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The Resource for the Global Finance Profession

Ukraine Turmoil Wreaks Havoc on Treasury and Finance Groups

  • By Maria Korolov
  • Published: 2014-07-30

Treasury and finance executives whose companies do business in Russia, the Ukraine, and other former Soviet republics are already seeing the effects of the mounting 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. “By the end of the first quarter, growth came to zero.”

It’s not just his company that’s affected, Berezovka added. “I was just at the Global 100 conference, where we met a lot of general managers, around 50 companies, and everybody said approximately the same,” he said. “The beginning of the year was good, but as of the end of the quarter, things got worse and worse.”

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.”

The ruble is down by roughly 8 percent against the dollar since the start of the year. Other economic indicators are down as well in this time frame—the Russian stock market lost a fifth of its value in dollar terms. Russia’s central bank raised interest rates from 5.5 percent at the beginning of March to 7.5 percent in May, and the International Monetary Fund cut its growth forecast for Russia for the year from 1.3 percent to just 0.2 percent.

According to the HSBC April Manufacturing PMI survey for Russia, there’s been a contraction of output and worsening of other economic conditions. It’s the sixth consecutive month of contraction for Russia’s manufacturing industry.

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.

Re-thinking the supply chain
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.

In fact, at the end of April, S&P cut Russia’s rating to BBB-—just one step above junk. The agency cited capital flight and the Ukrainian crisis as major concerns.

In addition to paying for imports, Sika also needs foreign currency to pay down its debt to its parent company. “Last year, we were actively paying down debts,” Berezovka said. “This year, profits are down, so we are no longer paying off the debt to our parent company. Plus, since our debt is in euros, our debt has increased automatically as a result of the devaluation of the ruble.”

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.

Safeguarding cross-border payments
Gridneva said her company does business with Citibank and two other foreign banks and, so far, has seen no problems making international payments. If all payments in and out of Russia were to cease, the company would no longer be able to import its equipment, or make payments to shareholders.

However, the emerging markets are, in general, sources of substantial value and profits, Gridneva said. “For my region, the majority of sales are from Russia, Ukraine, Turkmenistan, and Uzbekistan,” she said. “I personally doubt that Nokia... would forget this business. It simply means that the company would be carrying a huge loss for the near future.”

If Nokia were to walk away from this market, even temporarily, it would create an opportunity for Chinese competitors to swoop in, she said. Customers would suffer as well, she added, “because the European companies bring better equipment.”

Sika’s Berezovka said that his company is also concerned about the potential disruption of cross-border payments. Like Nokia, the company’s primary bank in Russia is Citibank. But the company has also opened an account in Sberbank, Russia’s biggest bank. “We’re insuring against the possibility that Citibank ceases operations in Russia,” he said.

Customer payments are now made to the Sberbank account, Berezovka said, and are only transferred to Citibank when needed. Sberbank is not currently on the list of banks sanctioned by the United States. Those are mostly smaller banks, including Rossiya Bank, which is the 17th-largest bank in Russia by assets, 36th-largest SMP Bank, 90th-largest Sobinbank and 197th-largest InvestCapitalBank.

In April, Russia complained that JPMorgan blocked a transfer from a Russian embassy to an insurance company part-owned by Bank Rossiya. Relations between companies in Russia and those in the West are affected by more than just these sanctions, however. The political crisis is taking a toll, in other ways, as well, including the fear of future sanctions.

“I have heard that some western counterparties have stopped interacting with Russian companies,” said Berezovka.

For example, in late April, Shell CFO Simon Henry told reporters on a conference call that the company will hold back on starting new projects in Russia, and will put on hold its early-stage plans for developing shale gas in Ukraine.

The crisis is affecting trading partner relationships in a number of ways, said Nancy Atkinson, senior analyst at Aite Group’s wholesale banking and payments practice. “It’s a broader problem than just payments,” she said. “How are you going to continue getting goods and services from your suppliers in the Ukraine or Russia if things get worse? I think it’s pretty important for companies to be looking at alternative suppliers.”

Customer spending down
But it’s not just the business-to-business transactions that are affected by the recent crisis in Russia. Individual consumers are feeling the heat, as well.

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.

Stressing that he was speaking generally, and not as a representative of PepsiCo, Artemov said that the industry has substantially lowered sales forecasts for Russia, the Ukraine, and for the other former Soviet countries in the Commonwealth of Independent States. “We really feel the pressure from the market,” he said.

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.

Russia is Pepsi’s second-largest market by revenue after the U.S. In an April earnings report, the company said that its revenue in Russia grew 10 percent in the first quarter compared to a year ago. It didn’t disclose financial results in Ukraine.

“We expect that we’re going to see continued profit growth coming out of Russia,” PepsiCo EVP and CFO Hugh Johnson told reporters in the April earnings call.

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

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