Treasury Management Challenges in Russia

Russia has become a key market in the wake of the global financial crisis, with many firms keen to increase their geographical footprint. However, operating a treasury function in the country can be far from straightforward, with the unwary facing regulatory, language and technological hurdles. But there are strategies available for negotiating these potential pitfalls.

Paul Stheeman, treasury consultant and former director of international treasury with Petro-Canada, points out that banking systems and standards differ from those used in Europe. “Everything is still done in Cyrillic language, making interfaces to treasury systems and this kind of thing extremely difficult,” he says. The other main challenge is that Russia is still very much a cash-based society. “Most suppliers in Russia still expect cash.” However, there are reasons to encourage a move away from cash, such as the increased potential for corruption, Stheeman says, adding that he has not, however, personally experienced corruption in the treasury space. “That is one reason treasurers would want to move away from cash as far as possible. If there are any illegal payments, cash is the way that such payments are most likely to be made.” A third issue is that of regulation. Navigating tax regulations and the impact that those have on treasury operating in Russia can be complex. “For a non-Russian it is quite difficult to understand exactly some of the regulations,” Stheeman adds.

Building relationships is a vital part of operating in Russia – not least because of the language barrier – a significant number of people speak only Russian. It is vital to have either a team member or a consultant with both the necessary language skills and treasury experience to meet with the authorities as well as the banks. For example, one of the requirements of the central bank’s clearing system is that payment orders have to be submitted in Cyrillic language. Stheeman says flexibility is key for companies operating a treasury in Russia. “A foreign company cannot go into Russia and expect, without having the necessary experience, to be able to work there as a treasurer. You also cannot expect the treasurer to try and do things the way you many be used to doing them in any other European country,” he explains. The international professional services firms such as PricewaterhouseCoopers and KPMG are likely to be the first port of call, but smaller, specialised firms with a high level of local knowledge may also be an option.

A Developing Landscape

The general treasury landscape is developing, albeit slowly – in some regions of Russia, payments can take up to a week to clear. “As soon as you get outside Moscow or St Petersburg, you are in a treasury wilderness. Some of the innovation and improvements, which certainly have been seen over the last couple of years in Russia, have been limited to the two major cities,” says Stheeman. “I get the impression [however] that it is certainly moving in the right direction. They are keen to learn from what is being done elsewhere in the world.” Banks are moving to improve their payment and clearing systems. The improvement is likely to be driven by the larger Russian banks, which are growing a network of branches exceeding the reach of both smaller local banks or the Russian subsidiaries of foreign banks.

However, as mentioned above, the local treasury space is unlikely to develop hugely unless local regulations are relaxed. “The inability to get around central bank reporting requirement hinders them an awful lot,” Stheeman comments. Additionally, all banks in Russia have to be local entities. “They cannot be foreign entities of, for example, European or American banks. So they are all subject to Russian rules and regulations and that limits the scope of what they can do,” he adds. For example, specific tax regulations implemented by the Russian Central Bank pertain to any trade with non-residents. It requires a passport of effects contract, which can take between three and five days to create. Once created, there are myriad regulations to negotiate in the ongoing trade relationship.

For example, if you trade with a foreign company where foreign exchange (FX) is involved, those regulations will control issues such as liability to the state, including unpaid tax credits. Although an ongoing tax credit in itself is normal for a multinational, local regulations set the limits for the size of that credit. It also carries certain reporting requirements. Similar laws – with attendant fines – closely regulate how quickly money made abroad by a company trading in Russia is moved back into the country. “There is lots of attention to FX to make sure you are not moving it out of the country,” says Valeriy Zubkov, treasury controller at London-headquartered British American Tobacco (BAT). Nikolai Lukashevich, head of Russian/CIS corporates at ratings agency Fitch, points out that intra-corporate loans may create certain unwelcome tax consequences: “It may require lengthy corporate procedures for approval, which from a treasury perspective is a considerable hindrance to seamless cash flow circulation across the globe,” he says.

The Banking Landscape

Russia has a number of large international banks used by multinationals, often in conjunction with the larger Russian banks, the biggest of which is Sberbank. There are also a number of small, localised banks serving a specific industry, as well as internal banks for a particular company. Additionally, although less visibly during the financial crisis, international banks have been expanding into regions by acquiring local small players. However, integration moves slowly, requiring the replacement of legacy systems and the implementation of new processes. There has been a move by the government and the central bank to rationalise these. “It feels as though the government is seeking the rationalisation of all the small players in favour of the bigger, better credit banks. This is potentially set to continue – it all depends on how the government and the central bank approach this,” says Zubkov.

Treasury Priorities

As everywhere, cash management is high on the agenda for treasurers operating in Russia. Many corporates in the country therefore rely heavily on overdraft facilities from domestic banks for funding. Some banks use overdraft facilities extensively, although these are typically for a very short period of time. Revolving credit facilities, although not uncommon, are less extensively used than in the European corporate world. “We still see a lot of non-revolving credit facilities here and obviously these are a bit more challenging for treasurers than revolving instruments,” Lukashevich says, adding that short-term liquidity has become less of an issue than 18 months or even a year ago. “The banking system has plenty of liquidity and it’s not difficult to get cash in the market,” Lukashevich says.

