With the situation in Ukraine turning more serious by the moment, even those who believe they have no exposure to Russia may be unwittingly entangled--for two primary reasons. First, as pointed out by Damian Handzy in a series of excellent posts “it’s easy to be fooled into thinking that since a portfolio has no direct exposure to Russia that it won’t be affected by these events. In reality, many countries, including Germany, are significant trading partners of Russia’s and their equity and fixed income markets would certainly suffer from contagion.” Second, the EU and the US have already imposed sanctions–primarily (but not exclusively) against specified Ukrainian and Russian individuals. Anyone dealing, directly or indirectly in any manner, with sanctioned entities, or those likely to be sanctioned, needs to get on top of the situation now.
The background is explained in Damian’s post, which notes that native-Russian speakers understand terms used by Putin (only now referencing Ukraine as core Russia) to be a strong signal that Russia might invade.
What to do? For those who believe they have no exposure to all this, Damian recommends a series of stress tests with modeling including spikes in energy prices and agriculture. The tests should include Russia’s main trading partners, Germany, Italy and France, where he notes, “Contagion to the interest rates and bond prices in Russia’s largest trading partners should not come as a surprise to anyone.” (The specific tests can be found in his posts.)
Also, even those without direct investment exposure to Russia, need to determine whether their firm must take action under sanctions imposed so far or which may be imposed if the situation worsens. Both the US and the EU imposed sanctions in March. The sanctions contain ambiguities; still, missteps can bring substantial fines and even criminal liability. Currently the sanctions are generally directed at specified individuals. However, they also include entities and other assets these individuals own or control, prohibitions on directly or indirectly making resources available for the benefit of such persons, and other concepts whose application in practice may be difficult. Changes to these requirements (which may in the future include other persons and entities) need to be closely monitored. The extraterritorial reach of the sanctions to entities located outside the US and the EU also needs to be considered.
The sanctions, applying to all transactions with sanctioned entities, can include payments to investors, clients, service providers, contracting parties and counterparties. The impact of the sanctions under relevant contractual provisions, such as derivative documentation, must be understood and may involve difficult issues of law across several jurisdictions. An excellent post about these issues can be found here.
Unless a firm understands the interplay of market risk and economic sanctions on its operations, it is not able to answer the question, “Impacted by Crimea?”