The Impact of Russian Aggression on Regional Treasury & FX

Commentary

This call was held at a point in the conflict where Ukraine had made serious inroads into Russian held territory, and there was a lot of talk about the potential use by Russia of nuclear weapons. So, one of the questions was whether treasurers are expecting a nuclear escalation, a spread of the conflict, and what to do to prepare for it.

None of these concerns were mentioned. For most companies, the business in the countries surrounding Russia and Ukraine is minimal. The bigger concern is, and remains, the impact on the business outlook in the rest of the world, the impact of increasing interest rates, inflation, and logistics issues – though logistics seem to be improving. 

Instead, most participants continue to do business in Russia – mostly because they are in industries which benefit from the health and humanitarian exceptions to sanctions. In other cases, the business is essentially local, but uses the corporate brand – this means care must be taken when withdrawing. Having an exception from sanctions still leaves issues:

• Even if your currency transactions are legal, a lot of banks refuse to handle them, because they do not want to take the risk of dealing with the country.
• Many banks withdraw, reducing the choice of service providers. There was a lot of discussion about Citi – most participants use them, but there has been some confusion as to whether they are staying. The message to all participants is that they are.
• Even when cross border transactions are processed, there can be a lot of delay: the banks’ compliance departments examine everything very closely – but they are overworked.
• The definitions of sanctions exempted products are inconsistent between various sanctioning groups (notably, the US and the EU), and they leave logical inconsistencies
• The sanctions and regulations on both sides are something of a moving target, so compliance can be challenging.
• There was an informal rouble zone in the countries surrounding Russia: Georgia, Kazakhstan, etc. This business is now moving to USD and EUR, which has reduced liquidity. 

Despite this, our participants found it is generally possible to make payments into and out of Russia, even if the process can take a long time. Banks are moving to close offshore rouble accounts, especially in London, but they are being flexible over deadlines. Dividends are definitely not allowed, but most other types of payment seem to be possible. While some participants continue to move towards the exit – protecting local employees remains a priority – other are finding that their business in Russia is doing surprisingly well.

In terms of banking, everyone seemed to be using Citi [this discussion took place before Citi announced their withdrawal from Russia - from March 2023], though most were opening accounts with Raiffeisen as a backup. This is a return to the Communist era, when Raiffeisen was the main conduit for payments to and from Russia.

Bottom line: for our treasurers, the main concern is slowing economic growth in the west, increasing energy prices, higher interest rate and inflation. This is impacting their main business, which is typically not in Eastern Europe. As for Russia itself, people continue to move towards the exit – but those who have to stay, for mostly humanitarian reasons, are finding that business is complicated - but it continues.