Russian and foreign corporates step up efforts to safeguard cash holdings from sanctions

By:
Kimberley Long
Published on:

Russian and foreign companies with substantial exposure to Russia are intensifying their efforts to move their money out of the country amid growing fears there could be a liquidity squeeze, as the European Union and US escalate sanctions.

Rouble water tank-envelope
Safeguarding cash: Rouble banknotes reportedly have chemical properties that allow them to stay dry even after submersion in liquid, as tested here

Blue-chip Russian companies such as MegaFon, the country's second-largest mobile phone operator, have started to move substantial chunks of their cash reserves into Hong Kong dollars with Chinese banks, while international companies with operations in Russia are stepping up their efforts to ensure they can withdraw their money as swiftly and frequently as possible from the country.

"The number-one thing we are doing in Russia is we're sweeping our cash out of there as quickly as we can," Jeff Lasher, chief financial officer of shoe company Crocs, told the CFO Journal. "We are not regularly looking at daily cash balances anywhere else like we are in Russia." 

For Russian companies, ensuring ample cash is held outside of the country is just as much of a priority. Amid rising concerns sanctions might disrupt payments in euros and dollars, MegaFon decided to shift 40% of its cash holdings into Hong Kong dollars deposited with Chinese banks, while keeping the remaining 60% of cash in roubles.

"We formed this position in the last quarter and deposited with Chinese banks in order to simplify payments with our key network equipment supplier, the Chinese company Huawei, as well as to limit the risks associated with possible difficulties in working with European banks," Gevork Vermishyan, MegaFon's CFO, told Reuters.

Bankers in London say other large Russian companies are either considering or are taking similar action. 

Efforts intensified

While Russian and foreign companies in Russia have been taking action to safeguard liquidity and access to funds since the EU and US sanctions kicked-off earlier this year, the fresh round of economic sanctions brought last week has intensified their efforts because of the direct impact on state-owned Russian banks and companies' ability to access funding on the capital markets. 

From August 1, state-owned and development banks Gazprombank, Rosselkhozbank, Sberbank, VEB and VTB Bank, their subsidiaries and institutions acting on their behalf, are barred from selling new bonds or equity with a maturity longer than 90 days to EU nationals and companies, sanctions that expand earlier partial restrictions by the US curbing access to US capital markets. 

Danielle_Tierney
In the longer term the reserves will not last forever

Danielle Tierney

Danielle Tierney, senior analyst at Aite Group, says that while the new sanctions could acutely impact Russian banks, as there are " unofficial sanctions, which have been underway for months".

She adds: " While the immediate reaction by Russia may be defiant, the longer-term effects would be much more worrisome."

Eleni Papoula, banks analysts at Berenberg, says the new sanctions might not only affect the availability of funds but the cost of wholesale funds too, which she believes could have an adverse impact in interest margins on banks subject to sanctions "with a knock-on effect on other banks with lending activities in Russia".     

Raiffeisen, UniCredit, Commerzbank, Société Générale, Nordea and ING are among some of the largest lenders to Russian banks and companies, according to Berenberg.

Vladimir Miklashevsky, economist and trading desk strategist at Danske Bank, adds that the uncertainty among Russian companies that co-operate with western peers could increase and affect investment and consumer goods imports to Russia.

"Together with tightening monetary policy by Russia’s central bank, the new sanctions could push up prices for loans and decrease their availability to both Russian corporations and private consumers, as the state-owned banks have the largest share of the banking system in Russia," he says. 

However, he adds that "the new sanctions do not affect any payments or cash-management operations with Russian banks, where those payments and operations are not related to new debt or equity issuance by sanctioned entities".

The Russian government has ample reserves to support its banks' funding needs, but as Aite's Tierney point out, the reserves are not infinite. " Russia has over $450 billion in central bank reserves, and the central bank has pledged its support to Russian banks in need, but in the longer term the reserves will not last forever," she says. 

"Also, assistance is needed beyond banks, in the other sanctioned sectors, and Russia cannot draw indefinitely on its reserves – that would be unsustainable." 

Longer term, one of the main questions is what impact the sanctions will have on the Russian economy. 

"The disruption may not be severe in the short term, but companies would probably postpone investments and capex," says Antonio Timoner-Salvá, senior economist at IHS Banking Risk Service. 

"The extent to which these interruptions eventually lead to economic stagnation or recession would depend on the central bank willingness and financial capacity to inject liquidity and money into the financial system to restore credit flows."