Last year, executive orders and sectoral sanctions were put in place against Russia by the European Union (EU) and the US Office of Foreign Assets Controls (OFAC) because of Russia’s annexation of Crimea and its efforts towards the destabilisation of Ukraine. This could mean great implications for corporations as some Russian companies engaged in trade are being targeted for sanctions in the American and European markets. Treasury Insider speaks to Tim Lind, global head of financial regulatory solutions at Thomson Reuters about the extent to which he believes these sanctions will restrict Russian banking, energy and military resources from being chosen by Western markets.
Could you give a brief explanation of how the Russian sanctions would affect corporates?
In July of 2014, President Obama, in a coordinated action with the European Union counterpart, signed an executive order that sanctioned Russia for what they called “contributing to the situation in Ukraine ” and because of Russia’s challenges to the territorial and political sovereignty of Ukraine and Crimea. The noteworthy aspect of these Russian sanctions is that they are applied on companies and a market that is well integrated into the global economy and the global capital markets sector. The sanctions were levied against Spur Bank, Gazprombank and VTB which are three of the largest Russian lenders, alongside military entity Rostec, which is the largest producer of weapons and ammunition in Russia. The Department of Treasury recognised the unprecedented nature of sanctions against companies that are widely held and intertwined with the global economy. The intent of the sanctions is to limit their access to public financing and prohibit trading of any new equity or debt issued by any sanctioned entity or a subsidiary. OFAC didn’t require divestment of existing ownership, which could create a fire sale situation and hurt US and European investors.
How does this affect the treasury department?
Typically, every bank, broker, dealer or investment manager or treasury department relies on a list put together by the compliance and legal operations of the firm. They rely on the list to manage any outbound payments or any outbound trading activity so this is related to the trading side of treasury, rather than the payments. Security is a noteworthy part of the Russian sanctions and in effect, one can still do business and still accept payments, but you cannot buy debt. Although, it is possible to execute payment with this Russian entity as there is more impact on the trading debt, rather than the treasury debt.
How would these sanctions affect trading?
They create a new compliance burden that every broker, dealer, investment manager needs to deal with and therefore, manage a list of these sanction instruments to understand whether or not they have been issued by a Russian entity or a subsidiary. Trading books have never been considered when clients want to buy or sell stock or bonds. Another concern they’ve never had to reflect upon is whether this particular stock or bond is subject to a Department of Treasury OFAC or EU sanction before. It is a big monitoring burden placed on all of the constituents of these regulatory regimes in the EU and the US. Also, countries like Canada, Norway, Japan, Switzerland, Australia and a lot of national regulatory regimes have followed the EU and the United States in issuing similar sanctions against Russia, so it really has become a global challenge.
How can we ensure that the sanctions are taken into consideration when trading with particular countries?
The compliance functions within banks and treasury departments use third parties like Thomson Reuters to manage detailed lists of entities that fall within OFAC restrictions and other sanctions regimes. These sanctions create an additional burden on investment and trade compliance as financial institutions must ensure they do not trade or settle new debt or equity issued by sanctioned entities. Another complication is that the sanctions also apply to any subsidiary of a sanctioned entity, which further complicates the tracking process. Establishing the appropriate controls to avoid trading in sanctioned instruments is a massive “connect the dots” exercise.
How have these sanctions helped to combat money laundering?
OFAC has fined banks hundreds of millions collectively over the past two years for money laundering violations. The sanctions have further highlighted how critical compliance functions are to banks and corporate treasurers. We expect these events will lead to even more attention on how institutions are developing additional controls to ensure compliance with OFAC and other national authorities and will ultimately lead to more effective anti-money laundering capabilities.
How are these Russian sanctions used to get around using digital currency?
The intent of the sanctions is to limit the ability of select Russian banking, energy, and military concerns to finance their operations through Western capital markets, as well as limit their access to specific technologies. The securities that are subject to the sanctions are denominated in established currencies like Russian roubles so digital currencies like bitcoin cannot be used to circumvent the sanctions.
How have changes in energy prices affected Russia?
Russia generates more than half of its revenue from oil and gas, so the declines in oil prices specifically, and energy prices in general, have a massive impact on the Russian economy. When combined with capital flight as a result of the sanctions, the Russian economy contracted by nearly 5% in the second quarter alone.
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