The Russia-Ukraine war has caused devastation and loss of life in Ukraine and instigated economic distress around the world. The war triggered global market volatility and record high inflation. The unprecedented set of sanctions imposed against Russia have created disruptions in supply chains and global trade relationships.
Just as they were emerging victorious from the pandemic, corporate leaders now face a new set of challenges. Over the last two years, the global pandemic placed tremendous pressure on CFOs and other business leaders to find ways to maintain growth while dealing with staff shortages and fluctuating product and service demand. They had to innovate while focusing on business continuity and resilience. In recent weeks, many corporate leaders had to make difficult decisions within a limited timespan about whether or not to scale back from Russia. They had to swiftly re-evaluate partner relationships and prepare for new supply chain disruptions.
What are the most critical issues CFOs face in the current climate, and how can they find success in the long-term?
Sanction Risk Exposure
The economic sanctions against Russian entities and individuals rolled out rapidly and caught many businesses around the world unprepared. CFOs had to quickly determine: do we have investments from Russian oligarchs we are not aware of? Have we invested in or partnered with companies that might ultimately be controlled by now sanctioned individuals or entities? Do we have customers that might also be sanctioned?
It is often not easy to determine if an entity is controlled by a Russian oligarch. Russian oligarchs prefer to conceal their ownership through layers of offshore companies and proxies—individuals who front as the owners for them. While we have heard a lot about the oligarchs’ yachts being seized, we rarely hear news about oligarchs’ investments in various businesses, including those in the U.S., Europe and around the world. Despite this, Russian oligarchs do have investments in all main sectors in key global markets. Untangling these complex corporate structures to determine the ultimate beneficial ownership is not straightforward and requires investigative research and diligent analysis.
Screening the names of investors, clients, partners or suppliers against sanction lists is not sufficient. Companies need to analyze their investor base, client portfolio and supply chain to identify potential high-risk parties—usually these will not be a direct match against sanctions lists. The next step is to conduct a deeper review and analysis to determine the ultimate beneficial ownership. If companies identify potential exposure, they must take mitigation steps. An investigation would need to be conducted and expert advice sought on how to work with regulators to unwind the transaction.
Supply Chain Disruption and Resilience
Over the last several weeks, CFOs have been unwinding supply chains with Russian exposure. This is one of the most significant shifts of supply chains known since globalization began.
Replacing vendors or partners is a time consuming and expensive process. There are often contracts with certain suppliers of substantial value that cannot be legally breached. Navigating through this legal process requires time, legal counsel and expert advice. Finding alternative suppliers is an equally challenging process, given that there are fewer options available while the demand remains at same level.
In addition to replacing sanctioned suppliers, and with soaring inflation, CFOs now have to worry about all the suppliers on their chain. Will vendors be able to continue to provide goods or services at previously negotiated prices, or at all? Addressing inflation challenges across the supply chain will require CFOs to re-evaluate their suppliers’ capacity and capabilities. Building a resilient supply chain and continuous monitoring of the supplier base are going to be critical elements to helping companies get ahead of the next crisis. What should CFOs focus on in the months to come?
- Diversification: creating a more diverse supplier portfolio allows for flexibility and the ability to withstand future disruptions. Geographic diversification is especially important given most recent events.
- Continuous intelligence gathering and monitoring: conducting more thorough due diligence of suppliers is critical to managing risks better. Understanding their strengths and weaknesses, associated risks and potential hidden liabilities, their activities and affiliations, and identifying the key risks in the environments in which they operate is going to empower CFOs to make informed decisions if another disruption emerges. Ongoing monitoring of the supplier-based risks is essential to staying current and up to date.
- Data-driven management: leveraging technology to have real-time visibility of the supply chain is essential. CFOs have to rely on technology that can efficiently and accurately gather data and produce analytics that translate into actionable insights
Identifying, selecting and managing relationships with suppliers and partners is now a critical strategic part of doing business, and not a back-office function. CFOs play the lead role on driving and executing the supply chain strategy.
ESG at the Forefront
Over 400 global corporations announced scaling back operations in Russia after the conflict erupted. Business leaders brought moral considerations to the forefront of their decision-making, at a large expense to their bottom lines and without a regulatory requirement. The corporate exodus from Russia raised the moral corporate bar. It also set a precedent that corporations will be expected to take bolder positions on various ESG issues.
Sustainability and sound governance are core components of long-term value creation. Consumers, shareholders and the public are more likely to trust companies that support social and environmental issues. Statistics show that turnover is much lower and that stock returns are much higher at companies that have robust ESG programs.
A robust ESG program, like any other business priority, requires strategic planning, tracking and reporting data of the progress. This is exactly where CFOs come in. In addition to increasingly being required to report on ESG metrics, CFOs are focused on strategic long-term value creation. The pressure on CFOs to show how they will derive value for their companies from sustainable business practices is going to continue to increase. This will mean gathering disparate sets of information from across the business and creating reporting to demonstrate measurable progress.
CFOs have challenges ahead, managing risk across sanctions exposure with business partners and suppliers, and ensuring their staying abreast of their ESG priorities. By taking steps now, CFOs can mitigate larger pain points in the future.