Barloworld’s ability to continue to operate in Russia remains a key consideration for the board amid the ongoing effect of the Russia-Ukraine war and a tightening regulatory framework.
Based on the results of its internal forensic investigation, the industrial group said in its annual report this week it was preparing a remediation report that would outline steps to address breaches at its Russia operation, to be included in its voluntary disclosure that would be submitted to US authorities by early March.
“We are intent on concluding the forensic investigation and ultimately finalising the regulatory process with the US department of commerce’s bureau of industry and security,” said group chair Lulu Gwagwa. “We will apply remedial actions and the key learnings towards further strengthening our internal control environment, where necessary.
“Geopolitics and its impact on the business of Barloworld remains a key item on the board’s agenda. So is cybersecurity,” she said.
This comes after the JSE-listed company filed an initial notification of voluntary self-disclosure after an internal analysis, flagging potential export control violations at its Vostochnaya Technica (VT) Russian subsidiary to the US bureau of industry and security in September.
Barloworld said it became aware of a potential breach of US export control regulations where certain of the inventory imported from various parts of Asia appeared to have been in breach of US export controls.
Geopolitics and its impact on the business of Barloworld remains a key item on the board’s agenda. So is cybersecurity.
— Group chair Lulu Gwagwa
The Caterpillar equipment distributor then appointed an independent forensic investigator to probe the existence and extent of these potential violations and to determine the root cause of the lapse in internal controls.
Barloworld filed an initial voluntary self-disclosure notification with the bureau of industry and security in an effort to uphold moral, transparent governance and to avoid severe US fines.
Since 2022, the bureau of industry and security implemented a series of stringent export controls requiring licensing on movements of certain US-origin goods into restricted territories, as part of a bid to restrict Russia’s access to the technologies and other items that it needs to sustain its attack on Ukraine.
Though Equipment Eurasia delivered an exceptionally strong performance, driven primarily by Equipment Mongolia, the war, sanctions and export controls have resulted in a tough trading environment for the R20bn group.
“Unfortunately, the ongoing conflict between Russia and Ukraine has had profound implications for our Russian business, VT,” said CEO Dominic Sewela. “The stringent exchange control regulations imposed as a result of the conflict have severely hampered trade in the region, leading to significant disruptions in our supply chains. These regulatory challenges have impacted our operational efficiency and overall business performance.”
Highlighting that the conflict in Ukraine and its continued effect on Barloworld remained a significant risk, the group said the topic was a regular agenda item for the board which continued to monitor its position in the country with compliance around business activities at the forefront.
Last year, ratings agency Moody’s Ratings warned that Barloworld’s exposure to Russia and the group’s operational concentration in SA, which exposed it to the socioeconomic, political and regulatory environment of the country, were risks to its ratings.
Barloworld has held its position nonetheless and reported that the business continued to trade above break-even and remained self-sufficient in terms of its funding requirements.
However, the Kremlin’s invasion of Ukraine in 2022 and the subsequent sanctions against Moscow have seen VT’s revenue hit by reduced product lines, supply chain constraints and the sanction regime in the eleven months to August.
Despite challenging operating conditions across the geographies where it operates, during the year Barloworld invested capital in organic growth opportunities, reduced gross debt levels by 29% to R7.9bn and returned capital to shareholders through a total dividend of 520c per share.
Sewela said as the group looked ahead into 2025, geopolitical risk had surpassed inflation as the foremost concern affecting Barloworld’s macroeconomic outlook. However, Barloworld was more optimistic about future prospects compared to last year.
This was as the predicted drop in worldwide headline inflation is expected to greatly boost business and consumer confidence, opening the door for further monetary policy easing and a more favourable economic climate.
“As inflationary pressures subside, we foresee increased spending and investment driving economic growth and stability,” the CEO said. “This positive shift in sentiment will likely enhance market dynamics, fostering a more optimistic outlook for both consumers and businesses.
“Locally, trading conditions are expected to improve, driven by a revival in consumer and business sentiment stemming from the lower interest rate environment, the government of national unity, and progress in reforming the electricity and logistics sectors.”
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