International Finance
Economy Magazine

The ‘Russian Minefield’ for Western businesses

IFM_ Russian Minefield
Just before the Ukraine war, Russia approved measures that could lead to the nationalisation of foreign firms suspending their operations in the country's domestic market

As the Russia-Ukraine war broke out in February 2022, the United States-led Western Bloc, apart from helping Kyiv with military logistics, came up with a host of economic countermeasures against Moscow. Apart from punishing the country on crucial fronts like banking and energy trade, Western businesses, which had their Russian presence, started pulling back from the nation.

As per the November 2023 estimates of the Yale School of Management, over 1,000 foreign businesses have publicly announced about voluntarily curtailing their Russia operations to some degree beyond the bare minimum legally required by international sanctions, while some ventures have continued to operate in the country undeterred.

Our story will revolve around these ‘Some Ventures’ and why leaving Russia now looks not so easy for companies in general, despite another central Asian country called Kazakhstan (which wants to be an economic powerhouse in the region) reaching out to hundreds of American and European entities with an offer of hosting the latters’ operations, since the 2023 beginning.

Companies bucking the trend

Leading Beverage giant Peet’s Coffee is staying put in Russia, with its parent company JDE Peet’s informing the media about “actively shaping a longer-term future in Russia” as the Ukraine war is all set to be a long-term affair. In fact, Peet’s Coffee is now planning to rename its Russian operations to protect its global reputation. Unlike its industry peer Starbucks, JDE Peet’s sees a major downside of leaving Russia in the form of its brands and intellectual property likely being seized and given to a third party, apart from putting the future of its 900-odd staffers’ futures at a massive risk.

One of the challenges before Unilever’s new CEO Hein Schumacher is to re-examine the company’s Russian operations. Schumacher reportedly received a letter from a Ukrainian war veteran who wanted the Anglo-Dutch conglomerate to exit Russia. Unilever has also been named an ‘international sponsor of war’ by the Ukrainian government for continuing its operations in Russia despite the conflict.

“A year later, Unilever Russia’s profits doubled from 4.8 billion roubles (USD 80 million) in 2021 to more than 9.2 billion roubles (USD 153 million) last year. In addition, thanks to the significant amount of profit obtained… [Unilever Russia] managed to increase the capital to 34.5 billion roubles in 2022 from 25.3 billion roubles in 2021,” Ukraine’s National Agency on Corruption Prevention remarked.

However, the FMCG giant has been so far defending its decision to remain in the country, as it sees carrying on selling “everyday food and hygiene products” to the Russian people as the best available option for it, rather than its business ending up in the hands of the Russian state. Along with Unilever, Olay-owned P&G and L’Oréal have continued their operations too.

Lack of choices

On September 2023, the Vladimir Putin government dropped a massive bombshell, as it announced imposing increasing costs for corporate breakups by foreign banks, along with the demand of unfreezing the Russian assets if these overseas financial entities wanted to exit the market.

“We have stated our position, and it stands — we will be tough in letting foreign banks go, it will depend on the decision to unfreeze Russian assets,” Alexei Moiseev, Russia’s deputy finance minister, informed the media.

In fact, Western and its allies have frozen over $300 billion in Russian central bank assets abroad as part of their sanctions on Moscow. What Moiseev remarked, reiterates the Putin regime’s stance of punishing the companies trying to exit the Russian market.

Despite 1,000 companies voluntarily cutting back on operations merely two months after the Ukraine war started back in February 2022, just 535 foreign companies have made a clean break with the country, an ongoing study from Yale University that was last updated in September 2023 has found.

As per the reports, over 2,000 companies have sought approval to exit the Russian market, but they were facing slow progress on this front. Also, Moscow has taken the game further by charging exiting companies a fee of at least 10% of the sale value of the local businesses. In addition, the Russian government has reportedly started requiring sellers from “unfriendly countries” to donate at least 10% of the sale proceeds to the Russian budget from March 2023.

Raiffeisen Bank, the largest Western bank still operating in Russia and working on a sale/spin-off of its local business, said in its half-year report released on August 1, “The local and international laws and regulations governing the sale of businesses in Russia are subject to constant change.”