In terms of investment, it is also very important to hold spare cash on the balance sheet in an environment where large domestic banks are happy to pay high rates of interest on deposits. Bank deposits are a frequently-used instrument, which ostensibly call for planned withdrawals but actually allow cash-on-demand. The interest paid on these deposits will largely depend on the length of time the cash is held by the bank – for a year, the interest rate will be around 7%, with the corporate being penalised if the cash is withdrawn earlier. There has been a notable increase in the flexibility of cash deposits – where banks used to penalise corporates heavily for withdrawals ahead of schedule, they can now expect a significant proportion of maximum interest on their deposits, even if these are called ahead of schedule.

Although local banks pay a significantly higher rate of interest on cash deposits than both their international counterparts and international banks based in Russia, they have a lower credit rating. “The difference in interest rates [between domestic and international banks] has declined recently, but the general trend is likely to stay broadly the same,” Lukashevich says.

The Russian securities market is also attractive to investors, according to Joakim Sjolund, client executive at SEB Russia. Among major instruments traded on the Russian stock market are corporate shares and bonds, government bonds, Central Bank of Russia (CBR) bonds, promissory notes of Russian banks and companies, Eurobonds and shares in mutual funds. “The major types of government bonds are federal loan bonds (OFZs) and CBR bonds denominated in Russian roubles, and foreign currency domestic bonds in US dollars (MinFin bonds),” he says. The OFZs are traded on the stock market only, while the MinFin bonds are mostly traded on the over-the-counter (OTC) market. Repo and reverse repo operations also exist on the Russian security market.

Harnessing Processes

Processes such as netting and pooling, that are popular with treasurers around the globe, are used to serve different business units within Russia, especially within the commodities industry. However, these processes are still relatively little-used by multinationals operating in Russia, owing to the combination of a relatively unsophisticated approach to treasury processes and the Russian Central Bank regulations on the registration of incoming and outgoing payments. “These processes are still a grey area in Russia. From what I understand, there hasn’t been a huge amount of improvement in that area. It’s not really possible in the country. Some banks now offer it, but I cannot say what the quality of service they provide there actually looks like,” Paul Stheeman says. He recommends having one bank account, or as few bank accounts as possible, thereby reducing the requirement for pooling. “But it basically doesn’t exist, certainly not in the manner we know it in other countries,” he adds.

“When we are trying to implement something that is different from the plain vanilla instruments, it takes a while before the guys on the other end of the line understand what you are trying to achieve. Although it might be a very simple market convention in London, it’s not very well understood in Moscow yet,” Zubkov explains.

“Two to Tango”

The development of treasury practice in Russia depends to a large extent on what banks can offer. “It takes two to tango. From the corporate perspective, they are limited to the choices that are provided by the banks. From that perspective, I haven’t seen any new instruments over the last year,” says Lukashevich. Stheeman contends that Russian banks are not particularly flexible. “They tend to have their rules and if you come up with some ‘western European magic’ they’re not going to be particularly receptive to it,” he says.

Paul Stheeman’s main advice for a company opening up in Russia is: plan lots of time for things to get done – it can take “five times as long” as in any other country. “Russian banks are still very bureaucratic in their bank account opening process.” Where the same documentation could be used in other countries, regardless of which one, this is often not possible in Russia. “It is these kind of obstacles you have to be aware of,” he says. “You can’t just rush in and open accounts and make payments. Things go much more slowly and banks are much more bureaucratic, not necessarily of their own accord, but simply due to existing regulations.”

Competitiveness – or the lack of it – is also a factor in the regional banking environment. For example, there is no FX portal to compare the facilities offered by local banks, which have to be contacted individually. Trading also is not automated. However, the agency dealing model allows London-based treasurers to challenge local banks on pricing, as well as increasing efficiency with the use of more sophisticated products than are offered in Russia. “If you look at the market, most of the multinationals in Russia are focusing on the straightforward money market deposits or FX forwards for their needs,” says Zubkov. “They occasionally use more exotic instruments, such as options, for example for the hedging requirements.” Owing to the wider margins they charge for FX, Russian banks or Russian representatives of the biggest banks are highly reluctant to use FX portals. “For example, the market in London is much bigger and more transparent – banks are forced to give you a better price,” Zubkov explains.


Although the Russia treasury landscape is still uncertain, there are signs that the environment is becoming easier to operate in. Combining local expertise with international banking instruments and reach is a sure way of getting the highest possible value from a Russian-based treasury function.

Managing Cross-border Regulation

UK-headquartered BAT operates three geographically distant factories in Russia – Saratov, St Petersburg and Moscow, where the head office is also based. The existence of a single distributor facilitates collections. Netting and pooling internally within the country is feasible, but the regulations do not allow the sweeping of funds into the centre, in London. “The problem from the perspective of the head office is that either we cannot get access to the cash – it sits in the head office, apart from the dividends, for example, or that it is costly and difficult to get it out,” says treasurer Valeriy Zubkov. A small treasury team is based in the country to look after funds not available from London, where the dealing room manages cash globally, but has limited access to cash in Russia because of the cross-border regulations. To accommodate this, the company uses the agency dealing model, which allows it to contact banks directly in Russia, trade funds in Russia on behalf of the Russian entities, but not take funds out of the country. BAT mostly deals with representatives of the big international banks based in Moscow and St Petersburg. The process is made more efficient because BAT has collections from a single customer, and a clearing system that works across Russia and in conjunction with Sberbank.



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