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The Russia-Ukraine conflict and implications for corporate treasury

War has a negative impact on corporations within the conflict zone as well as outside of the combat area.

We live in an interrelated world where corporations and financial and economic systems are interconnected with governments, intergovernmental organizations, central banks, supply chains, technology, transportation, stock, currency and commodity markets. The pandemic proved that disruption in supply chains was a global phenomenon, as was the disruption in trade, finance, health and education systems.

Russia’s invasion of Ukraine may be no exception. While Russia accounts for a mere 2% of the world’s gross domestic product (GDP), and its economy is driven mostly by exports of commodities, its conflict with Ukraine has the potential to throw a wrench into global supply chains, keep the stock markets jittery, bring volatility into commodity prices, and dampen investor sentiment for an extended period because of the uncertainty that accompanies an invasion.

The West has announced a suite of stringent sanctions aimed at cutting off Russia’s banks from the global financial system, along with sweeping restrictions on exports to Russia, including denying the country critical technology needed to power its defence and economy.

The toughest sanctions on Russia will also imperil U.S. corporations and global businesses already beset by soaring prices for oil and other commodities. This war will be a real test for corporate treasury intelligence and leadership, purpose and vision. Here are the implications of the Russia-Ukraine armed conflict on corporate treasuries.

Supply chain snarls

Russia is the world’s biggest exporter of wheat, fertilizer, urea and palladium, the second-largest producer of gas, and the third-largest oil producer in the world. Russia is also a significant producer of aluminium, copper, platinum, titanium and nickel.

Sanctions aimed at buckling Russia’s economy could mean that Moscow curbs or halts exports to countries that depend on Russia’s supply of commodities, aggravating the current global semiconductor chip crisis and disrupting the auto and aerospace supply chains.

Russia is Europe’s biggest supplier of gas, crude oil and coal. If Russia shuts off its supply of natural gas to Europe in response to the West’s sanctions, it might result in a supply crisis and create a slump in production across German factories (Germany is a major consumer of Russian natural gas). This would affect logistical and manufacturing supply chains further downstream (activities post-manufacturing) and also strain manufacturing in other countries.

Ukraine was the leading corn supplier in 2021 and together with Russia accounts for nearly 29% of the global wheat export market. As the crisis takes a turn for the worse, from wheat to barley, and copper to nickel, global supply chains in these sectors will be disrupted. Food supply chains will be hit particularly hard. This may adversely affect companies in the European Union (EU), the Middle East and Africa that rely on Ukrainian wheat and corn.

This would also impact the sales of corporations in other sectors that are compelled to halt their operations in the region in response to the escalating conflict. Even for companies without a supplier connection in Russia or Ukraine, the war has the potential to create some debilitating disruption across industries from agriculture to energy.

If the war continues, Gartner analysts Koray Köse and Sam New expect severe shortages of hydrocarbon, critical minerals, metals and energy. “Prices for those items will likely spike, thanks to both the shortages and behaviors such as irrational buying and protectionism. This will, in turn, impact manufacturing operations up- and downstream as much as raw material mining,” commented the Gartner analysts.

Companies can try to navigate the risks by improving their visibility beyond their immediate suppliers. The Gartner analysts recommend shielding supply chains from future geopolitical conflict in this way: “Visibility into all tiers of the supply chain is key to evaluate potential risk exposure, and determine vulnerabilities and the best response strategy — most urgently among tier-1 suppliers. Diversifying sources and logistics routes where possible, and preparing risk response plans for the most fragile supply chains, are critical for affected companies.”

In every adversity there is an opportunity. The Russia-Ukraine conflict offers corporations an opportunity to improve their supply chain systems so they can better predict future crises. "The biggest thing here is supply chain resiliency and flexibility," said Oleg Yanchyk, co-founder and CIO of Sleek Technologies, a procurement software firm that works with shippers and carriers.

SWIFT ban on Russia

The EU, U.S. and their allies have agreed to cut Russian banks off from the SWIFT global interbank payments system that connects more than 11,000 banks and institutions in over 200 countries and territories. SWIFT, or the "Society for Worldwide Interbank Financial Telecommunication", is a secure messaging system that makes fast, cross-border payments possible, enabling international trade.

