Western Accounting Firms in the Aftermath of the Russian Financial Crisis

Article excerpt

In Brief

Will New Opportunities Emerge?

Starting in the late 1980s, the reality of a vast untapped commercial market in the former Soviet Union, particularly Russia, was seen by an increasing number of Western companies as a distinct possibility. Western international accounting firms likewise saw huge potential and arrived in Moscow before 1990.

Now, after some 10 years of watching and waiting for a surge in economic growth, the firms face a period of significant declining growth in the wake of the August 1998 financial crisis. Their continued presence is being driven in the short term by the local operations of their large Western clients and their need for ongoing accounting services. In the long term, the possibility remains that the huge potential commercial market in Russia will awaken, although this prospect may take 10-15 years.

The front-page headline of the Moscow News read "Banks Go Bang." On August 17, 1998, the Russian financial collapse was official. The government declared its inability to service its domestic and foreign debt: In essence, Russia was bankrupt. The financial drag of rapidly expanding government debt during the preceding months had been exacerbated by a pyramid of shortterm government bonds known as GKOs. Coming on the heels of the Asian crisis, the government default on the GKOs precipitated the collapse. The Russian banks left holding these defaulted instruments immediately froze all payments.

By 1998, Western international accounting firms had spent a decade establishing a firm foothold in Russia. All the then Big Six firms had opened offices in Moscow to be in a position to share in the potential fruits of Mikhail Gorbachev's perestroika. After the fall of the Communist Party, Russia and most other territories of the former Soviet Union set their sights on moving toward a market economy, creating capital markets, reforming the system of taxation, privatizing state enterprises, and promoting an environment favorable to creditable accounting practices. Until the August 1998 financial crisis, the firms had experienced substantial growth in Russia as the economy underwent major restructuring and conditions became attractive to foreign investors.

The Aftermath

In the ensuing months after the August 1998 crisis, the ruble was devalued by 75%, making imported goods prohibitively expensive for most Russians, the banking system was thrown into turmoil, the Russian stock market plummeted 90%, and the flow of foreign investment into Russia ground to a virtual halt. Western banks reported major losses; for example, Chase Manhattan Bank and Citicorp estimated losses of $200 million each and Credit Suisse First Boston, $250 million.

For the Western accounting firms, the overwhelming result was a dramatic downturn in business, especially in the banking sector, where many clients disappeared, in consulting engagements, which were either curtailed or pushed back, and in due diligence work. Of course, the severity of impact varied among firms depending on their mix of business. One firm, which had mostly Russian clients and "admittedly failed to see the crisis coming," was forced to slash its budget by $20 million (almost 30/). Another firm, whose banking practice had been a major strength prior to the crisis, saw a 30-40% reduction in volume. The firm's multinational practice went from approximately 50% of its total billings before the crisis to 60-700/ afterward. A third firm, which had a large portion of its business with multinational entities with operations in Russia and other parts of the former Soviet Union, suffered less because the multinationals stayed, albeit with plans for growth generally put on hold.

How have the accounting firms weathered the effects of the financial crisis? What changes have been brought about by the crisis? What is the current outlook for Russia? During a visit to Moscow in October 1999, the authors discussed these topics with the managing partners and their associates at each of the Big Five accounting firms. …