decline in the value of the ruble. “We have a large amount of imports,” Berezovka said. “Over 60 percent. The devaluation of the ruble has affected the cost of raw materials, and this has had an effect on our profitability and financial results.”

Fears are high that the crisis in the Ukraine and international sanctions could tip Russia into a full-blown recession. “Every third Russian company has felt problems as a result of the situation in the Ukraine,” Berezovka said.

To address the issue of rising import costs, Berezovka’s company is devoting a great deal of effort to finding local replacements for materials that it currently imports from outside the region. Finding local replacements can require additional capital, however, and the devaluation of the ruble will hit hard here, as well.

“If we try to borrow money to replace imports with local production, the cost of borrowing is going to be higher by 2 or 3 percent at least,” Berezovka said.

Some companies have such a hard time getting financing overseas that they are looking at internal sources, Berezovka added. But even that is getting harder. According to Russia’s central bank, capital flight exceeded $50 billion during the first quarter of this year, up from around $27 billion at this time last year. This is the highest level of capital flight since the 2008 financial crisis. That number is estimated to go as high as $100 billion for the year as a whole.

Nokia Solutions and Networks is seeing a similar problem, as the devaluation of the ruble is making it more expensive to pay for imports and to repatriate profits to investors. “The foreign exchange rate of the ruble started devaluing against the euro and the dollar even earlier than the Ukrainian grivna,” said Irina Gridneva, Moscow-based head of accounting and controlling for Nokia Solutions and Networks’ northeast region.

“So now we have to spend more rubles or grivna to buy the hard currency,” said Gridneva, who is responsible for 14 countries in Eastern Europe, including Russia.

Customer spending down

According to Russia’s Federal Statistics Service, real disposable incomes fell 6.8 percent in March compared to the year before. “We understand that our products are not being consumed on as regular basis as they were before,” said Pavel Artemov, strategy profitability management director at PepsiCo in Moscow.

Of particular concern are sales of juice and dairy products in the Ukraine, since patriotic Ukrainians might prefer to buy locally-sourced versions of these products instead of those imported from Russia. “All our other categories—beverages, snacks—are international brands, so I don’t expect the same things happening with them,” Artemov added.

The full version of this article will be available in the June issue of Exchange.

Copyright © 2015 Association for Financial Professionals, Inc.
All rights reserved.

Copyright © 2015 Association for Financial Professionals, Inc. - All rights reserved.
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