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TREASURY

Corporates must review contingency planning to reflect the new geopolitical reality

The Russia-Ukraine war is a sobering reminder for all treasurers that geopolitical risk can escalate rapidly. The importance of forward planning cannot be overstated.

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Recent episodes of conflict in Eastern Europe, such as the annexation of Crimea in 2014, did not have a lasting impact on business sentiment in Europe. This time is different. The scale of Russia’s actions – coupled with the extreme tail-risks for commodity supplies and prices – demand immediate action from corporates across the continent.

Corporates should identify the shelf life of products if there is a risk that the product cannot be sold immediately
Mitch Thomas, FinLync
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Russia and Ukraine are relatively small export markets for the UK, with around 1% of total exports going to the former and about half that going to the latter.

The first step any corporate with links to Russia will have taken is to identify any exposure to sanctions to determine whether or not operations will be interrupted and what can be done to ensure continuity.

“If in-country funds are required to continue operations, corporates should have looked to pre-fund before restrictions were fully in place or sought out alternative vendors that didn’t involve restricted banks,” says Mitch Thomas, head of solution engineering North America at treasury technology vendor FinLync.

“It is also important to consider whether you will still be able to sell/transfer goods even if they can be produced,” he adds. “Corporates should identify the shelf life of products if there is a risk that the product cannot be sold immediately or will not be marketable when released or made available for sale.”

Grey zone

State-on-state activity has been a geopolitical risk factor for some time. This has been in the form of direct conflict, as we are witnessing in Ukraine, but also in what is referred to as the grey zone – defined as the area between peace and war in which state and non-state actors engage in competition – in which Russia has also been an active player.

Neal Croft, global client relationship director and head of geopolitical risk at Willis Towers Watson, recommends corporates concerned about their exposures conduct strategic analysis to understand how they might be affected directly and indirectly, and identify the risk factors with the highest potential impact.

“Once they have done that, they can work out a risk-management strategy and stress test their assumptions through techniques such as scenario development and address interlinked risks with integrated solutions,” he says. “It makes sense to reduce risk such as cybersecurity exposure before insuring what risk remains.”

In a hard insurance market with reduced capacity in some areas there will be certain risks that cannot be covered. However, companies that fully understand their risks will be able to manage them better and spot opportunities that they might not otherwise have identified.

Historical examples

Corporates looking to mitigate geopolitical risk should focus on operational resilience and have clear third-party risk-management tolerances. The interconnected nature of global business means additional redundancies are needed to ensure supply chains remain robust.

Foreign-exchange volatility could go well beyond that of the recent past
Sonia Baxendale, Global Risk Institute
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That is the view of Sonia Baxendale, president and chief executive of the Global Risk Institute, who says liquidity and capital management practices may need to return to the past, when fungibility and free movement of capital cannot necessarily be assumed.

“Stress tests will feature highly in risk-management practices that may include scenarios of an embargo on certain jurisdictions,” she says. “Foreign-exchange volatility could go well beyond that of the recent past, so it is worth examining historical examples for modelling of exposures.”

Baxendale suggests recovery and resolution planning should be updated and that corporates should maintain key relationships with potential local buyers of foreign assets while refreshing contingency plans to extract foreign workers.

“Finally, it is important to maintain a conduit of local knowledge to truly understand the nature of the risk rather than hearing it second-hand via media sources,” she adds.

According to Jason McMann, head of geopolitical risk analysis for decision intelligence company Morning Consult, it is difficult to say whether the range of potential geopolitical risk faced by multinationals is more varied or harder to predict than before.

“I would argue that multinationals have an advantage in the current environment – specifically, a sharp increase in the availability of data-driven analysis on the likely trajectory of geopolitical risks that will help them devise more objective assessments of the direction in which things are headed and what to do about it,” he says. “This will in turn enable companies to be more adept at managing geopolitical risk and identifying opportunities for growth.”

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