The Western allies also restricted access to the US $600 billion in Russian Central Bank reserves, a move that sent the value of the ruble plummeting. These financial sanctions and stringent export controls may cripple the Russian economy, severely limiting Russia’s ability to import and export commodities, drive up international crude oil prices, increase pressure on financial markets, and reduce economic growth. These factors will also hurt the Western allies’ banks and corporations. It will mean less business for these organizations and will also impact their earnings. Already, there are reports of non-Russian credit and debit cards being declined in Russia. The U.S. Embassy in Russia says U.S. citizens in Russia should be prepared with alternate means of payment should cards be rejected.

The fallout of the Russia-Ukrainian war will affect the sales of several large multinational companies with noticeable exposure to Russia. These include Sylvamo Corporation, Kinross Gold Corporation, Arconic Corporation, Philip-Morris International, PepsiCo, Mohawk Industries, McDonald's, Exxon Mobil Corp, BP, Shell PLC, Renault SA, and brewer Carlsberg A/S.

The Russian expulsion from SWIFT poses serious challenges for companies that do business in Russia because it means there is a problem in moving money in and out of Russia (getting funds in and out, and making payments in and out), meaning that organizations may be limited to just the cash they already have within Russia – which could last a few days or weeks at most.

Decoupling Russia from SWIFT would stop a majority of cross-border treasury trading and payments, which will then limit foreign corporates with accounts in Russia to domestic transactional trading, or potentially push them to turn to other payment methods to move money across borders, such as crypto currency. Crypto currency is being touted as a workaround for Russia after being disconnected from SWIFT.

SWIFT offered global treasury centres cash visibility and connectivity to their banks in Russia for domestic and cross-border payments. Ejecting Russia from SWIFT will mean a lack of cash visibility and the inability to initiate appropriate domestic payments.

The decision to disengage Russia from SWIFT could compel Russians to get more creative in accessing the financial system. According to a recent report in Reuters, "this could encourage nesting, in which Russian entities turn to non-sanctioned banks and large multinationals instead in a bid to access the financial system.”

“Multinationals with large treasury operations and banks with SWIFT access could become the new hubs of financial transactions out of Russia.”

In 2014, Russia had set up the System for Transfer of Financial Messages (SPFS), its equivalent of SWIFT. “Sleeving” of trades, in which a third party is commissioned to provide trade credit and undertake trade between Russia and some country seeking to buy oil or gas, is also an option.

The consequences of barring Russia from SWIFT may draw China and Russia to establish an alternative payment system, even though Chinese state-owned financial institutions are for now distancing themselves from Russia’s beleaguered economy. China built its cross-border interbank payment system (CIPS) and SWIFT equivalent in 2015 to aid the internationalization of the yuan, and then rolled out a digital legal tender (digital currency), dubbed e-CNY that can be leveraged to promote their own central bank digital currency (CBDC) for global trade and finance and to weaken the dollar’s international clout.

Cyber warfare

Since the Western nations have slapped a raft of stringent sanctions against Russia for invading Ukraine, there is a heightened fear of cyber-attacks from Russia. Banks, corporations, governments and homes worldwide are being urged to shore up their defences, as the cyberwarfare could move beyond Ukraine’s borders.

The United States Department of Homeland Security (DHS) warns, “Every organization in the United States is at risk from cyber threats.” The European Central Bank (ECB) has alerted European financial institutions of the risk of retaliatory Russian cyber-attacks. David Ring, Federal Bureau of Investigation’s (FBI) Cyber Chief has asked U.S. businesses and local governments to be mindful of the potential for ransomware attacks as the Russian-Ukraine crisis deepens.

It is expected that an onslaught of cyberattacks – wiper software, ransomware and other malware – may be unleashed to undermine an organization’s defence capabilities. Corporations around the world should prepare for cyber assaults.

Some experts at the recent Wall Street Journal’s (WSJ) virtual CIO Network Summit event warned “Companies to prepare for phishing and password-spraying attacks that recycle passwords from past password data dumps to access corporate networks.”

