18.06.09

Managing Foreign Currency Losses in a Ruble Economy -
Financial and HR Aspects
Chet Bowling, Managing Partner, Alinga Consulting Group

With the dramatic drop in the ruble’s value, many business have found that exchange rate losses are not only a financial problem but often an HR management issue as well. We found that the main key to facing both challenges was constant and effective communication.

Alinga, like many other companies in the market, was encouraged by the strength of the ruble during 2006 – 2007 and changed its primary billing currency to the ruble. Fortunately two factors helped offset this ruble dependency: 1) The nature of the start-up services we provide – company formation and consulting on accounting system setup for reporting under RAS. Since most of these clients did not yet have a presence in Russia we were forced to bill in foreign currency. 2) An inherent currency risk aversion (many of our Partners had survived the 1998 financial crisis) led us to keep a large part of free funds in foreign currency and only convert to rubles as needed. While this was painful while the ruble was strengthening before, when the crisis hit we were glad we had maintained the conservative policy.

Managing cash flow is among the most significant financial challenges. A lot depends on the business cycles. At Alinga we have a quarterly billing cycle and one possible solution to better manage the ruble devaluation was to move to a monthly cycle. However, while mitigating the effect of exchange loss, this would have severely affected cash flow. We did not come up with a one-size-fits-all solution. We analyzed our clients’ paying patterns, worked with them individually to understand their budgeting and decision-making processes, and based on this, we offered some to convert to euros or dollars and, in some cases, we left the billing in rubles in recognition of “customer loyalty.”

Budgeting and forecasting were also financial challenges. Following the “prudence” principle, we forecast a weaker ruble on the revenue side (lower income in dollar terms) and a stronger ruble on the expense side (higher expenses). We made operational changes based on that scenario.

The valuable lesson learned was that the rapid access to business intelligence (financial and operational) which we had – even as a small company – proved to be invaluable in providing the information needed, in a timely fashion, to understand the trends and cycles of the business and to help make informed decisions.

The HR challenges of managing and explaining the currency losses were related to the fact that, in rubles, our revenue was growing in most months. However we were cutting back expenses nevertheless and managers were questioning this. A few factors helped us in dealing with this issue:

• Historically we had always communicated the results to the staff in US dollars rather than Russian rubles;
• We explained that we had majority foreign stakeholders that only understood and measured our performance in foreign currency;
• We began discussing our financial results more frequently with middle management and departments heads;
• While stressing the overall weaker bottom line in USD, we also emphasized the strong ruble results (before the exchange losses), thereby showing our team that we were still in a solid financial position despite the need to scale back.

The main lesson here was what most “gurus” have been saying – communication, communication, communication - both internally with the staff as well as externally with clients.

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