Market Updates | 18th March 2022

Initial thoughts on the impact of the Russia-Ukraine war

The unprecedented economic sanctions imposed on Russia in response to the desperate tragedy unfolding in Ukraine have isolated the world’s 11th largest economy just four months after global trade levels reached a record high, according to statistics from UNCTAD. The implications of this 21st century blockade are unknown as global supply chains—along with everything that depends on them—face their second potentially catastrophic shock in as many years. But it’s hard to believe that any sector in any part of the world economy won’t be impacted to some degree. Over the last two weeks, we’ve been starting to look at how the economic war will impact the professional services sector.

The immediate impact of this crisis has been on operations and people. Early results of an on-going survey based on feedback from (mainly large) consulting firms around the world suggest that half had taken action to protect their employees in Ukraine and/or Russia, and two-thirds had closed offices there and/or divested the Russian part of their business (please note that these percentages are of all survey respondents, but not every firm had connections and/or staff in that part of the world). The next most immediate problem has been to sort out contractual ties with Russian businesses: These range from cancelling specific contracts, which may incur financial penalties, to untangling the far more complex issues around, most notably, the obligations of statutory financial audits, some of which will take months to resolve. In this context it’s worth noting that only 4% of the firms we surveyed were making changes because of government pressure: Nine out of ten firms were doing what they thought was morally right, and two-thirds were concerned about the potential consequence to their reputation if they didn’t act quickly.

But, looking ahead to the long term, if the clients of professional services firms now live in an “Age of Crisis”, how are they likely to react to this new crisis? What impact will sanctions have on their need for professional services? It seems reasonable—for the moment—to consider two different scenarios: one in which the existing sanctions remain in place (or, at worst, are harmonised internationally) for the foreseeable future, and one in which they’re escalated, by for example, more comprehensive restrictions around Russian oil companies.

Beginning with the first scenario: Based on research we’ve carried out about the attitudes of clients post-COVID, three-quarters of organisations have emerged with more ambitious corporate goals. Driving this change are leadership teams whose confidence has been buoyed by the fact that they’ve survived—and in some cases, thrived—over the last two years. Success, they’ve learned, depends on the speed with which they react, even at the height of uncertainty, and their willingness to adopt radical, new solutions. Other than shifting more staff back to home-working, these teams were unphased by Omicron, so it’s not unreasonable to believe that they’ll adopt the same approach in this scenario. We should therefore expect to see a period of time when clients are working out what they need to do and re-allocating budgets from existing to new initiatives (monitoring sanctions compliance, reconfiguring supply chains, etc.). While this will cause a slowdown in demand for professional services, it will be short-lived: More quickly than they did in 2020, clients will realise they’re short of critical skills to do this work and will turn to firms for support. Moreover, as some of the second- and third-order consequences become apparent as time passes, levels of demand are likely to remain high. This wave of activity will have an impact on all parts of the private sector, but will obviously be most acute among the biggest, most complex multinational corporations, especially manufacturing (which accounts for 18% of the global professional services market), TMT (12%), and financial services (26%).

In the second scenario, tighter controls around energy and other natural resources creates huge pressure on a wide range of industrial and consumer manufacturing companies, with implications all along downstream supply chains. The sudden and urgent need to find alternative energy supplies and sources of scarce commodities will change the return on investment decisions, triggering widespread M&A activity as companies seek to create more vertically integrated businesses. All this will require support; however, rampant inflation and falling consumer confidence could well lead to cutbacks in the use of professional services that may offset increased workloads elsewhere.

For the moment, this is an initial analysis based on a very limited number of data points. Over the next few weeks and months, we’ll not only be continuing to gather data on the probable impact of sanctions but will also be providing estimates on how demand for professional services might change as a result.

If you’d like more information on our data sources, please do get in touch.