Assessing corporate risk in Ukraine

Written by Reuters | Updated: Mar 7 2014, 08:28am hrs
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 Frances 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 Ukraines top 10 lenders. International companies involved with Russian finances include Austrias Raiffeisen, Frances Socit Gnrale, 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 analyse 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.

Companies also monitor the steps taken by governments seeking to influence Russiaincluding the increasing call for sanctionsand Moscows possible responses.

These corporations must make sure their actions are in compliance with the legal framework of their country of origin, for they can be severely penalised for violations. Standard Chartered, for example, paid fines for breaching U.S. sanctions against Iran, Sudan, Myanmar and Libya. If Washington and the EU 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 lineparticularly 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 defence at a time of crisis.

In Ukraine, for example, official institutions have been weak since the countrys 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 assessmentwithout dragging the entire organisation 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 existbecause of high potential returns on investmentare 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.

Lucy P Marcus