Insight to All Things Currency and Treasury Management

This blog post is based on my article “Why Corporates Can’t Afford to Sleep on the Rouble Crisis” published on gtnews, December 24, 2014. Read the article on gtnews.

The fall of the Russian ruble portends rough seas ahead for multinational corporates and the challenge of dealing with its consequences will undoubtedly be felt the most in Europe. This is the kind of crisis that will separate the effective risk managers from the rest – rewarding those corporates that can manage through intense volatility, and punishing those that can’t.

What are we seeing and expecting to see?

To set the stage, let’s start with a few facts gleaned from FiREapps’ Quarterly Currency Impact Research: Since the first quarter of 2014, the number of European companies reporting impacts from the ruble has been consistently 50% higher than the number of U.S. companies. This should come as no surprise for European chief financial officers and treasurers as European corporates engage in significantly more cross-border trade due to proximity to the Russian market. To substantiate this fact: according to data from the Observatory of Economic Complexity, Europe represents nearly 59% of Russian imports while North America represents roughly 5% of Russian imports.

Starting in the second week of September, the ruble began its precipitous decline against a broad basket of currencies.

Two weeks later, by the end of the third quarter, we saw an overall decline of 8.1% of the value of the ruble against the euro. And in hindsight, that now seems like a relatively modest move.

As a result of the 8.1% drop, FiREapps research shows a 120% increase from Q2 to Q3 in the number of European companies reporting negative impact from the ruble. Of particular interest is the fact that 50% of the European companies that reported negative ruble impacts in Q3 were “first time offenders” with respect to this calendar year.

Now, looking at the current quarter: Since the beginning of Q4 through 17 December 2014, the euro has strengthened 70.3% against the ruble; the three major Nordic currencies (SEK, NOK, DKK) strengthened more than 60% on average against it; and the pound is up more than 50%.

When we combine these sharp directional movements with the results we saw in Q3, we expect to see a major jump in the number and size of reported impacts in Q4.

While the challenge created by the ruble for Europe-based corporates is relatively larger than their North American counterparts, that does not mean that North American corporates are going to dodge this storm entirely.

On 16 December we witnessed, Apple, a North American corporation, taking extreme measures to “stem the bleeding” by halting all online sales in Russia (this comes a month after it implemented a 25% price increase on its flagship product, the iPhone 6, in response to the weakening ruble). And by 18 December, another member of the top 10 fortune 500 companies, General Motors, had suspended all deliveries to Russia for the time being.

Looking at the potential North American corporate impact of the ruble movement through the same lens as Europe, we found a 400% jump in the number of North American corporates reporting ruble impact from Q2 to Q3. At the same time, the ruble fell 16.39% relative to the greenback.

Combine that statistic with the fact that the dollar strengthened 72.6% (1 October – 17 December) against the ruble since the beginning of Q4 – and the same story emerges in North America as Europe: We expect to see a major jump in the number and size of reported impacts in Q4 and some spillover into Q1 2015.

All that said about the ruble, what we are really seeing now is the currency war taken to a new level. Consider what has happened just in the first three weeks of December. The price of oil hit a five-year low. “Abenomics” was given renewed support, indicating more yen volatility is likely in the near- to mid-term. Janet Yellen, in her ever-subtle and obfuscated language, indicated that a hike in US interest rates is likely within the next three Fed meetings. Cracks in the eurozone resurfaced with the recent Greek election news and other structural factors coming back in the spotlight. The Indonesian central bank intervened in the currency markets to bring stability back to the rupiah after a slide. During all of this, South American currencies have not calmed down, more volatile markets have just been getting more attention.

The key message here is: do not fixate on just the ruble. This is a highly complex, geometric problem, especially when you take into consideration all of the currency crosses which have and will be affected by the aforementioned December movement(s). If you have not done so already, use this crisis as a rallying cry to modernize your program and begin to leverage the power of your financial data using big data analytics.

So what can be done?

There is a big differentiator between effective risk management programs and ineffective ones, especially during a crisis like this. Effective programs have the tools and the ability to manage and report on the economic impact of any currency movement, in real time (or close to it). This insight empowers fact-based risk management and equips teams with the information critical to making the right business decisions.

Coming up on the crisis, a quarterly hedge on the ruble would have cost roughly 2% of the notional amount, proving once again the importance of having on-demand access to a complete picture of exposure, and the cost to manage it.

In my recent conversations with quite a few anxious CFOs (mostly European), the recent ruble movement served to highlight their need for timely exposure data–as it was painful for many who did not have the visibility into the risk/reward of managing underlying exposures, and were consequently surprised.

In the aftermath of a crisis, people tend to scrutinize the effectiveness (or lack thereof) of risk management controls that corporates had in place. While currency risk is just one of many risks a corporate must manage (though likely the largest financial risk), analysts and investors often interpret the lack of a modern currency risk management program as symptomatic of a lack of effective risk management in other areas as well. So one of the further reaching consequences/reactions of this current crisis could be a sudden mandate among boards and executives to update their risk management programs and controls, and revisit policy.