Russia-Ukraine war highlights the need for strong FX risk management
The Ukraine crisis has led to a surge in FX volatility following the strict economic sanctions placed on Russia from countries around the world, increasing the need for strong FX risk management for corporates to protect their bottom line, according to experts.
“In such times managing your currency exposure is paramount in the here and now but it also highlights the importance of formulating a strategy in advance to protect yourself against adverse currency movement,” says Reece Dye, head of corporate clients at Clear Treasury.
“It’s looking increasingly unlikely that the events in Ukraine will de-escalate any time soon, and should that be the case, businesses should be fully prepared for the volatility to remain. […] Being alert to any favourable spikes in the market is critical and has the ability to minimise the impact on a business’s financials,” he says.
However, the recent spike in volatility is no different from any other economic crisis, explains Wolfgang Koester, chief evangelist at Kyriba.
“Significant currency movements in response to geopolitical crises are not new. While CFOs cannot anticipate market volatility, they can prepare for it by understanding how vulnerable their balance sheets and income statements are to currency risk. Currency volatility can be proactively managed.”
Moreover, the “calm” currency markets of the latter part of last year should have been a “warning sign” of the high volatility to come, he says.
Multinational companies based in North America and Europe had $11.98bn in total impacts to earnings from currency volatility in Q3 of 2021 compared to $27.87bn in Q2, according to a recent Kyriba report.
“Currency markets are cyclical so while current events may not have been predictable, the fact that volatility would occur was a realistic probability,” says Koester.