The war in Ukraine: Four areas of focus for finance and risk
May 27, 2022
10-MINUTE READ
May 27, 2022
10-MINUTE READ
Russia’s invasion of Ukraine has had dire impacts, sparking a humanitarian crisis and the drastic upheaval of day-to-day life.
The economic impact is rippling across the globe, including from sanctions and disrupted physical supply chains. As a finance and risk leader, you play a critical role in helping your business navigate the fray.
You know better than most how macroeconomic trends impact business. You also have a line of sight into data and reporting across the enterprise. These insights can help your leadership team devise a data-driven, strategic response to crises.
Both Russia and Ukraine are important suppliers of commodities and raw materials, many of which have seen sharp price increases since the war began.1 They’re both significant exporters of agricultural products that are critical for food and beverage companies.2
~30%
of wheat
35%
of barley
75%
of sunflower seed oil
17%
of corn
Ukraine is a key source of raw materials for the semiconductor industry, with about half of the world’s neon gas supply and 40% of its krypton gas supply.3 Semiconductor chips are critical inputs into numerous products and services, including household appliances, smartphones, laptops, printers, gaming consoles, PCs, automobiles, airplanes, and medical devices, among others.4
Russia is an energy powerhouse that ranks as the world’s third largest oil producer and top gas exporter.5 Oil and gas prices have skyrocketed due to concerns about Russian supply. While they’ve dipped since their peak in March 2022, they’re still high compared to historical levels.6
The impact on profitability will vary across industries and markets. Naturally, it depends on the importance of energy, raw materials and agricultural commodities to cost structure.
Sectors like automotive, industrials and food could take a significant hit, particularly in Europe, where reliance on Russian oil and gas is highest. The pressure on prices and wages from these supply shocks will have ripple effects across other industries globally.7
Inflation
The current shock has drawn comparisons with the stagflationary shocks of the 1970s.8 However, the impact of oil price surges has become less severe over time and consensus estimates don’t see inflation reaching double-digit levels in the next year in the United Kingdom, France and Germany (Figure 1).
Figure 1: Energy price shocks and inflation in Europe
Note: Stagflation refers to the combination of sluggish growth twinned with high inflation. We consider the average of the UK, Germany and France. E = expected. PP = percentage point
Source: Accenture Research analysis of OECD statistics
Consumer confidence in Europe has dropped, reaching its lowest level since April 2020 in April.9 In the United States, consumer sentiment was already on a downward path and hit its lowest level since August 2011 in early May.10 The erosion of consumer confidence is of particular concern for consumer goods and retail, as it may decrease spending.
GDP
The conflict in Ukraine is also likely to drag global gross domestic product (GDP) growth:
The question of recession
The consensus among international institutions and investment banks is that we’ll avoid a recession in 2022.13 However, long-term headwinds are mounting. Monetary policy is expected to tighten aggressively in the US. This has some analysts pointing to the risk of a recession next year.14
Against this backdrop of uncertainty, chief financial officers (CFOs) and chief risk officers (CROs) should assess vulnerabilities and cost reduction while pivoting to new sources of growth.
In unpredictable situations, focus is essential. While each organization has its own priorities, we recommend paying attention to these areas in the short term:
Navigating uncertainty without data is like navigating a storm without radar. Insights help you to act with speed and agility.
Work with stakeholders to build a rapid scenario modelling capability. The shorthand:
Areas to model will vary by industry and market but may include:
Remember: Good scenario planning isn’t a one-and-done exercise. It’s ongoing and iterative.
Your goal is to run a series of scenarios that continually reflect changing circumstances and assumptions.
Are you ready? Questions to be asking.
The crisis in Ukraine affects a company’s risk profile along five major dimensions. As an integral part of decision-making, screening and strategy planning, the CRO and their team should work with finance to review exposure across all of them.
Hackers are increasingly fueled by ideology, rather than traditional financial motives, which makes it that much harder to predict targets.16
Consider setting up controls for new threats based on analysis of cyber intelligence.
Are you ready? Questions to be asking.
If you have major operations in Russia and Ukraine, cutting costs could be a matter of survival.
Scan your value chain
The crisis primarily affects business outlook through inflationary pressures. As such, keep a close eye on cost structure. Consider both direct exposure to higher energy and raw materials costs as well as their indirect exposure to inflation along the value chain.
Take inventory of general costs
Quickly cutting general costs is a playbook move in a crisis, and this situation is no exception.
Items for discussion:
Keep in mind, the broader goal is to reset your cost baseline for the emerging new reality.
