The international outlook is at its most turbulent in years. International businesses are under real pressure and an “economic hurricane” of unconfirmed intensity is on the way, according to the largest US bank (by assets).
Russia’s invasion of Ukraine has exacerbated matters, and resulted in the imposition of extensive sanctions, crystallising losses for investors. Moreover, with the war has come inflation, interest rate rises, and deep economic uncertainty. In short, the era of freewheeling globalization is coming to a shuddering halt.
Companies must now prepare for the fallout, and act to minimize the impact. Some businesses are sure to founder, and company director and management fraud, propelled by efforts at survival or at asset stripping, are already increasing.
Key to corporate survival and recovery in such circumstances is to act early to identify assets, and to strike quickly. Those businesses that can identify counterparty vulnerabilities early, and carry out pre-emptive asset searches, will be those that limit losses. Waiting to launch legal action at a later date is never a sound strategy.
The Russian invasion of Ukraine has resulted not only in the adoption of a breadth of sanctions on Moscow, but has also heightened tensions much further afield – including (but not limited to) the Taiwan Straits and South China Sea. The geopolitical environment is more combustible than in many years.
In response, many governments are overriding market freedoms, and augmenting restrictions imposed during the pandemic. The sanctions on Russia, for instance, may soon amount to a de facto embargo on its oil or gas. Moreover, new sanctions on other targets could follow. US restrictions on China could expand at short notice, for instance in the event of a Taiwan crisis, leading to a wrenching and sudden “decoupling”.
These political risks only add to existing economic uncertainty. China’s “zero-COVID” stance had already forced some companies to ask whether to restructure supply chains. Now, the Ukraine conflict has crimped supplies of oil and gas, wheat, fertilizer, nickel and neon, and worsened global shipping constraints – perhaps 10% of seafarers come from Russia, and 4% from Ukraine.
Such bottlenecks have combined with heavy spending and loose monetary policy to push inflation to its highest level in years. Worse, associated interest rate rises will now work on stresses induced by high levels of debt – perhaps best exemplified by the slow-motion crisis under way in the Chinese property sector.
In this context, the current debt crisis in Sri Lanka may be the first of a number to come; and political instability and civil unrest seem sure to thrive amidst debt crises and rising food prices.
Losses to come
The upshot will be steep losses, at least for some. Immediate shortfalls may come from the forced sale of assets; for instance, Guangzhou-based R&F Properties recently sold a property in Nine Elms in London for a USD90 million loss.
Equally, debtors will seek to restructure loans, or even default. No doubt some companies will rely on force majeure clauses to fend off contractual claims – particularly in states that fall into political unrest.
Regulatory risks will also lead to losses. Moscow, for instance, has strengthened capital controls, published a list of “unfriendly nations”, and seized foreign aircraft. Beijing could take comparable measures, were its companies to face similar sanctions from the US.
What to do
This troubling outlook poses severe challenges – but it is not insuperable. Companies can prepare themselves for the storms to come by carrying out independent assessments of vulnerabilities, and by conducting pre-emptive asset searches aimed at appraising the standing of key counterparties.
Of course, not all businesses will have a clear idea of how to act, not least as structuring an approach will vary. Every appraisal will differ in terms of the individuals and entities involved, the relevant legal structures (such as bonds, shares, cash or property), and the jurisdictions at play. Companies cannot just operate on a “cookie cutter” basis.
In this context SVA recommend an initial assessment. Such an appraisal would have: a business intelligence component, aimed at identifying events that might trigger non-payment or a fall into insolvency; and an asset search component, to help in assessing whether a counterparty is facing acute stresses, or has sought to hide assets ahead of a collapse. In short, such an appraisal would help a business understand how to pre-empt other claims, and so protect its interests.
Strategically handling such findings will also bear consideration. Senior executives will need to think about what “real world” solutions are available to them. After all, an immediate termination of a relationship may not be feasible, or could take time, and changes to payment terms or other core issues could cause friction.
Such considerations are important, though, as traditional solutions to disputes, such as cross-border litigation, seem unlikely to prove fruitful at present. Enforcement of a judgment in another jurisdiction has always been hard. In the current climate of distemper, it could prove impossible, particularly against a well-connected target.
In that context, those seeking to protect their interests should work closely, and at a senior level, with a key intelligence provider such as SVA, so as to sculpt the kind of business intelligence and asset search appraisal that would best protect their interests. They should then take immediate pre-emptive steps to protect their interests, rather than wait to launch legal action.
Forewarned is forearmed, after all.
SVA (www.stevevickersassociates.com) is a specialist international risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals and insurance companies and underwriters around the world.
SVA is in an extremely strong position to assist with assessment of relevant risks in this testing environment. We can provide detailed appraisals and investigations on an individual basis, aimed at dealing with potential risks or on a systemised basis. Moreover, we can assist with stress testing exercises and measures aimed at strengthening internal mechanisms.
SVA also has a dedicated crisis management team which, for our retained clients, stands ready to assist companies during crisis situations.
Retained clients pay an annual fee for a 24-hour response capability.
SVA is based in Hong Kong and Singapore, with operations all over Asia.