Magazine article Risk Management

Behind Russia's Risk Curtain: Risk Is the Norm in Russia, Where Liberal Currency Laws and Hot Capital Flows Create a Volatile Currency Environment. but Simple Strategies and Vibrant Capital Markets Enable Businesses to Manage Their Exposure

Magazine article Risk Management

Behind Russia's Risk Curtain: Risk Is the Norm in Russia, Where Liberal Currency Laws and Hot Capital Flows Create a Volatile Currency Environment. but Simple Strategies and Vibrant Capital Markets Enable Businesses to Manage Their Exposure

Article excerpt

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Even with Russia's entrance into the World Trade Organization this summer, there remains a stubborn gap in perception and reality of the risks of doing business in the country. Admittedly, Russian stocks, a barometer of sorts for investor attitude toward Russia as a whole, remain undervalued relative to their peers for real reasons, such as the volatility of the ruble. But lingering and unsubstantiated negative perceptions about risks in the country continue to permeate the thinking of businesses and market analysts, which masks the improving operating environment and significant opportunities in the market.

Indeed, since the global financial crisis of 2008, a combination of government-backed and private initiatives have ensured that more and more Russian companies are successfully integrating sophisticated risk management controls, and their leadership is heralding a new chapter in Russian corporate governance. In fact, Russian companies are providing the assurances on managing risk that global investors need to make smart investments in the country's burgeoning economy, where average household earnings increased 10% last year--during a time when many other economies saw continued declines in earnings--and where household debt is virtually non-existent. In general, Russian companies have made significant improvements in developing best practices for financial and operational risk management.

FINANCIAL RISK

With a strong resource base, Russian companies are by their nature global, as most of the largest firms sell products domestically and internationally. The currency and operational risks inherent through the import of sophisticated machinery or other products and services is therefore negated by the sale of goods and services abroad. Despite the proliferation of ruble-based financial instruments, many Russian companies can look to markets in Europe or the United States for capital-raising without incurring unnecessary currency risk. A range of Russian companies--in the financial sector, resource economy or service sectors--continue to utilize Eurobond markets, while others, most recently a prominent freight hauler, have tapped equity markets for further capital needs.

But for some companies, managing currency risk is a continuous exercise, as they may collect revenue and make expenditures in different currencies. But strategic and thoughtful treasury strategies, including being opportunistic in finding pools of liquidity and developing currency hedging strategies, ensure that companies are not incurring too much currency risk.

This includes using the existing credit sources in Russia. After the financial crisis of 2008, with funding cut off from Europe and the United States and the ruble weakened by a global and Russian monetary policy, the ruble bond market became a primary source of much-needed liquidity. The benefits continue today: in the past four years, the total volume of ruble-denominated corporate bonds outstanding has nearly doubled to close to RUB 4 trillion rubles ($125 billion). A strong ruble market has allowed companies to better match revenues with obligations, the most basic and sensible way to manage currency exposure.

But there are challenges: despite the growth in the ruble market, tenors are short by comparison. …

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