Russia-Ukraine: updates to the treasurer’s checklist

Go back 17 March 2022

17 March 2022

Events relating to the Russian invasion of Ukraine are evolving rapidly. Any company facing a direct or indirect material impact from the invasion will need to consider their approach to the crisis. Part of the decision-making process will be the likely timeframe being considered – i.e. will the war be resolved quickly and Russia invited back into global organisations (such as SWIFT) or will Russia be frozen out of normal trading relationships with the rest of the world for many years. Along with other parts of the organisation, the treasurer will need to consider a number of short- and longer-term risks and potential mitigants.

As treasurers one of our main responsibilities is to protect the assets of our companies and mitigate any financial risks of doing business. Treasurers will need to evaluate the risks and provide input into the approach taken by their organisations – whether at a global, regional or local level. To assist the treasurer and wider finance community the ACT’s Policy & Technical team has compiled some general points for consideration.

Sanctions

The list of sanctioned individuals, companies and financial institutions is growing.

  • Is it clear, who in your organisation is responsible for ensuring that sanctions rules are being applied in a timely manner?
  • Although there may be some replication between the lists issued by the UK, the EU, the US and other countries, it is important that all relevant internal lists are being updated on a regular (and potentially real time) basis. Many companies will be using a 3rd party or their banks to process payments. Have you had a recent conversation with your payment provider to make sure that appropriate and effective sanctions screening processes are being applied to payments and receipts? This check needs to be applied to established and long-term relationships as well as any new ones.
  • As well as supplier and customer payments, have you checked for other payments such as bond interest, dividends and pension payments?
  • In addition to the checking of payments, procurement teams need to review existing contracts as well as ones being negotiated to ensure that they are not dealing with sanctioned organisations.
  • Check that any analysis of sanctions across your supply chain includes the impact of correspondent and other intermediary banks and financial institutions. This may require significant effort as the lack of end-to-end visibility of payments may hinder the level of transparency of payments. The use of products such as SWIFT gpi may help companies identify all of the parties involved in the making and receiving of a payment.

This situation will become more complex as multinational companies shed long-term relationships and joint ventures with Russian companies and individuals.

Trade finance and credit insurance

  • For businesses trading with Russian partners (directly and indirectly), it is important to undertake an inventory of what goods are where. Have goods already been shipped (either from or to Russia)? If not, can the deal be cancelled? If goods are already on their way, what options are available?
  • If there is any doubt, do you have appropriate contacts at HM Treasury or the Department for International Trade?
  • If credit insurance covering targeted companies is in place, have you been in touch with your insurer to assess what your rights and obligations are?

Investments

Fund managers have been working hard to review their holdings and assess if they hold any sanctioned issuers. In addition a number of money market funds have seen significant outflows as a direct result of the invasion. Treasurers should therefore check:

  • With their fund managers if they are experiencing any material changes to their total assets under management
  • Consider doing a “look through” analysis of the true diversification of their investments given that different fund managers may be investing in the same securities from the same issuers

Counterparty risk

  • If you currently have investments in Russia that are trapped, do you know what the total exposure is and which counterparties and banks are involved?
  • On the basis that it is currently not possible to access or transfer the funds out of the country, do you understand the accounting and tax implications of this loss of access?
  • Non-Russian banks with significant exposures to Russia / Russian businesses may be downgraded. For your main relationship banks, do you understand the extent of their exposures and possible risk of downgrade?

Funding

  • If your Russian business had loans outstanding with a bank or other local financial institution, do you know if the terms of the loan have been affected? Has the debt become due for immediate repayment?  
  • If you have a Russian bank in a syndicated facility, what are the implications for the facility as a whole?

Currency risk

  • If you have rouble denominated assets and derivatives, how are you dealing with the sharp depreciation in the local currency?
  • Do you have any over-hedged currency exposures and if so how will you deal with them. Do you know what the accounting and tax implications are?
  • For other currency exposures in eastern Europe (such as Polish zloty and Hungarian forint) is your risk management approach still fit for purpose?
  • Depending on whether you have the 1992 or the 2002 ISDA agreement, it may be possible to claim an event of default. The 2002 agreement has a provision – Section 5(b)(i). Further guidance is available from ISDA.

Liquidity risk and cash forecasting

  • Does the invasion of Ukraine affect your supply chain directly or indirectly? Will you need to hold more inventory?
  • Will you face an increase in working capital? Do you have sufficient liquidity to finance this increased funding requirement?
  • Are your cash forecasting processes responsive enough to determine risks to forecast payments and receipts?

Ensure you are in regular contact with the sales and procurement teams to keep up to date with the evolving landscape.

Inflation and interest rate risks

  • With oil prices surging and supply chains facing additional stresses, do you need to revisit your assumptions for inflation and interest rate rises in 2022 and possibly 2023?

Investor relations

Investors, lenders and credit rating agencies may want to understand the extent of any direct or indirect exposures resulting from the invasion of Ukraine. It is critical that the treasurer is able to articulate the materially of any impacts to the company and its operations and what additional steps are being taken to mitigate any existing or potential risks that may emerge or become significant.

  • Will you need to take any impairment charges? Will you need to assess any Cumulative Currency Translation Differences in the balance sheet that may have an impact on the Income Statement following divestment/ impairment?
  • Will this and other changes potentially affect any of your covenants?
  • Do you need to provide a market update and if so when is it best to do so? Do you need to proactively update your main banks and other key stakeholders?

ESG

There is a social aspect to the crisis.

  • If you have employees in impacted countries, how do you ensure that they are still safe?
  • What contingency plans are there to ensure that directly affected staff continue to be paid?
  • How do you support your teams and colleagues who may be affected by the difficulties faced by staff employed in Russia or the Ukraine?

Cyber attacks

The risk of cyber attacks has increased significantly as a result of the invasion.

Assuming that steps are already being taken by corporate IT teams, treasurers need to review the security of their own technology landscape.

Depending on the role of your own local IT team have you checked that the latest available security is being applied to your:

    • bank connectivity for payments related activity;
    • treasury management system;
    • connectivity to card processing and other non-bank payment systems;
    • dealing portals (both for FX and investments); and
    • other treasury related systems

More so than before any incidents should be reported to the authorities including the National Cyber Security Centre.

This checklist draws on previous checklists and suggests just a few of the many questions that you will no doubt need to address in the coming weeks. Do get in touch if we can help or if you think of topics that should be included in this list and it will be updated accordingly.

 

Naresh Aggarwal, Sarah Boyce, James Winterton

Associate Directors, ACT Policy & Technical

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