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Ukraine crisis: 3 things you need to know about your financial risks

Since Russian troops took over Ukraine’s Crimea region tensions have significantly increased. Although the European and American political leaders are still trying to find a diplomatic solution in this escalating crisis, Russia’s military intervention in Ukraine is reinforcing the potential risk of restrictions on importations and exportation of natural gas and other goods. Besides the human factor of this crisis this situation may trigger significant financial risks for companies and not only those doing business in Ukraine. We have listed below the most important three risk factors that may impact you in the short term: 1. Risk Factor: Energy Prices Russia’s vast resources of land and minerals have made the mining and quarrying industry one of the dominant sectors of Russian economy. Russia has become the first natural gas supplier of the European Union and represents currently approximately 25% of the European supply. One third of this supply transits through Ukraine. These figures clearly state a potential risk of energy supply for the European countries in case of an armed conflict. Consequently, European energy suppliers may increase their natural gas importation from alternative sources than Russia. Following the concept of free markets, this will, however, very likely trigger higher market prices and thus unexpected costs to manufacturing companies, in particular those being stongly dependent on energy.

Russian natural gas share for some European countries:

Russian Gas in Europe.png

2. Risk Factor: Importation from Russian Suppliers In addition to the energy prices, companies can also face supply chain risks related to goods imported from Russia in the likely event that economic sanctions will be applied to Russian goods (which might even include natural gas).

In fact, the Obama administration is close to impose punitive economic sanctions on Russia but faces resistance from their European allies who strongly depend on the energy supply from Russia. Although the economic sanctions are currently on standby, the international community may change their mind and restrict importations from Russia in case the crisis in Ukraine gets worse (e.g. armed conflict). This could then have a strong impact on the supply chain, in particular for those companies having a “mono-sourcing” from Russia.

Russia Exports (in billion US$) to: Russian Exportation

3. Risk Factor: Unexpected Loss due to the strong Currency Volatility This week Russia woke up in financial shock when the ruble fell to an historic low against the U.S. dollar. This shows that the current situation has also a collateral impact on the Russian currency and its market places. Since January, the ruble lost around 10% against the euro. The volatility of the ruble over the last days led to a significant financial risk for companies doing business with Russia.

For example, if your company holds a sales contract in ruble already signed in January 2014 and you are producing in the eurozone, the value of your commercial agreement has probably decreased by 10%. If your cost in euro is not equally impacted, your commercial margin may be directly affected, unless you have covered your position.

Evolution of the EUR/RUB exchange rate since January 2014:

EUR-RUB

How to react in a proactive way: If you are currently facing challenges linked to one of the risks mentioned above, we can assist you to define and implement a risk response strategy at short notice and help you securing your financial results. Please contact us here for more information.

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