BankingCash & Working CapitalRegional

Liquidity and Payments in Focus as Sanctions Deadlines Loom 

By March 17, 2022No Comments

Top concerns remain paying salaries to staff and ensuring local businesses have enough liquidity to meet their obligations.   

Editor’s Note: NeuGroup is running weekly special sessions on the Russian-Ukrainian crisis. Senior executive advisor Paul Dalle Molle, a former banker with extensive European experience, leads the discussions.

By Paul Dalle Molle

Thousands of international companies have been weighing their options since Russia’s invasion of Ukraine. These range from full and immediate pullouts to doing business as usual—and many nuanced positions in between. Even corporates pausing operations or announcing exits face challenges to meet financial responsibilities to staff, suppliers, customers and governments.

  • The details depend on a company’s level of investment, number of employees in the region and its industry. Businesses that sell humanitarian products such as pharmaceuticals and medical devices, for example, will keep operating in compliant ways, in some cases with an OFAC license, as in other sanctioned countries.

How to exit? Let me count the ways. Some companies that are willing to part permanently with their Russian business are stymied by the present situation. Let’s say you have a professional services company and would like to turn it over to your Russian employees. If your clients are mostly sanctioned companies or the government, would the employees want it? Does it still meet the Russian definition of a going concern that could be transferred, or must it be wound down and declared bankrupt?

  • This unprecedented situation is being reviewed by attorneys in Russia and around the world, looking to understand the rules and for answers on next steps.    

These challenges will go on for weeks, months and possibly years before companies definitively cut ties to Russia or—we can hope—the conflict ends and some sense of normalcy returns. Treasurers are hungry to share best practices to make sure that they can do what’s needed as some key banks reduce or withdraw local services and Russian counter-sanctions get rolled out.

  • Many eyes are now focused on the end of the transition period to full implementation of sanctions, with several NeuGroup members mentioning a March 26 deadline for some bank sanctions.

Here are other topics, comments and questions that surfaced this week:    

The top concern remains how to pay the salaries of Russian and Ukrainian staff, both those remaining in-country and those leaving. The consensus among members, though not unanimous, is that purely domestic payments in Russia may continue under sanctions. The Russian subsidiary of a foreign company with RUB liquidity at a non-sanctioned bank in Russia can instruct that bank to pay the company’s employees in RUB with a domestic funds transfer, even if some payments are made to employees with accounts at sanctioned Russian banks. 

  • In the same way that cross-border cash pools are no longer possible but domestic cash pools are functioning as usual, companies must make sure local staff initiate salary payments, with no cross-border nexus. As we have heard since the start of the crisis, corporates are asking employees in Russia to open personal accounts at non-sanctioned banks, but this is a slow and imperfect process. 
  • Dealing with the complexities of bank sanctions while paying employees requires “constant rejiggering of who can we touch, who can’t we touch,” one member said. “Is it the bank that can touch it, can’t touch it; is it us that can touch it, can’t touch it?” He and others are holding frequent calls with compliance and other teams to stay aligned on what’s allowed.
  • One member shared with peers a Western Union B2C solution called Quick Cash to wire to money to fleeing employees once they reach other countries. Another is preparing to use a stablecoin if paying employees through banks proves impossible. He told NeuGroup Insights the company’s IT security group “put us in touch with outside vendors who specialize in helping companies with cryptocurrency, particularly for ransomware payments.
    • “While they have never done this particular structure before, they saw it as very feasible, subject to security protocols and regulatory clearance. Getting stablecoins to our Russian affiliate should be fairly simple. More of a challenge would be the affiliate using it to pay vendors or employees, but that should be solvable.”

The banking landscape continues to shift. The biggest foreign-owned Russian banks continue to receive praise from members for their positive attitude in finding solutions for payments that are compliant with sanctions and local law. That includes Citibank, which one member called “fantastic,” citing its efforts and ability to help the company get payments to employees fleeing Ukraine to other countries, in some cases using debit cards and the bank’s extensive regional network of offices, with limited bureaucracy.

  • Smaller foreign banks, especially branches, are rapidly curtailing activity, announcing exits, and informing members that they will not be continuing business as usual. And some banks consider overdrafts or drawdowns on uncommitted lines of credit to be “new business” and they are telling members that they will not do new business. 

Companies with excess ruble liquidity are, as far as we can tell, unwilling to swap or sell that liquidity to companies that are scrambling for more local funding in Russia. The reason? In a crisis the typical calculations of minimum cash go out the window. The priority becomes keeping the cash for essential payments to employees, suppliers and tax authorities. Having excess cash allows for flexibility in the future, including the unknown costs of winding down a business.  

  • One member reported that even lending excess rubles to an affiliate company looks to be compromised, at least temporarily, by a recent presidential decree that forbids Russian legal entities lending to other entities owned by a parent company located in an “unfriendly country.” Apparently, a company must apply for and receive a specific license from the Russian authorities for such inter-company loans. Members are seeking confirmation from their local regulators and attorneys. 

Many companies are negotiating with banks for early termination of hedges on the theory that negotiating calmly and openly with the banks, and having flexible timing, leads to better prices and eliminates the risk of settlement delays and failures. But not all companies are doing this, with some opting to maintain all their hedges to term and relying on the quality of their counterparties to deliver. There still appears to be no market appetite for rollovers or new trades. 

Justin Jones

Author Justin Jones

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