Corporate treasurers must prepare for cyber-attacks now. They must revisit and reinforce their defence capabilities, train their staff (, deploy new security layers and tools, implement testing procedures to back up and restore data, carefully scrutinize their supply chains, actively engage treasury security consultants and vendors to enrich security intelligence, instil a security mindset in their employees, and integrate cybersecurity into business continuity planning.

Cash, liquidity and risk management

Russia’s invasion of Ukraine came at a vulnerable time in an already fragile and inflationary global economy. The war spiked the oil and natural gas prices and may now stoke inflation. It wouldn’t just lift prices at the pump, drive up electricity and heating costs, and mean higher prices on almost everything consumers purchase, but may also cause the global interest bill of corporates to rise.

The soaring energy prices may be the biggest source of global inflationary pressure, but fresh supply-chain disruptions will add to the costs and drive food prices up.

To curb soaring inflation, a number of major central banks may tighten monetary policy by raising interest rates at regular intervals this year. This would make borrowing more expensive for consumers and corporate treasury, potentially impacting the profit margins of companies worldwide, and would also place a squeeze on household income that will likely slow the global economy.

Higher interest rates will also affect corporations’ cost of capital, and that would drive down cash flow. Higher debt service (higher borrowing costs) may decrease profits and dissuade companies across various sectors from commencing new projects or expanding because of the inability to access affordable capital.

The stringent financial penalties imposed by the West, restrictions on trade and investment, volatility in commodity markets, and Germany’s suspension of the Nord Stream 2 gas pipeline all bear financial risks for corporates who continue to do business or restricted business in Russia, as well as companies that have had a significant presence in Russia.

Analysts expect the volatility to continue in oil markets for some time as geopolitical tensions remain high. For manufacturing companies that operate or have built up production sites in Russia, the conflict upsurge between the West and Russia has placed a heightened degree of uncertainty in their business operations, and that means putting strategic decisions on hold. The fear that Russia will withhold commodity supplies and underutilize the gas pipelines it already has to drive up prices will impact these companies, their products and the markets in which they operate.

A number of corporate treasury departments are expected to become risk averse in relation to all exposures. This will be in line with their policy to tighten risk management practices as is done in a crisis. The focus will be on trying to maintain a larger liquidity buffer and reducing losses on investments.

Another scenario that will play out is major oil companies and energy-related businesses that have sophisticated asset liability management strategies and financial derivatives in place standing to gain because of the war. They will make a lot of money, as will a section of commodity traders who thrive in chaos. “As long as the Russia-Ukraine heat continues, commodities will be the dominating theme versus the consumption theme,” remarked B. Gopkumar, managing director and chief executive officer at Axis Securities Ltd.

The war costing Russian economy

The Russian central bank on Monday more than doubled the country’s key interest rate from 9.5% to 20% in an emergency move to boost the sinking ruble that plunged as much as 40% on Monday against the dollar and to offset increased risk of inflation and the damage inflicted by international sanctions.

The Russian finance ministry and the central bank also announced plans to order domestic exporters to sell 80% of their foreign exchange revenues received under export contracts, notwithstanding a growing number of corporations in the U.S. and Europe having severed business dealings with Russia. For instance, cash-management company Brink’s Co. has halted all operations in Russia, including bank note transfers, to ensure it complies with the U.S. sanctions against Russia.

To conclude, the cost to run this invasion for Russia is high. The unprecedented financial sanctions imposed by the West on Russia will increase its borrowing costs, spike inflation and gradually erode the country’s long-term industrial base, but key imperatives cannot be ignored. Nearly 40% of the natural gas consumed by the EU comes from Russia, 40% of the world’s supply of palladium, 20% of the world’s platinum, 18% of the global wheat exports and 10% of the world’s oil comes from Russia. And herein is an important lesson for corporates and governments, as the Russian-Ukraine conflict must redouble the focus on what’s needed for the long term – self-sufficiency or less dependency on Russian commodities, particularly in finding alternative sources of energy beyond Russia.

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