Russian Sanctions Sound Bad for Microsoft Corporation Stock

Here's why you don't need to worry about MSFT stock

Why Microsoft Is a Must-Buy Stock on a Pullback

Source: Mike Mozart via Flickr (Modified)

Reuters published an attention-getting report on Microsoft Corporation’s (NASDAQ:MSFT) Russian-related problems. Microsoft’s issue is much different from those facing content-hosting tech giants such as Facebook, Inc. (NASDAQ:FB) and it will affect MSFT stock differently.

Microsoft hasn’t gotten implicated in hacking or election-related scandals. Instead, it’s having problems on the revenue-recognition side.

In November, the United States greatly stiffened its regulations against Russia. It was seen as an effort to punish the country for its continuing involvement in the Ukraine political/military crisis.

What the Sanctions Mean for MSFT Stock

Previously, the west maintained sanctions that largely impacted Russian banks and energy firms. The sanctions prohibited Russian banks from obtaining long-term loans, essentially locking them out of international credit markets.

The country had to develop alternative financing firms, such as homegrown payments processor Qiwi plc (NASDAQ:QIWI) to replace its lost access to foreign financial capital and technology.

Similarly, the west’s actions blocked Russian energy firms from participating in the global economy in the same way other state-run oil firms could.

However, until last November, the sanctions didn’t have much impact on ordinary multinational companies merely selling their products in Russia. That has changed now though. The tighter sanctions now prohibit all the but the shortest of loans to Russian firms generally.

This is highly problematic. Analysts are now interpreting the sanctions to mean that product manufacturers can’t extend vendor financing past the shortest of terms.

When a company sells a product to a retailer, for example, it generally doesn’t expect to get paid for 30-90 days, or until the retailer in turn sells the good to an end consumer.

The manufacturer doesn’t mind this risk, since retailers are usually good for the money, unless they are on the brink of bankruptcy. And by offering the product to retailers without an upfront obligation, it makes it easier to earn shelf space and brand acceptance.

Microsoft’s Issue

As Reuters explains, in Russia, retailers routinely don’t pay vendors for products until months after delivery. Speaking from experience, I can assure you it’s the same in Latin America, among other emerging markets.

It’s not uncommon for consumer products companies to not get paid up to six months after shipping goods to a retail store outside of developed countries.

So when the newly-sharpened Russian sanctions appear to ban anything but the shortest-term forms of vendor financing, it breaks a traditional capitalist product sales arrangement.

The investigative report specifically detailed that:

“One of the two Microsoft distributors, a Russian company called Merlion, said in its notification to partners that all sanctioned buyers of Microsoft licenses must pay within tight deadlines, or even pay upfront in some cases.

The second distributor, RRC, said in its notification, seen by Reuters, that “serious restrictions are being introduced” on Microsoft orders from firms subject to U.S. sanctions.”

In practice, this could play out as follows. A PC vendor acquires a license for Microsoft Windows, Office, or other such software. Previously, it would have paid for the license once the PC sold at a retail store.

Now, however, they will have to pay upfront for the license, which could put a crimp on sales, since a lot of business models rely heavily on the float between getting paid and paying back the supplier. Flip it in reverse, and things get more difficult.

How Much Will It Hit Sales?

Here’s where things get substantially better for MSFT stock. All the above stuff sounds quite bad on the surface. But, in fact, it’s largely irrelevant to MSFT stock specifically. For one, Microsoft is just one of at least dozens of companies that will potentially be hit by these sanctions.

What makes an Apple Inc. (NASDAQ:AAPL) phone or computer any less immune to these rules? Many sectors, including liquor and luxury goods, to name just two, should be vulnerable to sanctions due to vendor financing as well.

To put it another way, this is a Russia problem, not a MSFT stock problem. Diageo plc (ADR) (NYSE:DEO), which sells a lot of spirits in Russia, will probably see a meaningful sales hit for example. If you own an American company with substantial Russian sales, consider Russia as a risk factor. This runs far past just MSFT stock.

On the plus side, Russia isn’t a particularly large market. It has just 144 million people, just 2% of the world’s population. And, due to its low birth rate, Russia has an even smaller part of the world’s youth population. In other words, this isn’t a key Microsoft market.

Adding to that, Russia is known for its hackers. Many of the world’s pirating sites have ties to Russia. I don’t have any hard data, but I’d be quite surprised if Russia doesn’t have an unusually high amount of unlicensed Microsoft software in use.

Furthermore, the Russian Ruble crated from 30 to the dollar in 2013 to almost 60 to the dollar today. That sort of massive devaluation greatly cut the amount of profits Microsoft was earning on its Russian sales.

MSFT Stock Verdict

MSFT stock powered higher on Monday despite the Russia story. In fact, it rallied almost 2% to hit new all-time highs above $90/share. As I wrote last summer: “A move toward $100 could well be in the cards.”

The key battle continues to be in the cloud, not in Russia. And so far, Microsoft is winning. MSFT stock is up from $75 to $91 since that previous article.

As for whether it hits $100 as soon as its next earnings report, that will depend on how much the company gains from the tax bill, among other factors. Russia has caused significant headaches for numerous tech firms. But any problems won’t have a great affect on MSFT stock.

At the time of this writing, the author owned DEO stock and QIWI stock. He held no positions in any other of the aforementioned securities. You can reach him on Twitter at @irbezek.

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