The payroll processor’s pullout is another snag facing corporates. Others: collecting receivables, payment delays, supply chain woes.
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
News that payroll processor ADP had notified one NeuGroup member company that it will cease payroll operations in Russia on June 30 generated plenty of discussion at our most recent weekly Russia crisis session. One treasurer called the information “pretty shocking.” Most multinationals continue to pay Russian staff even if the companies have suspended operations, meaning they still require payroll processing and payment services.
- An ADP spokeswoman did not confirm the date of the company’s pullout from Russia. But in a statement, ADP said, “We have suspended all new sales of ADP services in Russia. We have a relatively small percentage of existing multinational clients, headquartered outside of Russia, with employees in Russia. While there are complexities to the work we do, we can confirm we are in the process of transitioning our operations out of the country while working closely with each client to limit any impact to their business and their employees.”
What now? It is theoretically possible that ADP could provide the processing from outside the country, but so far ADP has not provided any such guidance. So, members are looking for alternative processors. The most mentioned alternative is ABU, whose website says it is a partner of ADP in Russia. Another company named: Accace, a Slovakian company active in Russia.
- One possibility is to separate the processing from the payments. One member mentioned that the former KPMG business in Russia and Belarus (which will change its name once its exit from the KPMG network is complete) can make the payroll calculations but not payments. He said sending domestic wire transfers in Russia to make payments did not appear to be a scalable solution.
- Clearly, multinational companies want to outsource both payroll processing and payments to one supplier; making wire transfers themselves is the least preferable option.
Cross-border collections are very difficult. Several members have reported they have long-overdue receivables from customers and former partners in Russia that simply stopped paying after their companies announced exits. One member’s former partner even opened a bank account at a non-sanctioned bank to make the final payments under their contract. However, the funds are not forthcoming, and the partner blames the new bank for long bureaucratic procedures.
- Other members believe that unpaid receivables are common in high-risk emerging markets when commercial relationships end. All of these are in the cross-border category, so the multinational company has very little recourse and low hopes of enforcing its claim.
But most domestic RUB collections are being made, sometimes slowly. Members report, so far, that most Russian customers are paying their domestic RUB obligations to the domestic subsidiaries of multinationals, even if there are some delays. Russian regulators have been allowing commercial transitions and payments to take place much as before, even as they are increasingly restricting dividends and especially intercompany loans.
Funds transfers are increasingly delayed or rejected. One member recounted a blocked payment caused by misspelling the name of the beneficiary, an issue that was ultimately resolved. Members also report that large banks have big payments backlogs as they make extra efforts to scrutinize the names and ownership of the sanctioned people, companies, institutions and assets.
- Despite high-tech solutions at big banks, all exceptions or suspected inspections get careful human analysis, and delays are inevitable. Some payments are indeed rejected, but most are sanctions compliant and get processed. A few Western banks have declined to make legitimate, sanctions-compliant transactions out of an excess of caution, but these frustrating situations have mostly been resolved.
Supply chain problems and supply chain finance problems are stopping some in-country activity prematurely. One company’s production facilities could not get the needed inputs for logistical reasons, so its plant shut down even before the company had announced suspension of activity in Russia. Another company‘s supply chain finance supplier stopped processing transactions, so suppliers have halted shipments.
Members increasingly fear cyberattacks as punishment for suspending Russian business. NeuGroup is planning to dig more deeply into this problem in future sessions. One member offered to share her company’s global ransomware report (not specific to Russia or Ukraine) with other members for background. So far there are few reported attacks. Members speculate that this is thanks to the intense forewarning by US and EU officials that may have allowed companies to improve their defenses. Also, Russian hackers have their hands full attacking Ukrainian targets and fighting off the well-known efforts of Ukrainians and others to help Ukraine.
Tax audits as a counter-sanctions weapon? One member with substantial activities in the country is receiving regular inquiries from local tax officials regarding dividends, withholding taxes and other transactions. Another member reported last week that there are weekly inspections to make sure that the company’s premises are still open and staff are working.
Semi-official counter-sanctions? According to one member, a large US tech company that suspended retail and wholesale sales in Russia is being sued by a local consumer protection organization.The claim is that by ceasing operations in the country, the company effectively stopped servicing customers, violating local law. The member fears the company’s assets being frozen and seized to pay consumer claims.