The situation in Ukraine has dominated new headlines for weeks on end now, and for good reason. The country is in a dire humanitarian crisis and has affected the world from waves of refugees to rising US gas prices. But is the relevance of such a crisis relevant to finance professionals, or is this just an unfortunate occurrence that such workers will keep hearing about for the foreseeable future?
The crisis does, in fact, have serious ramifications for enterprises across the world and should be taken into serious consideration by the finance function (including ones that do not have operations or suppliers in Eastern Europe).
But this terrible war has huge implications — both immediate and longer-term — that are making every CFO sit up and take notice. All finance chiefs should stay well-informed and nimble in managing risks during this time.
Being Proactive as Finance Professional During the Crisis
1. Manage Supply Chain Disruptions
Russia’s invasion has skyrocketed the price of oil, wheat, and other crucial inputs and exacerbated pandemic-related supply chain woes, threatening an even further increase in inflation and borrowing costs.
The conflict is the latest reminder that finance leaders need to diversify their supply chains and ensure redundancies and localized sourcing are built into the system to guard against various turbulences. Western sanctions on Russia have stopped ships in ports, exacerbating the global logistics crunch. Airspace restrictions mean new routes need to be found for any supplies that used to be flown over Russia, raising the costs of having far-flung operations and supplies.
CFOs should also avoid falling for the illusion that they are immune from foreign volatility because their products are priced in U.S. dollars. The war also reinforces the criticality of sound data systems that empowers CFOs to drill down into their supply chains to understand where they have risks and opportunities. European vehicle makers like Porsche and Volkswagen Group, for example, have had to cut back on production due to shortages in wire harnesses that are sourced from Ukraine.
In this environment, CFOs should be alert to strategies such as paying a premium to become a preferred customer and securing the supply of certain products with high margins (and thus relatively low production quantity). At the same time, they need to be on guard against the panic-buying tendencies that can arise when supply shortages intensify. CFOs need to closely manage purchasing processes to ensure they don’t overpay for goods across the board and take losses on the back-end if prices tank.
Finance chiefs also need to avoid falling for the illusion they are immune from foreign volatility because their products are priced in U.S. dollars. Any company with a global supply chain is inherently vulnerable to the fluctuations in currency and input prices that this crisis is intensifying. That puts the onus on the CFO to manage treasury risks and closely monitor the company’s international contracts.
The lack of known cyber attacks by Russia against Ukraine and other targets since the invasion began should impress upon organizations a false sense of security. The 2017 NotPetya attack, believed to have been launched by Russia, hit Ukraine in 2017 before spreading to other countries and companies around the world. Whether or not the worst is yet to come, organizations and government agencies (especially those responsible for critical infrastructure) must be ready for a potential escalation in cyberattacks, as well as consumer and stakeholder demands for privacy protections. Corporate boards are focused on cybersecurity risks, capabilities and investments, as well. In a February 25 letter to the National Association of Corporate Directors regarding Russia’s invasion, Jen Easterly, director of the Cybersecurity and Infrastructure Security Agency (CISA), urged board members to “ensure that [their] organizations are taking the necessary steps to protect themselves from the impact of potential cyberattacks.” Most of these steps, which include empowering CISOs, concentrating on business continuity capabilities and investments, and improving scenario planning, intersect with the CFO’s growing role in supporting and financing the organization’s cybersecurity framework.
3. Follow Affairs Consistently
Of longer-term significance, the Russian invasion has heightened geopolitical tensions. The event likely signals a new era of increased political risk and friction between regional trading blocs. This makes it more important for CFOs to be well-versed in foreign affairs.
Finance leaders should get their information from a wide variety of news sources and not be limited by a perhaps myopic media lens. This becomes even more crucial at a time when the pandemic still limits international travel, making it difficult for CFOs and other managers to get a feel for what’s happening on the ground.
Relatively recently, Russia was part of the BRIC (Brazil, Russia, India, China) a group of potentially high-growth, investor-friendly economies that were heavily hyped. Having a more thorough understanding of Russia’s underlying power dynamics and politics would have helped organizations avoid expensive entanglements there that have become serious problems today. If companies learn the right lessons from this crisis, they’ll better anticipate future crises, whether that is in Eastern Europe and other geopolitical hotspots.
4. Protect Organizational Reputation
The Russia-Ukraine conflict doesn’t affect only companies with operations in Russia; it raises reputational and legal risks for any business with links to sanctioned entities or individuals. CFOs need to be hyper-aware of where their company has business exposure to make decisions with the management team on how to limit risks where necessary. They can start by checking the U.S. Office of Foreign Assets Control list and subscribing to the updates on U.S. Treasury sanctions across the globe.
5. Portfolio exposure and balance sheets:
Restricting Russia’s access to the SWIFT network makes it more difficult for financial institutions to collect on loans to Russian-based organizations. The swoon in the rubble also means Russia likely will default on its own loans, which will result in lenders taking write-offs. Russia’s precarious position was described last week when making interest payments on two dollar-denominated government bonds that required clearance by the USA. Curtailing operations and activities in Russia, whether in compliance with sanctions or voluntarily, also creates financial exposure that CFOs need to assess and reflect on their balance sheets.
All of these challenges fall squarely on the finance group’s FP&A capabilities. Given the imposing scope of the war’s forecasting variables and the variance of those variables (e.g., oil prices potentially swinging from $85 to $150 per barrel), CFOs will need to consistently improve upon the next-generation, dynamic forecasting methods they deployed in response to pandemic uncertainties. More real-time data should be accessed from more internal and external systems, which will likely necessitate updating budgets and forecasts on a regular basis. More analyses need to look beyond sales projections and gauge delivery streams that determine how much, and when, revenue will be earned and realized in cash.