Even in August 2023, Raiffeisen is in no situation to give a timeframe for the sale/spin-off of its Russian subsidiary. Johann Strobl, the CEO of the Austrian venture, told the media that the whole process required approval from many Russian authorities and European ones. The bank was aiming for a spin-off of its Russian business by the 2023 end and was eyeing a September timeframe for completing the move.

The European Central Bank has been pressing Raiffeisen to unwind its highly profitable Russian business. The concerned venture, on the other hand, reportedly takes care of the financial needs of its 3 million Russian customers and any exit measure from the country, no doubt, needs a properly planned and implemented action plan, to avoid the chaos. Raiffeisen is in a perfect ‘Catch-22’ situation right now.

Why is it so difficult?

In March 2023, the Financial Times, while citing a person involved in a business exit negotiation in Russia, found out that the authorities in Moscow, who handle these applications, were meeting only three times a month, while reportedly considering up to seven applications each time, thereby prolonging the exit process for the businesses.

To cut a long story short, if you want to leave your Russian operations, it’s not that easy to pack up and go.

“Many companies were quick to announce their intent to leave the Russian market after it invaded Ukraine. While some big brands such as McDonald’s, and Starbucks have fully exited the country, others may be taking a slow and orderly approach to their exit strategy for various reasons,” Business Insider noted.

Also, we have examples like Peet’s Coffee, where companies are taking a serious relook at the obligations to their local employees while deciding to leave/stay.

“Our colleagues in Russia have, through no fault of their own, endured months of stress and uncertainty,” stated IBM CEO Arvind Krishna recently. His venture was one of the earliest companies to exit the Russian market.

“We do not think it is right to abandon our people in Russia,” Unilever echoed similar sentiments in February 2023. The conglomerate has stopped all imports and exports of its products and capital flows into and out of Russia since 2022, but it has reportedly continued to supply made-in-Russia products domestically.

“It is clear that were we to abandon our business and brands in the country, they would be appropriated – and then operated – by the Russian state. To date we have not been able to find a solution which avoids the Russian state potentially gaining further benefit,” the European venture added further.

On March 2022, just barely two weeks into its Ukraine adventure, Russia published a list of “unfriendly countries”, to combat the growing list of nations extending their support to Kyiv. The list included Australia, the United Kingdom, the entire European Union, Iceland, Canada, Liechtenstein, Monaco, New Zealand, Norway, Korea, San Marino, Singapore, the United States, Taiwan, Ukraine, Montenegro, Switzerland and Japan.

Countries like the United States, EU, Canada and Switzerland issued sanctions against Russia, Russian oligarchs, and Putin as the war broke out and businesses from these countries also have a heavy presence in Russia.

As per Moscow’s latest rule, investors who want to sell their businesses and are from “unfriendly countries” must donate at least 10% of the sale proceeds to the Russian Budget. On top of that, these investors will also need to bear a 50% cut on the sale of their assets.

Apart from all these, the concerned businesses also need to obtain state approvals before they start the departure procedure. “What about the Russian staffers whose jobs will be at the firing line?” add this to the ‘Priority List’ for businesses as well.

Recently, Business Insider reported that the “companies that want to exit Russia are pressed to find buyers for their Russian operations who would continue running the business under a different brand. The pool of buyers is also limited due to international sanctions against Russia.”

McDonald’s sold its Russian business to a local licensee after the Ukraine war broke out. The buyer was required to continue employing and paying all of the fast-food giant’s staff in Russia for two years after the takeover, as per the handover deal terms.

Aluminium oligarch Oleg Deripaska told the Krasnoyarsk Economic Forum in Siberia in March 2023, “Russia will need foreign investors as its funds are running low. There will be no money already next year (2024).”

Russia needs to keep its economy running and for that it needs capital. The foreign ventures, especially those from the West, want to leave the country sooner, to avoid the media glare of operating in an ‘Enemy Nation’. However, the departure rules set by Moscow make these businesses unfairly pay for their strategic decisions, while keeping the Russian exchequers full for sustaining the war efforts.

