Assessing corporate risk in Ukraine
As the crisis in Ukraine escalates, boardrooms and senior management teams worldwide are now likely talking about the problems of doing business in conflict zones. These regions test the boundaries of risk tolerance.
Any multinational corporation involved in and around Ukraine and Russia must be feeling the impact. Companies such as Italian group Eni and France’s EDF, which signed an offshore oil and gas production-sharing agreement with Ukraine in November, are likely to be monitoring developments. So, too, are Chevron and Royal Dutch Shell, which signed shale gas deals with Ukraine.
Many financial institutions also have exposure. Consider UniCredit, one of Ukraine’s top 10 lenders. International companies involved with Russian finances include Austria’s Raiffeisen, France’s Société Générale, and Citigroup, Morgan Stanley, and Goldman Sachs.
The ripples extend from companies invested in companies in the region to those that do business with them. Ukraine is a key transit route for energy supplies from Russia to Western Europe, so this instability could domino into Europe.
What are these companies thinking about when doing a risk assessment? They analyze the security of their staff on the ground and of their corporate assets. They consider consumer behavior, both in the embattled region and in response to the actions they take there, as well as the behavior of other businesses.
These corporations must make sure their actions are in compliance with the legal framework of their country of origin, for they can be severely penalized for violations. Standard Chartered, for example, paid fines for breaching U.S. sanctions against Iran, Sudan, Myanmar and Libya. If Washington and the European Union do impose sanctions on Moscow, companies must observe them.
Most multinational companies doing business directly or indirectly in the region likely have a plan in place to mitigate the risk. Even so, no amount of preparation will avoid some impact on the bottom line — particularly as the markets grow jittery.
Companies should consult with experts on the region, but they must also pay attention to in-house or local expertise. Businesses need to be able to rely on their own internal resources, which most multinational companies operating in any high-risk region will have.
Political crises have many underlying factors that can each pose dangers and require companies to put mitigation in place. This can be a first line of defense at a time of crisis.
In Ukraine, for example, official institutions have been weak since the country’s independence at the end of the Cold War. For more than a decade, Ukraine has been a fragile state. Rule of law has been shaky at best, corruption systemic, and successive governments devoid of sustained popular support.
All this should have made investors and those doing business in the region cautious, knowing it is something of a powder keg.
If a company has done a comprehensive assessment, then they are aware of the potential for serious risk to their operations. Contingency plans can help limit their exposure. These companies will also have insured against loss, destruction, and disruption. If confronting inevitable losses, they will have been calculated and contained based on that initial risk assessment — without dragging the entire organization into the regional chaos.
Ukraine is not an isolated situation. Wide-ranging companies now operate in some of the most challenging places around the globe, whether these are extraction industries like BP or consumer-based like McDonalds.
Many countries where exceptional business opportunities exist — because of high potential returns on investment — are plagued by some form of instability. This can be as extreme as what is happening right now in Ukraine, Venezuela, or Bangladesh; or the political unrest in Brazil or Argentina, or the volatile security situations in parts of China or India.
In a turbulent world, the essential lesson for corporations is to have a strong understanding of the risk involved and a clear internal guideline of risk appetite. Most important, boards and management teams have to keep an ever watchful eye on developing events.
PHOTO (TOP): A logo of Sberbank of Russia is seen behind a barricade in a camp of pro-European integration protesters at Independence Square in Kiev, December 17, 2013. REUTERS/Vasily Fedosenko
PHOTO (INSERT 1): A worker looks on at the site of a well for shale gas exploration at Yuzivska field in the eastern Kharkiv region, November 29, 2013. REUTERS/Dmitry Neymyrok
PHOTO (INSERT 2): Vehicles at a gas filling station, owned by Gazprom Transgaz Stavropol, with the company logo of Russian natural gas producer Gazprom on the station, in Stavropol in southern Russia, October 9, 2013. REUTERS/Eduard Korniyenko