Usually, sanctions are imposed faster than they’re removed. As a result, cross-border trade may continue to be costly. The crisis has also recentered focus around fossil fuels, accelerating the trend toward renewable energy. Talent was scarce before the crisis and it is likely to remain so after. For this reason, it’s important for cost-cutting programs to allow for the support of strategic assets.
Are you ready? Questions to be asking.
Many businesses have already made the decision regarding whether to suspend or discontinue operations in Russia. Recently, some companies that initially suspended operations have decided to permanently leave the country.18
1000
The approximate number of global companies that have announced full or partial withdrawal from Russia.18
To stay or go?
How you make and carry out these decisions may vary from business to business. The complexity, size and nature of your financial commitment in the market are all important factors. Companies in asset-light sectors may find it easier than those with challenges such as:
For them, the path from decision to exit is long and includes the risk of asset appropriation, among others. Given geopolitical uncertainty, CFOs of asset-intensive companies might consider discontinuing operations while trying to hold onto their assets, waiting for better times ahead.
Common issues to consider
Are you ready? Questions to be asking.
For now, change may be the only constant. But finance and risk leaders have the ability to bring things into focus for their companies.
Centering the discussion around these four areas—planning, risk, costs and divestment—will help you ground your CEOs and leadership teams with the critical analysis and insights they need right now. In doing so, you’ll all be better positioned to assess vulnerabilities, take action to contain costs and stay on track for growth.
Copyright © 2022 Accenture. All rights reserved. Accenture and its logo are registered trademarks of Accenture. The material in this document reflects information available at the point in time at which this document was prepared as indicated by the date provided on the front page, however the global situation is rapidly evolving and the position may change. This content is provided for general information purposes only, does not take into account the reader’s specific circumstances, and is not intended to be used in place of consultation with our professional advisors. Accenture disclaims, to the fullest extent permitted by applicable law, any and all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit, or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professionals. Accenture and its logo are registered trademarks of Accenture.
References
1 OECD Economic Outlook, Interim Report March 2022: Economic and Social Impacts and Policy Implications of the War in Ukraine, accessed March 31.
2 “Ukraine War Threatens to Cause a Global Food Crisis”, The New York Times, March 20, 2022, accessed on May 19, 2022
3 “Low on gas: Ukraine invasion chokes supply of neon needed for chipmaking”, Arstechnica.com, March 4, 2022, accessed on May 12, 2022
4 “These 169 industries are being hit by the global chip shortage”, Yahoo Finance, April 25, 2021, accessed on May 16, 2021
5 Energy Fact Sheet: Why does Russian oil and gas matter? IEA, March 21, 2022, accessed on May 1, 2022
6 “Worried About Oil Prices? These Charts Show What Could Come Next.”, Barron’s, March 21, 2022 accessed April 1
7 Accenture Strategy, “How businesses can survive & thrive through high inflation”, May 11, 2022, accessed on May 12, 2022
8 J. Ha, M. A. Kose, F. Ohnsorge, “Today’s inflation and the Great Inflation of the 1970s: Similarities and Differences", Vox EU, March 30, 2022, accessed April 13.
9 European Commission Business and consumer survey results for April 2022, accessed May 19
10 Marketwatch, U.S. Consumer Sentiment Fell in Early May on Inflation Concerns -- University of Michigan, May 13, 2022, accessed May 19
11 OECD, Economic and Social Impacts and Policy Implications of the War in Ukraine, Accessed on April 8th
12 UNCTAD, Ukraine war cuts global growth prospects by 1%, accessed April 8th
13 Accenture Research analysis based on Morgan Stanley, Barclays, Goldman Sachs, BNP Paribas, Credit Suisse and J.P. Morgan 2022 GDP & Inflation Outlooks. Data as of 21st March 2022
14 “Deutsche Bank is the first big bank to forecast a US recession”, CNN Business, April 5, 2022, accessed on April 8, 2022
15 “Russia to seize IP and assets of companies leaving the country”, Managing IP, March 16, 2022, accessed on May 23, 2022
16 “Global Incident Report: Threat Actors Divide Along Ideological Lines over the Russia-Ukraine Conflict on Underground Forums”, Accenture, February 28, 2022, accessed on April 13.
17 “Ukraine war prompts European reappraisal of its energy supplies”, The Guardian, March 4, accessed on April 13
18 “McDonald’s are leaving Russia altogether”, CNN Business, May 17, 2022, accessed on May 18, 2022
18 “Almost 1,000 Companies Have Curtailed Operations in Russia—But Some Remain,” Yale School of Management, accessed May 23, 2022