What it means
Governments block currencies to defend scarce foreign exchange reserves. The usual tools are licences for buying hard currency, limits on dividend remittances, and an official rate held well above the level a free market would set.
For a multinational, the first accounting question is which exchange rate to use. If the official rate is not actually available to the business in practice, using it overstates both the value of the subsidiary and the profit it contributes to the group.
Auditors increasingly expect companies to translate at a rate reflecting what they could genuinely obtain. The operational responses are creative but limited in scope.
Businesses buy exportable goods with trapped cash, pay local costs that would otherwise be funded centrally, settle intercompany balances locally, or accept the money as stranded and stop counting on it in any forecast. The nuance worth remembering is that blocked cash is a valuation problem rather than merely a treasury inconvenience.
Analysts routinely apply a haircut to reported cash held in blocked currencies, and some exclude it entirely from net debt calculations. A group that looks cash rich on the face of the balance sheet can be considerably weaker once blocked balances are stripped out.
There is also a reporting risk that follows from all this. Groups that have translated blocked balances at a favourable official rate for years can face a very large one-off charge when they finally move to a realistic rate.
Boards prefer to take that hit early and explain it clearly rather than have it forced on them.
In practice
Real-world examples.
Example
A consumer goods group earns strong local profits in a market with strict exchange controls but has not remitted a dividend in four years. It reports the profit in group earnings while noting that the associated cash cannot be repatriated, which prompts analysts to value those earnings at a heavy discount.
Example
An airline that sells tickets in a blocked currency uses the trapped balances to pay local fuel, ground handling and staff costs. When local costs are still insufficient to absorb the receipts, it reduces flight frequency to that destination rather than accumulate more unusable cash.
Example
An engineering contractor negotiates payment in dollars through an offshore escrow account before agreeing to a project in a country with currency controls. The contract price is roughly 8% higher than a comparable domestic project, which the contractor treats as the price of avoiding the blockage risk.
Formula
Calculation
Value of blocked cash = local currency balance / applicable exchange rate. Write down = value at official rate - value at realistic rate.
A group's subsidiary has accumulated 450,000,000 units of a blocked local currency. At the official rate of 30 units to the dollar, that balance translates to 450,000,000 / 30 = $15,000,000. The only rate at which the company can actually convert and remit is 75 units to the dollar, giving 450,000,000 / 75 = $6,000,000. Moving to the realistic rate produces a write down of $15,000,000 - $6,000,000 = $9,000,000, a 60% reduction in the reported value of that cash. If group cash was reported as $80,000,000, the adjustment cuts it to $71,000,000.Case study
Seen in the real world.
This is a fictional, illustrative case. Calderon Beverages ran a bottling subsidiary that generated the local currency equivalent of about $22,000,000 a year in profit at the official exchange rate, and group results treated it as one of the better performing regions. Over five years the subsidiary built up local balances translating to $46,000,000 at the official rate.
When the group finance director tested what could actually be converted, the answer was uncomfortable. Licensed conversion was available for only a fraction of the balance, and the realistic blended rate implied a value closer to $17,000,000. The group recognised a $29,000,000 write down and restated the region's contribution to profit downwards for the following year.
Calderon changed its approach rather than its market. It shifted to sourcing packaging and syrup locally instead of importing them, which absorbed local cash productively, and it set a policy that no capital investment would be approved in a blocked currency market unless it paid back within three years using local cash alone. Group cash reporting from then on separated freely available cash from restricted and blocked balances on every board pack.
Watch out
Common mistakes.
- Valuing blocked balances at the official exchange rate. If the business cannot actually transact at that rate, the number is a fiction and will eventually have to be corrected.
- Including blocked cash in group liquidity. Cash that cannot leave the country cannot pay group debt or fund dividends, so it should be excluded from any usable liquidity measure.
- Confusing a blocked currency with a merely volatile one. A volatile currency can still be sold at some price, whereas a blocked currency cannot be converted or remitted at all without permission.
Questions
People also ask.
How is a blocked currency different from a blocked account?
A blocked currency is restricted by exchange controls that apply across a whole country, while a blocked account is a single account restricted by a bank, court or contract.
Can profits in a blocked currency still be recognised?
Usually yes, since the profit has been earned, but the translation rate and any impairment of the resulting cash balance need careful judgement and disclosure.
What can a company do with trapped cash?
Common routes include buying exportable goods, funding local costs and capital projects, settling intercompany balances locally, or in some markets using licensed conversion schemes.
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