Heading Towards Thin Ice: Major Corporations Weighing Risks in Russia

Since mid-2023, a landslide exit from Russia of major transnational corporations and brands has been observed. Back in March-May 2022, they made statements about the possibility of leaving and certainly promised to sharply reduce their presence in the Russian market. They managed to hold on without making abrupt moves until the beginning of 2023. But now, it seems they are leaving. Why now? How will this affect them and their shareholders?

In July 2023, the French food producer Danone published its report for the first half of 2023, stating that the company effectively wrote off Russian assets worth 200 million euros. This was related to the fact that Danone's business in Russia was recently transferred under the management of the Federal Agency for State Property Management (Rosimushchestvo), which is equivalent to nationalization.

The American giant of the chemical industry, 3M, has completely left Russia as well. True, back in March, the corporation only mentioned "suspending" its business in Russia. However, the 3M report for the second quarter of 2023 includes a point about selling Russian assets, which brought the company 18 million dollars. It happened after some hundred millions dollars investments in russians projects.

In February, the British tobacco manufacturer British American Tobacco announced plans to complete its exit from business in Russia and Belarus by the end of 2023.

In March, the French holding Adeo, which owns the network of construction supermarkets Leroy Merlin, announced its intention to sell its stores in Russia to new owners. Soon, a similar statement was made by the American food components manufacturer, Duracell. The company sent a letter to its business partners warning them that the shareholders of the company decided to completely terminate Duracell's business in Russia.

In April, the brewing concern Heineken announced that it applied for the sale of its Russian assets, and two months later, the Danish brewing company Carlsberg Group declared that it had signed an agreement to sell its Russian business.

How to briefly describe what is happening?

Transnational corporations are recording losses and cleaning up toxic assets.

Any business in Russia has been risky since August 2008 (Georgia invasion). Since March 2014 (annexation of Crimea), business in Russia has become very risky. And since 2022, when Putin began to threaten nuclear strikes in the event of Ukraine's liberation of the territories captured by Russia, being present in Russia has become unequivocally toxic for business.

Photo: NAZK(Ukraine government agency) designates Unilever an "international sponsor of war." Despite the 🇬🇧 company’s promise to "review" its operations in 🇷🇺 last year, the maker of Dove almost doubled its revenue and paid $331M in tax to the Kremlin. Source: B4Ukraine Twitter account.

Saying Goodbye, but Not Leaving

However, a large part of transnational corporations still clings to Russia. According to a joint study by the Swiss business school IMD and the University of St. Gallen (HSG), by the beginning of 2023, about 1,400 companies from the G7 and European Union countries completely withdrew their activities from Russia. This is about 9% of all foreign companies represented in Russia. According to Yale University data, as of July 26, 2023, over 1,000 companies announced that they are voluntarily scaling back their operations in Russia.

According to the estimates of IMD and HSG, by the end of 2023, 25-30% of companies that were present in Russia at the beginning of the open Russian invasion of Ukraine in February 2022 may say goodbye to the Russian market. But my assessment is harsher. If sanctions continue to tighten at the same pace as demonstrated by the US, EU member countries, and other developed countries in May-July 2023, then possibly half or more of those who were present in Russia in February 2022 may leave.

They're Afraid to Upset Shareholders Right Now

Why are many transnational corporations not in a hurry to leave Russia? In most cases, it all comes down to money. Corporate leaders fear upsetting their shareholders. They are afraid to write off multi-million-dollar investments right now. And although these investments are already dead, they try not to remind themselves of it one more time.

For example, the Austrian banking group Raiffeisen Bank International (RBI) receives 50% of its profits from its Russian subsidiary bank, "Raiffeisen Bank." Despite international pressure - Ukraine even recognized RBI as a sponsor of the war - the Austrian group has been postponing the decision to leave the Russian market for a year and a half.

PepsiCo, which had promised to scale back its business in Russia following the full-scale invasion of Ukraine, is still present in there and continues to sell beverages, baby food, and other products there. In 2022, PepsiCo's revenue in Russia grew by 20% to $4.1 billion. A similar situation exists for Mars, whose profits in Russia surged by 60% in 2022, with sales volume rising by 14%.

Many companies that are still in Russia have adopted a wait-and-see approach, observing the developments on the Ukrainian-Russian front. Although they may formally freeze their operations in Russia, they keep a "backup plan" to quickly return if needed.

Kering, the group that owns fashion brands like Balenciaga, Gucci, Yves Saint Laurent, and others, followed this approach. In March 2022, Kering suspended its stores in Russia but mentioned continuing financial support to local teams while closely monitoring the situation. The Swedish company Volvo, owned by Chinese Geely Holding, halted its Kaluga plant's operations but does not sell its business in Russia. This situation has led Sweden's authorities to consider boycotting Volvo. 

Photo: Protest at Colgate-Palmolive offices, Sydney, Australia. Source: Nicholas Buenk, FB

Who Benefits from This Situation?

As long as there are no comprehensive sanctions against corporations and banks working in Russia that finance the war, decisive withdrawals will be limited. Moreover, some companies aim to strengthen their presence in Russia and fill the void left by departing competitors. Primarily, Chinese companies, given China's friendly relationship with Russia, are active in this regard.

Huawei briefly suspended its operations in Russia but resumed supplying the country in the summer of 2022. Consequently, its share in the Russian smartphone market nearly tripled to 3% in 2022. Chinese automakers are particularly active in Russia, exporting 287,000 new cars to Russia from January to May 2023, 1.8 times more than in the entire 2022.

Nevertheless, Leaving Russia Pleases Shareholders

Despite the potential benefits of staying in the Russian market, the risks outweigh the gains. A conscious exit from Russia shields companies from sudden sanctions that might be imposed for their presence in the country. For instance, in March 2022, the Danish company LEGO cited avoiding sanctions as the reason for withdrawing from the Russian market. A similar rationale was provided by the payment system American Express when it discontinued collaboration with Russian banks.

Cutting ties with Russia mitigates reputational losses, whereas maintaining such ties involves risks and complexities. French company Auchan, which owns the supermarket chain "Ashan" in Russia, made it clear that it does not intend to leave Russia. Since then, the retailer has been involved in several scandals, and it has even been accused of aiding Russian forces by supplying various goods for free.

A more significant argument in favor of withdrawing from the Russian market is preserving business capitalization. For example, Michelin's shares, which ceased operations in Russia, including production, in March 2022, rose by 9% by the end of July 2023. Mercedes-Benz's shares, after announcing a complete departure from Russia and selling its Russian assets in October 2022, increased by 27% since then. Heineken's shares initially dropped by nearly 10% after severing ties with Russia during May. However, in June and July, the shares rebounded, appreciating by 4%.

Certainly, news of companies ceasing their operations in Russia might temporarily sour investor sentiment and lead to a decline in share prices. However, even in the medium and long term, such decisions are positively evaluated by the market because the Russian market appears unequivocally toxic.