Russia And Sanctions: Things Will Get Worse Before They Get Better.

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It looks as though the economic war between the West and Russia is heating up. Yesterday, the EU announced its next tier of sanctions, targeting the finance and energy sectors.

Russia, in response, is developing its own miniature sanctions scheme. The State Duma is debating the creation of a new legal term: ’aggressor state’ – countries that sanction against Russia.

Companies originating from aggressor states will have limited trading rights within the Russian Federation. In the first round, it is proposed that companies offering audit and management consulting will be banned.

Russian legislator Evgeniy Fedorov has been quoted as saying: "All six major US audit and consulting companies working in Russia – and these are Deloitte, KPMG, Ernst & Young, PricewaterhouseCoopers, Boston Consulting Group and McKinsey – will be included in the list."

The stand-off between Moscow and the other leading Western countries has been unabatedly grim since the protests in the Maiden broke out in late 2013. I hope that, in the light of escalating tension, companies would have been reviewing their contracts already since Russia annexed the Ukrainian peninsula of Crimea. But recent events call for much more.

It seems since the worsening of relations that more than reviewing exposure is required by those organisations that have significant footprints in Eastern Europe. Many companies may wish to follow the estimated estimate $100bn of capital flight which has struck the Russian economy in 2014.

With a new round of banking sanctions, suppliers may face significant cashflow issues. Their ability to pay their own suppliers may be at risk, or indeed, the ability for their Russian customer to honour deals. It could be a time when Western companies more actively divest from the country and switch their supplier base away from a zone of spiralling political risk and war.

At every point throughout the affair, the tension has only intensified. With Russia allegedly shelling Ukrainian territory with artillery behind the border, the long shipment trains of heavy weaponry to separatists and the shooting down of passenger plane MH17 only serving to amplify animosity from both sides.

It seems that such tension is likely only to increase as the political rhetoric rises to meet the firm military reality. BP is already reporting that the sanctions against Russia will likely have an impact on the oil company’s profitability. This indicates the broader economic malaise which will affect the recovery of many countries, which are still climbing out of the deep effects of the financial crisis.

Sadly, it seems as though this crisis will get worse before it gets better. And, if companies are to contain these effects, they need to act decisively now.

Jonathan Webb
Posted by Jonathan Webb

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