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Effects of the Ukraine war on credit management

What are the economic consequences of the war being fought by Putin in Ukraine and what impact does it have on credit management?
Schumann Insights, Blog post
24.03.2022, Prof. Dr. Matthias Schumann

The economic effects of Putin's war in Ukraine can already be clearly felt due to the worldwide networking of value-creation chains. The prices of gas and oil have risen significantly. The result is an increase in prices in almost all areas as energy is an important input factor for production.

But what are the resulting effects for credit management? Here, we can make a difference between direct and indirect effects.

Direct effects are being created by the economic isolation of Russia and the loss of value-creation capacities in Ukraine.

  • For the affected industries and companies, withdrawal from the Russian market means a reduction in turnover – in consequence also a reduction of the EBIT.
  • Investments in Russian production capacities may need to be written off. This will lead to a reduction in profits and, in the case of debt financing, to further financial burdens without any income to offset them.
  • Losses in production capacities can also lead to supply shortfalls.
  • In Ukraine, which was heavily export-orientated, the loss of at least one wheat harvest must be assumed. Equally, this well-established IT location is not currently able to participate, which will lead at least to delays in projects and in some cases to their cancellation. The automotive supply industry is also massively affected.
  • Reorganization and changes of location involve financial burdens. Investment will be necessary.

As a consequence, companies which were in financially challenging circumstances already before this crisis and are now affected by this new situation will get into further difficulties. For such companies it is therefore necessary to check whether they have involvement in the affected regions. If this is the case, more exact analysis in relation to the effects must be performed.

The indirect effects will also have enormous consequences for our economy.

  • The loss of suppliers will lead to a lack of input products and thus to breaks in supply chains. This will cause production stoppages in later stages of supply. Switching to alternative products will take time and will make capacities scarce. The consequence could be loss of turnover and possibly payment difficulties. Also here, analysis must be performed to determine whether supply chains from particular regions are affected.
  • The chip crisis will continue for longer. This will also make the problems worse, not only for automobile manufacturers but particularly in mechanical engineering.
  • The transport sector is suffering from the increased fuel prices. For transport contracts with fixed prices there is a danger that the costs are not covered or that expensive diesel purchases cannot be performed. Insolvencies will be the consequence.
  • The broad inflation with increasing prices (e.g. for energy) will result in a reduction in consumption. This will cause difficulties for company planning.
  • Another consequence of these price increases will be demands for higher salaries and wages. If these demands are met, this will lead to further price increases or jobs will be relocated to cheaper regions. The consequence will be a loss of buying power. Additionally, short-time working is still being subsidized due to corona and here also "catch-up effects" in terms of job losses are to be expected.
  • We are already seeing an increase in interest rates for mortgages. Refinancing will become expensive and the rate of construction will slow down.

The scenario of an economic recession therefore threatens.

In addition, the Ukraine war is causing further economic problems:

  • Russia is threatening to nationalize western companies and property. For example, a large percentage of the Aeroflot planes are leased from western companies. If they are nationalized, this amounts to expropriation. The leasing payments can be written off by the leasing companies.
  • It is also questionable whether Russian loans from western credit institutions will be repaid.
  • Larger projects are secured with guarantees. It could also be that these projects are stopped or fail. The question then arises as to whether the guarantees can be activated.
  • Equally, the insolvency of Russian companies is to be assumed. The same applies, of course, to companies in Ukraine.

The economic situation is therefore extremely volatile. The result is many difficult tasks in the area of credit management. IT systems can help by selecting endangered companies according to specific criteria and initiating appropriate measures.