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How Bureaucracy and Greed Hinder Exit from Russia

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Photo: Over 1,000 Companies Have Curtailed Operations in Russia. But Some Remain. Source: Chief Executive Leadership Institute, Yale SOM
Photo: Over 1,000 Companies Have Curtailed Operations in Russia. But Some Remain. Source: Chief Executive Leadership Institute, Yale SOM

Why do foreign companies continue to cling to the Russian market? Because they previously deemed it highly profitable and now their executives fear being held accountable to shareholders for past poor decisions, thus prolonging the exit process as much as possible. Of course, the onerous conditions set by the Russian government and Putin for withdrawing investments play a role, but these are consequences rather than causes. The root causes lie in the greed of shareholders and top managers, as well as corporate bureaucracy.


Western businesses are changing their stance on the Russian market. Increasingly, foreign companies that announced their intention to leave Russia are actually deciding to stay or adopting a wait-and-see approach.


According to the monitoring project LeaveRussia, run by KSE Institute, as of 3 June 2024, there were still 2,175 foreign companies in Russia (including those with a "wait-and-see" status), 1,231 companies in the process of winding down their business, and 396 companies that had completely exited the Russian market. For comparison, at the end of 2023, KSE Institute counted 2,120 companies that had decided to stay in Russia or wait out the uncertain times, while the number of those that had left was around 300.


Despite the toxic nature of business ties with Russia, foreign businesses are clinging to the Russian market for pragmatic reasons: money. Some companies derive up to 70% of their revenue from Russia. Moreover, many investors simply do not want to sell their business at a significant discount or for next to nothing, as demanded by the Russian authorities.


Backtracking on Exits

Following the full-scale invasion on 24 February 2022, the withdrawal of foreign businesses from Russia became a significant trend. As reported by the Yale School of Management, within the first week of hostilities, "several dozen companies" announced their exit.


Throughout 2022, Russia lost global brands such as Ford, Renault, Nissan, Skoda, McDonald's, Ikea, Apple, and Shell. Companies either closed their subsidiaries or sold them to local investors. However, in 2023, the pace of foreign business exits from Russia began to slow. According to research by economists from the University of St. Gallen and the IMD Business School, about 8.5% of Western companies left Russia in 2022, mainly subsidiaries with headquarters in the US, Japan, and the EU.


Experts increasingly noted that foreign businesses were adjusting their plans and opting to slow down their exit from Russia. Many companies formally maintained their intention to close their Russian operations but left themselves room to retreat.


For example, the Kering group, which owns luxury brands Balenciaga, Gucci, and Yves Saint Laurent, suspended operations in Russia in March 2022 but stated they would "closely monitor the situation." The supermarket chain Auchan formally changed ownership but did not close its stores, explaining that the company's mission is to provide civilians with "quality food at the best prices."


PepsiCo ceased sales of its Pepsi-Cola drink in Russia but retained its dairy business, which employs about 60,000 workers. PepsiCo representatives stated that as a food and beverage producer, the company must remain true to its "humanitarian aspect." Meanwhile, Pepsi's competitor Coca-Cola filed an application with the Russian state intellectual property agency "Rospatent" in April 2024 to re-register its trademarks in Russia, as reported by the Russian business newspaper "Vedomosti." Starbucks has done the same in Russia.


Investors Seek Cream of the Crop


In August 2022, the Yale School of Management reported that over 1,000 major global companies had reduced their presence in the Russian market since the start of the war (completely withdrawn, suspended operations, frozen investments, etc.). By June 2024, the number of companies that had left Russia reached 1,028.


From this, it can be concluded that the potential for a mass voluntary business exodus from Russia is nearly exhausted. It even appears that the number of companies reconsidering their decisions is growing. According to calculations by the KSE Institute, there are currently 5.5 times more Western companies remaining in Russia than those that have completely left.


Some company representatives openly state that they are not ready to part with the Russian market. Dirk Van de Put, CEO of Mondelez, said that the company’s investors are not concerned about the moral aspects of operating in Russia. Nelson Peltz, a board member of Unilever, admitted that the corporation does not want to give up its Russian assets to competitors.


Many companies hold onto Russia because of the revenue and profit generated by their business there. In 2023, the developer Ant Yapi (Turkey) received over 65% of its revenue from Russia, the energy equipment manufacturer APS Energia (Poland) earned 28% of its income from Russia, and the automotive company Chery (China) derived 15% of its revenue from the Russian market.


In 2023, the telecommunications holding Veon (the Netherlands) increased its profit in Russia to $523 million, the media group Naspers (South Africa) earned $288 million in profit, OTP Bank (Hungary) made $255 million, and the tobacco company Japan Tobacco International (Switzerland) earned $122 million in Russia.


Additionally, corporations do not want to lose market share. This is particularly true for banks that have steadily increased their Russian business. For instance, the share of Russian assets for the Austrian group Raiffeisen is about 15%, and for the Italian group UniCredit, it is 5%. The combined profit of European banks operating in Russia reached $3.2 billion in 2023.


Western companies also complain about bureaucratic hurdles that prevent them from quickly and efficiently selling their Russian businesses. Russia has imposed a specific levy for exiting the market. Assets of companies from so-called unfriendly countries can only be sold to Russian entrepreneurs at a 50% discount and with the payment of a special tax at a rate of 15%.


The process of exiting Russia is becoming painful. Assets of companies like Danone and Carlsberg have been seized. Danone was only able to sell its business at a significant discount in May 2024, and Carlsberg is bogged down in legal disputes with the Russian side.


Waiting it out is not an option. Delaying the exit from Russia only absolves current top managers of responsibility while accumulating risks for the future.


Inevitable Departure


Even if the moral aspect and reputation damage are disregarded, maintaining Russian business is a potential risk. Investors could lose their assets in Russia at any moment. In April 2023, Russian President Vladimir Putin issued a decree that allows for the transfer of foreign companies’ assets to temporary management by Rosimushchestvo, which is tantamount to nationalisation. The first to be affected by this mechanism were the Russian assets of the Finnish energy company Fortum.


In response to the actions of the G7, the nationalisation of Western assets in Russia is likely to intensify. It is worth noting that the bloc countries are not only tightening sanctions against Russia but are also ready to transfer funds from frozen Russian assets to Ukraine.


Russia is threatening foreign investors with the notion that they are unlikely to recover the $83 billion invested in the Russian economy.


This is another signal to Western businesses that leaving the Russian market is inevitable. The losses of multinationals from their forced exit from Russia during 2022-2023 have already amounted to $107 billion. And this figure will only grow.


The question is how much more can be added to this figure due to reputational issues and direct penalties for financing Russia’s aggressive war against Ukraine. And the Kremlin has already sent signals that it will confiscate the assets of Western private companies in Russia in response to the use of frozen Russian state assets in Europe, Canada, and the USA for Ukraine's benefit.

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