What can firms do to #StandWithUkraine ?
A week ago, Russia started an unprovoked war against Ukraine. Since then, civilian Ukrainians have suffered atrocities not seen since WWII. As the Ukrainian army fights to contain the world’s second largest military, many abroad ask how to support Ukraine in this fight. Below, I suggest how firms can fight on the financial front.
The high-level sanctions on Russia (particularly disconnecting ALL Russian banks from SWIFT) are critical, but official sanctions have loopholes and require proactive involvement of individuals and firms to have the desired effect of isolating the Russian regime financially.
This article offers the list of steps for firms to isolate Russia financially and help Ukraine. If you are an employee, investor, or customer, you should demand immediate action. Apple, H&M, Exxon, Ford and many other companies have already stopped serving the Russian market. Failing to act now can trigger enormous reputational costs.
Does your company currently do business with Russia-related entities? Starting from your company’s cashflows, identify any flows going to Russia directly or through related parties.
Closing in on capital flows to Russia: what can firms do?
Firms should freeze any money or goods flows to Russia until such time that Russia ceases any military action on the territory of Ukraine. As the first order of priority, assess your own firm’s operations. As the next step, examine those of your customers and suppliers. For a structured approach, see the steps below.
1. Supply chains — upstream.
As a firm, review all the cash flows from operations that are going to your suppliers. Are any of the suppliers based in Russia? Are they tied to Russian firms or oligarchs through offshore “shell companies” in BVI (British Virgin Islands), the Seychelles, Panama or Malta? Offshore capital hubs are one reason Russian oligarchs and their firms have so far managed to minimize the effects of sanctions. That is why I call on freezing business activity with Russia-related firms (i.e., firms that are either (i) based in Russia, or (ii) operating through offshore hubs, or (iii) connected to any Putin-supporting figure).
2. Supply chains — downstream.
Do you have Russia-related customers? As a firm, review all the cash flows you receive from customers. If your company delivers goods or services to Russia, these must be ceased. Some industries like defense, semiconductor, and tech have already implemented these bans. Others — like software providers or professional service firms — have been slower to act. The truth is, acting fast can help you set precedent in your industry and competitors typically follow suit.
3. Investing activities.
Do you invest in Russia-related projects or have subsidiaries in Russia? While there is no obvious answer to how to handle the immediate sale of Russian assets (to any transaction, there’s a seller and a buyer, and sanctions prevent firms from selling Russian assets to Russian buyers), you can treat Russia-related assets as stranded if you cannot sell them immediately. Ensure there are no ongoing flows of capital towards these ventures. The most recent example are international oil and gas giants like BP and Shell. BP announced the sale its 20% stake in Russia’s Rosneft, at about $25 bn loss, according to Matt Levine of Bloomberg’s MoneyStuff. Shell is also exiting its positions in Russian gas ventures, including Nord Stream 2. Car manufacturers like Daimler, Volvo, Volkswagen, and Nissan are shutting or halting their production lines in Russia.
4. Export/import operations.
Does your business engage in export/import activity with Russia-related companies? Ceasing the trade in goods and services in high-tech industries is especially important, as official sanctions by the Western allies already require firms to curtail Russia’s access to technology. The sanctions packages are changing rapidly, hence firms risk potential legal action or reputational losses if they fail to act fast.
5. Borrowing/lending/derivative exposure.
Do you borrow or lend money to Russia-related firms? Do you have derivative exposure to them? Unwinding financial positions in Russian assets is complicated by falling prices, low liquidity (aka trouble finding buyers), and no obvious answer to “who is allowed / willing to buy them?” Also, major stock markets announced the halt in trading of Russian stocks. However, as a practical matter, the relevant question is not positions on balance sheets (which may be, for example, written off if no buyer is found), but whether those positions generate capital inflows to Russia right now or in the future (e.g., interest or dividend payments). If the answer to the latter question is yes, then these capital flows must cease.
6. Forex.
Do you conduct any foreign currency operations (including in cryptocurrency) with Russia-related entities? Existing sanctions already restrict most operations involving the Russian Ruble (most importantly — by banning any transactions of Western banks with the Central Bank of Russia. This prevents the latter from converting its $640 bn of foreign currency reserves into Rubles). However, the loopholes remain. For example, some cryptocurrency exchanges refuse to cease conversions between Rubles and cryptocurrencies.
7. Other.
Do any other cash flows from your business go towards Russia-related companies? Money flows through India, the UAE, Venezuela, Cuba and China create loopholes for the Russian entities to evade some of the sanctions. That’s why proactive action by companies is critical. After all, the risk of reputational fallout is high enough to justify short-term losses.
But what about the ordinary Russians?
One objection to ceasing business with Russia is that the economic pain is inflicted on ordinary Russians. Unfortunately, such is the mechanism of the sanctions: to be effective for stopping the bloodshed in Ukraine (including by Russian soldiers), the economic pain must reach the ordinary Russians. It’s citizens of Russia who have the power to demand the change of the Putin regime.
What about the financial help to Ukraine?
So far, this post has been about isolating Russia financially. But your firm can also donate for humanitarian needs in Ukraine. I screened a variety of charities, and so far, the fastest way to help is by donating to charities that have direct presence on the ground. I’ll mention three options here:
- Kyiv School of Economics Fund (now focused on humanitarian needs in Kyiv) https://kse.ua/support/donation
- Come Back Alive Foundation (addressing the needs of the army and civilians in war-affected areas) https://savelife.in.ua/en/donate/
- Special accounts for Humanitarian needs and Army needs at the National Bank of Ukraine (there are daily updates on how much money was raised and spent) https://bank.gov.ua/en/news/all/natsionalniy-bank-vidkriv-spetsrahunok-dlya-zboru-koshtiv-na-potrebi-armiyi