Russia Sanctions Strategy: Corporates Prepare for Disruptions

By February 3, 2022February 17th, 2022No Comments

Members at a special NeuGroup session discuss banks, dividends, SWIFT payments and more amid Russia-Ukraine tensions.

Cross-border payments with SWIFT, relationships with local and foreign banks and repatriating funds are among the key focal points of corporate treasury teams planning for possible US and EU sanctions if Russia attacks Ukraine. That takeaway surfaced Wednesday at a NeuGroup session on contingency planning attended by more than 80 members—a packed virtual house that shows the significance of the situation for corporates with business and staff in Russia.  

  • The session was led by NeuGroup’s Scott Flieger, director of peer groups, and Paul Dalle Molle, senior executive advisor and a former international banker. Mr. Dalle Molle observed, “Mostly, people are wondering how to improve what they are already doing and how to prepare for changes to SWIFT or other funds transfer regimes if sanctions bite hard. Very few are looking at massive repatriations because of this crisis; it’s too late for that.” 
  • He noted that all the members at the session have some experience dealing with sanctions in Russia and elsewhere, and will all fully comply with US and European laws. That said, as long as corporates are allowed to operate in a country, they need to find the best sanctions-compliant ways to continue their business operations.

Dividends. Repatriating money from Russia through dividends generated considerable discussion, much concerning how long it takes, even in the best of times. Members said it ranges from three to 11 months to organize and pay dividends, although one treasurer is on the verge of accomplishing it in just six weeks. His company has retained earnings from its last fiscal year that are available to dividend and doesn’t have to wait for the official closing of the 2021 books.  

  • Documentation and the relative complexity or simplicity of a corporate’s legal entity structure seem to be the two biggest issues that delay the process, Mr. Dalle Molle noted.  
  • Another member said his company had not made dividends from Russia a priority following an entity restructuring because the business wasn’t generating significant cash there at the time. But that changed in the last year as its business grew. He called that bad timing in terms of prioritizing the movement of retained earnings out of Russia. “But it’s a priority now, I can tell you that,” he said.  

Banks. Mr. Dalle Molle, who has been talking to corporates for weeks about Russia, said some members believe that having a mix of indigenous and international banks provides a natural hedge against the risk of restrictions, sanctions or counter sanctions that could affect foreign banks differently than local institutions. At this point, though, members are not rushing to open new accounts at local banks.  

  • Citibank was by far the name most frequently mentioned by members as their main local bank in Russia. Other banks named often included Rosbank (SocGen) and Unicredit. Deutsche Bank, MUFG, Credit Agricole, BNP, JP Morgan and VTB were also mentioned. There was some speculation that a large Asian bank like MUFG might have more flexibility than a US or European bank in the event of sanctions. 
  • Some members are discussing with international banks whether funds held by their Russian subsidiaries in the Moscow branches of those banks would be affected by sanctions differently than deposits held in, say, the London branch of the same bank.  

SWIFT and payments. Some news reports indicate that the likelihood of sanctions including a SWIFT cutoff is receding, in part because it may do more harm to Western interests than damage to Russia, Mr. Dalle Molle noted. But some companies at the meeting mentioned exploring the option of making prepayments for their businesses just in case the situation worsens.  

  • If a SWIFT alternative is needed, the most likely channel seems to be the Chinese Cross-Border Inter-Bank Payments System (CIPS). It’s a very small system compared to SWIFT, but it works, and 13 Russian banks are already members.  
  • In addition, Mr. Dalle Molle said, a digital ruble is currently being tested in Crimea, but that won’t likely be a viable alternative for several more years. 
  • A “mini-SWIFT” for humanitarian payments called INSTEX that’s sponsored by the EU could potentially be used by life science companies and other corporates with cross-border humanitarian goods and services. 
  • For domestic payments and the use of cards, the consensus is that the Russian payments clearing system SPFS and the domestic Russian card system “Mir” (NPCS) will work well during sanctions and that companies can use these for most of their local payment, local currency needs with customers, suppliers and staff.  

Contingency planning. Mr. Dalle Molle said multinational companies have been derisking in Russia for a decade, even as they expand their business there. But the heightened risk of sanctions or other business interruptions means it’s worth reminding corporates doing business there to have contingency plans for: 

  1. Business process optimization 
  2. Partner and supplier risks 
  3. Royalty structures 
  4. Cash management, both domestic and cross-border 
  5. Depreciation and devaluation risk 
  6. Funding risk
Justin Jones

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