How to prepare for operational risks in Russia during the hard times?

The Finnish subsidiaries operating in Russia should pay attention to monitoring and controlling the companies in this difficult economic situation. According to Russian practices, subsidiaries usually operate without Board of Directors: unless otherwise decided, the general manager forms a board of one person, which has no strategic importance concerning the operations of the business. In practice, the Board of Directors or Management Group formed by Finnish parent company is operating as the Board of Directors and as an operational supervisor for the subsidiary, within the framework defined in good governance. As the economic sanctions intensify the business atmosphere, companies should pay particular attention to the changes in legislation and the increasing, distracting inspections. The positive development in the business environment has stopped, or at least slowed down – at the same time different inspections in companies have increased in number: as an example the surprise inspections and closing of the McDonald’s restaurants in Moscow. One of the lately introduced, unfavorable legislation changes relates to suspected tax crimes. More power was returned to the investigative officers by an amendment to the law signed by Putin 22nd of October 2014. The new law repealed the earlier, important reform made by Dmitry Medvedev in year 2011, which ruled that only tax officers could initiate a criminal tax prosecution. According to the new law, the investigative authority can initiate the criminal tax prosecutions. This change will significantly weaken the foreign companies’ legal protection and business opportunities. At the same time, it makes the operating environment more uncertain and less favorable.

How to operate in the new situation?

It is clear, that after the collapse of ruble, the purchasing power of the Russian companies has weakened and financing problems have increased. This has resulted e.g. delays in payments, unpaid bills and even lawsuits. The investments of Russian clients are frozen. Planned deals are postponed since many Russian banks are on the sanctions list and do not receive foreign financing. This also means that the Finnish subsidiaries face more problems in their operations. New investors are not flowing into Russia. Acquiring new customers gets more difficult. The subsidiaries are more and more dependent from the finance and services from parent companies. Repatriation of profits can also get more problematic. It is obvious that the situation must be followed, more carefully than ever before. In addition, abuses can increase when the companies have fewer opportunities for increasing wages in the shrinking markets and with the economy going downhill. As President Niinistö mentioned in his speech a little while ago: “The Cossack will take what is loosely attached” (a Finnish saying). Even though the companies, that make their invoicing in Euros can also benefit from the situation, even if their turnover would not increase.
Companies can prepare to the situation by making the contracts with extra care, and paying attention to the sanction clauses, which give more security in the contracts. Also taking advance payments is a good way to avoid credit losses. Finding new solutions to maintain the business requires a new way of thinking: finding local customers and suppliers can help through the worst times. New investments should be postponed into the distant future. In addition, it would be good to start finding new, replacing markets. New markets could be Germany, Nordic Countries, China, and other countries that are not affected by the economic sanctions. The golden age of Russian market is over, and return to the former glory is not in sight.

Pirjo Karhu,
Yrittäjäneuvos, CEO
Centre d'Expertise Oy