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ECONOMY

Corporate Japan gauges Russia risk as sanctions deepen

  • March 1, 2022
  • , Nikkei Asia , 3:24 a.m.
  • English Press

YUJI NITTA, Nikkei staff writer

 

TOKYO — As Japan joins the U.S. and the European Union in blocking Russian banks from international financial networks, Japanese companies are assessing whether their operations in Russia can be maintained amid the economic fallout.

 

Since Monday morning, a Japanese trading house has been checking direct deposit accounts used to pay employees working in Russia. As of now, the payments appear unlikely be impacted by the sanctions since they are wired to accounts created at a U.S. bank, the company said.

 

But many Japanese businesses wire funds directly to Russian-domiciled banks. Workers would face roadblocks accessing their wages if those banks are subject to sanctions.

 

Prime Minister Fumio Kishida said Sunday that Japan will join efforts to remove Russian banks from the SWIFT network for international payments. If a Russian bank is blocked from SWIFT, Japanese companies essentially will be unable to wire funds to affected accounts through Japanese financial institutions.

 

One likely alternative involves using European financial institutions with a strong presence in Russia, such as Italy’s UniCredit.

 

But it is uncertain how long such routes will remain viable. In addition to the potential for broader international sanctions, the plunge in the ruble’s liquidity has made procuring cash in the market increasingly difficult.

 

Liquefied natural gas is Japan’s largest import from Russia. Much of the Russian LNG comes through the Sakhalin-2 oil and gas development project, in which Japanese trading groups Mitsubishi Corp. and Mitsui & Co. hold interests.

 

When Japanese power and gas facilities buy LNG, they make payments to the resource developers through Japanese or international financial groups. The funds typically are denominated in dollars. Multiple banks, including those in Russia, are involved in the paperwork.

 

If sanctions block a bank from receiving wire transfers, a Japanese bank would need to transfer payments through a Russian subsidiary, among other alternatives.

 

Japanese manufacturers with factories in Russia are rushing to gather information as well. Toyota Motor, which operates a plant in St. Petersburg, apparently can maintain production for now thanks to having parts inventory covering about one month.

 

Output may slow depending on parts supplies from Europe and the level of inventory. Imports of assembled vehicles into Russia likely will stall due to port disruptions.

 

Mitsubishi Motors runs an assembly plant near Moscow with Dutch-domiciled automaker Stellantis. Critical parts are sent to the factory from Japan and Thailand. Payments are made in rubles, so an immediate halt to parts supplies due to a hold on payments is unlikely. But Mitsubishi Motors is investigating the impact on the supply chain.

 

Resource development drives strong demand for construction and mining machinery in Russia. Komatsu, the Japanese heavy equipment maker, established an emergency task force on Monday led by company President Hiroyuki Ogawa to collect information regarding the effect of the sanctions.

 

“The depreciating ruble will raise the price of construction equipment that is being imported and sold, which will potentially depress local demand,” said Takeshi Horikoshi, Komatsu’s chief financial officer.

 

With the sinking ruble and other factors, “the economy is already starting to destabilize,” said Masashi Nakajima, professor of economics at Japan’s Reitaku University. “Turmoil in the financial markets may occur in the shorter term than [the loss to access to] SWIFT deteriorates the Russian economy.”

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