Even if these multinationals come out of Russia, they will face their global operations being impacted “if a subsidiary in one place is closed,” Saul Estrin, a professor at the London School of Economics, and Klaus E. Meyer, a professor at Ivey Business School, explained in a note.

Citing McDonald’s and Starbucks as examples, these experts wrote, “This interdependence may be small when the subsidiary solely has a sales and service role. However, the interdependence is high and disruptive for the parent organisation when the subsidiary is procuring critical raw materials or intermediate products for the parent that cannot easily be obtained elsewhere.”

“Complex global supply chains mean that companies such as those in the automotive and machine tool industries would have to change their procurement processes if they close an operation,” they added further.

Russia’s tactical brilliance

Russia’s demand for a 50% discount on the assets of companies exiting its market has benefited the country’s businessmen who bought the assets of 110 Western companies “that have fully or partially left Russia” at bargain-bin prices, as per independent Russian newspaper Novaya Gazeta.

“More than 100 new major asset owners have emerged in Russia since the war began. The assets of Western companies, usually acquired for next to nothing, have already bought them at least 223 billion roubles (€2.2 billion) in net profit last year (2022). Among the beneficiaries of the redistribution of Western assets are businessmen close to the Kremlin, former top managers of the companies that have left Russia, and medium-sized businesses,” the report noted.

“The departure of Western businesses enabled Russian businesspeople to acquire large assets at huge discounts or for the measly sum of one rouble (€0.010) — virtually for free. Companies that have decided to leave Russia at any cost are forced to make such deals because of the rules set by the government which mandate discounts and contributions to the state budget,” it stated further.

As per Reuters, some ventures trying to exit Russia were facing demands of even steeper discounts than the 50% one, with those operating in strategically important sectors like energy and resources needing President Vladimir Putin’s seal of approval, before they exit the country.

Just before the Ukraine war, Russia approved measures that could lead to the nationalisation of foreign firms suspending their operations in the country’s domestic market.

In April 2023, Moscow took control of the Russian subsidiaries of two energy firms, Germany’s Uniper and Finland’s Fortum, after Putin signed a decree ordering the move.

The Kremlin defended the move as it stated that the seizes were in retaliation to the “similar moves from Western nations”, as the latter reportedly blocked/seized $58 billion of assets controlled by Russia in the one year since the beginning of the Ukraine war.

“In July, Moscow targeted the Russian assets of food and beverage giants Danone and Carlsberg for seizures. Russia did not give any specific reasons for the seizures, but they happened after people close to Putin’s regime expressed interest in the assets,” Business Insider noted.

Nabi Abdullaev, a partner at Control Risks and former editor of the Moscow Times, summed up the situation perfectly, as he told CNBC, “Some companies decide to stay because the risk of leaving Russia, at this moment at least, is higher than the risk of staying.”

The Ukraine war and the resultant economic warfare between Russia and the United States-led Western Bloc have made the scenario a dangerous one for Western companies. If they want to leave the country, they may end up jeopardising their assets being taken by the state, apart from what Abdullaev termed as “criminal prosecution of Russian staff”.

Along with Unilever, Nestle, Philip Morris, UniCredit, Raiffeisen and PepsiCo, some 500 Western firms are still operating in Russia. While they are looking for buyers before they leave or cut down their operations in the country, they have to pay taxes to the Russian government. This tax amount is subsequently getting diverted to Moscow. While these ventures are getting branded as “international sponsors of war,” they are not doing it willingly.

Beverage giant Heineken had 1,800 staff in its Russian unit and was unable to execute a quick exit. On August 25, the venture found a buyer in the Russian Arnest Group which purchased the companies’ Russian operations for a euro.

“Western companies that remain in the country are able to continue doing business because, despite sanctions, numerous transactions and activities are still authorised. As part of the ‘smart’ sanctions approach, the civilian and humanitarian sectors are not targeted, and many Western companies continue to operate in these sectors,” CNBC commented.

However, most of these ventures belong to the nations marked as “unfriendly countries” by Russia. So technically, these ventures are at the mercy of the Kremlin. Add the nationalisation of Uniper and Fortum, the territory gets stickier for these businesses.

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