Refining Russian liquidity

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Sandvik’s determination to centralise cash across its Russian operations led it to break new ground in multi-entity pooling. Now that bank partner Nordea is pulling back, the company is having to find a new provider.

by Julian Lewis

Published: 11 March 2020

It took four years, but Sandvik’s determination to optimise liquidity across its Russian operations led it to establish what it and bankers believe is the country’s first cash pool with multiple legal entities. The initiative reinforces the Swedish engineer’s efforts to concentrate its cash in emerging markets – for which EuroFinance previously reported its African strategy here.

“Our policy is to centralise wherever possible,” comments Anneli Walltott, deputy group treasurer and head of cash flow management. Walltott, who joined the Stockholm-headquartered group in 2010, two years after it began centralising its liquidity and treasury management, led both the Russian and African projects.

The new arrangement, put in place despite scepticism both inside and outside the company and Russia’s laborious bureaucracy, lowers Sandvik’s risk and improves its corporate governance. “We wanted to increase efficiency in Russia, where we have lots of companies and many banks, by lowering overdrafts and reducing the number of bank accounts. At the same time, we were looking to improve transparency and control, as well as net interest,” Walltott explains.

Although it involves many unique features, Sandvik’s Russian breakthrough also illustrates a broader point for treasury in emerging markets: in-depth local understanding is key in dealing with challenging legislative and regulatory environments, along with persistence and support from banks.

Pooling pioneer

Russia is one of Sandvik’s largest operations. After a surge in 2018 it ranks alongside the group’s domestic market, with only the US, Germany, China and Australia contributing more to total revenues of 100 billion Swedish kronor ($10.4 billion).

In the course of its strong growth in the country, Sandvik accumulated as many as seven different legal entities, plus their subsidiaries. Each operated independently and had its own banking arrangements, with some relying on expensive overdraft borrowing.

Anneli Walltott, Deputy Group Treasurer and Head of Cash Flow Management, Sandvik
Anneli Walltott, Deputy Group Treasurer and Head of Cash Flow Management, Sandvik [right]
By centralising, Sandvik would offset its cash balances in the country to reduce overdraft costs. It also aimed to achieve a better rate on its overall rouble surplus than local companies could command on their own, as well as implementing its global payment solution to gain full control from Stockholm and reduce the risk of fraud.

However, local units did not share Sandvik’s appetite for the cash pool that appeared the obvious solution. With internal reluctance and uncertainty over the pool’s legal and tax dimensions, a project that began back in 2014 with the goal of closing by the end of 2015 eventually went live last year.

Just as in Africa, where Sandvik now employs Standard Chartered’s Straight2Bank Exchange (S2BX) platform for all of its transactions, the group consolidated its Russian banks to one core provider: Nordea.

However, the bank recently decided to “limit” its services to Nordic companies in Russia, according to a spokesperson. Sandvik is now meeting potential replacements. Nordea’s decision to limit its services highlights the potential downside for corporates of relying on a single provider – especially in a market like Russia where the headline risk of events such as the Baltic money laundering scandal is significant.

Finding a willing bank partner was not the only challenge. Establishing the pool required completing extensive documentation – particularly in creating the master account, which threw up many legal and tax issues. Sandvik also had to review the potential impact of measures like account suspensions on its local companies.

As part of an extensive mapping out of risks and mitigations the group consulted multiple law firms and accountants, as well as the Central Bank of Russia, Ministry of Finance and local tax authorities.

Meanwhile, efforts to find international peers to benchmark Sandvik’s approach against were fruitless. “We didn’t at that time find any relevant,” explains Walltott.

‘An ear to the ground’

Although Walltott describes the risk analysis required in Russia as “quite unique”, she draws broader conclusions from the cash pool breakthrough. “In difficult markets legislation and government are quite challenging. You can’t just copy what you do elsewhere – you have to have ‘an ear to the ground’ and really understand the local conditions.”

Accordingly, while Sandvik is also setting up cash pools in China and India, where it again operates multiple entities, it has not sought to replicate the Russian arrangement. In India, for example, this reflects the tax environment. A heavy tax burden forces foreign companies to instead create one pool per entity and its subsidiaries.

A further dimension is the potential for local entities to not support innovative change – either out of the assumption that conventional solutions are the only viable ones or a reluctance to stand out. “They can be crying wolf. You always need to verify and understand yourself before decisions are taken,” Walltott cautions.

An example would be the fear of creating the multi-entity pool felt among some of Sandvik’s Russian businesses. Although other markets are also challenging, “Russia is a difficult country when it comes to treasury-related activities and they emphasise different specifics,” notes Walltott.

“Reclassifying a group as a financial institution, seizing of pool master and participant accounts, as well as FX controls and transfer pricing, were all concerns that we needed to address and deal with.”

Besides detailed local knowledge, Walltott identifies attitude as key. “You have to be extremely persistent. I never gave up,” she recalls. “The decision was that we should be able to implement this. So that’s what I did.”