Industrial major Barloworld is concerned about possible penalties for alleged export breaches in its Russian operations and is pinning its hopes on less severe penalties by being proactive.
The group recently flagged possible export control violations at its Vostochnaya Technica (VT) Russian subsidiary to US authorities after an initial internal analysis.
VT supplies the full range of CAT and other OEM products, including surface earthmoving equipment, underground mining units, parts and after-sales support services.
Speaking to investors in a preclose call, CEO Dominic Sewela sought to clarify that amid the many regulations pertaining to Russia, Barloworld’s compliance teams discovered that the ever-changing export control regimes were affecting several items that they should not have imported, prompting an internal investigation.
Russia is an important market for the JSE-listed group, which chose to keep Russian operations going despite escalating sanctions, saying it was equipped with sufficient funding facilities to run it.
But the Kremlin’s invasion of Ukraine in 2022 and the subsequent sanctions against Moscow have seen VT’s revenue hit by the reduced product lines, supply chain constraints and the sanction regime in the eleven months to August.
Since 2022, the US department of commerce’s Bureau of Industry and Security (BIS) implemented a series of stringent export controls that restrict Russia’s access to the technologies and other items that it needs to sustain its brutal attack on Ukraine.
Sewela said that rather than making an initial notification of voluntary self-disclosure to the BIS about possible export control breaches, it was looking into sales of specific items to its Russian subsidiary.
The company's share price briefly slumped as much as 15% on the news, before paring the loss to 12.47% on September 13 in its biggest one-day fall in more than 17 years.
But Sewela stood firm behind the move, saying the self-initiated probe had nothing to do with breaking sanctions rules but rather was focused on export regulations.
“This is about export control,” he said. “This is not about sanctions violations.”
He said the group felt it was important to do self-reporting to mitigate any punitive issues with the BIS that could be mitigated.
The Johannesburg-based firm’s board has since appointed forensics firm ENS to examine exchange controls and whether there would have been any sanctions that could have been violated, though it believes there were no prohibition breaches.
“We said that’s the route that we’re choosing to go. We didn’t have to go that route... because in our view, there was nothing relating to sanctions,” said Sewela. “During this period, it’s very critical and important that we are thorough and make sure that we are able to disclose.”
Group head of legal Sandile Langa said Barloworld had nearly six months to complete the investigation and file a final report with the authorities.
“What we are ... investigating are potential export control violations and, in particular, US export control violations,” said Langa. “And this relates to the importation of, principally, US origin parts into the Russian territory.”
“In terms of that process, we have up to 180 days to complete the investigation and file a final investigation report with the BIS,” said Langa.
Sewela emphasised the need for transparency, saying he was hopeful that the disclosure, investigation and voluntary engagements with the BIS would stand the company — which is valued at about R16.3bn on the JSE — in good stead against any punitive penalties.
“Some of what we’ve been told by legal counsel is that there’ve been companies that have sort of never gotten any penalty of any sort,” he said. “I can’t determine now what that penalty would be if there has to be any. But my hope is that having disclosed ... the penalty is not severe.”
Last year, ratings agency Moody’s Investors Service 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’s shareprice was 1.31% higher at R86.14 at the close on Friday, having risen more than 40% in the past six months.
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