Why are so many Western firms staying put in Russia, despite the rising risks?
London CNN —
When Russia launched its full-scale invasion of Ukraine in February 2022, a slew of Western companies left in protest. But some of the world’s biggest firms — including Nestlé, Heineken and snack maker Mondelez — stayed put.
More than a year later, companies that chose to remain in Russia are in an increasingly sticky position: Leaving has become costlier and more complex, while staying has grown riskier.
Companies now find themselves caught between Western sanctions and public outrage on the one hand, and an increasingly hostile Russian government on the other. The Kremlin is making it more difficult for Western firms to sell their Russian assets — and imposing steep discounts and punitive taxes when they do.
The experience of French yoghurt maker Danone (DANOY) and Danish brewer Carlsberg (CABGY) provides a chilling example of the kind of far-reaching state intervention that could befall other foreign firms hoping to beat a retreat from Russia.
Both companies had been finalizing sales to local buyers when President Vladimir Putin signed an order nationalizing their local assets earlier this month.
Carlsberg said the development meant the prospects for the sale of its Baltika Breweries — one of Russia’s largest consumer goods companies — were now “highly uncertain.”
Danone said Wednesday it would book a €200 million ($221 million) writedown on its Russia business, adding to a previously reported €500 million ($554 million) charge. It added that, while it remained the “legal owner,” it “no longer retains control of the management” of the operations.
The “window of opportunity to exit Russia is almost closed,” Maria Shagina, a sanctions expert at the International Institute for Strategic Studies, told CNN. “Western companies are now caught between a rock and a hard place.”
A production line in the Danone dairy factory in Lyubuchany, Russia, pictured in April 2016 Andrey Rudakov/Bloomberg/Getty Images
Difficult choices
More than 1,000 foreign companies have exited or suspended operations in Russia since the war broke out, according to researchers at Yale University.
Spurred by sweeping Western sanctions, oil companies, automakers, technology firms, consultancies and banks led the initial wave of departures. McDonald’s (MCD) sold more than 800 local restaurants, writing off well over $1 billion in the process.
BP (BP), meanwhile, took a $24.4 billion charge for giving up its 19.75% shareholding in Rosneft, Russia’s biggest oil company. The move also took a bite out of the British energy giant’s oil and gas reserves.
But even after the mass exodus of major corporations, the Yale researchers estimate that more than 200 companies from around the globe continue to do business as usual in Russia.
An additional 178 firms are “buying time,” meaning they have suspended new investments and scaled back their operations but still have a presence in the country.
Unilever (UL), Nestlé, Mondelēz and Procter & Gamble (PG) — the world’s biggest consumer goods companies — fall into this category.
Nescafé coffee, produced by Nestlé, in a store in Moscow in March 2022 Konstantin Zavrazhin/Getty Images
While the exact reasons each company gives for staying vary, common themes include concern for the welfare of employees and their families in Russia, as well as obligations to local partners, including farmers. The companies also say they are delivering vital supplies to ordinary people and some argue that abandoning their Russian assets would only boost the Kremlin’s war chest by giving it easy access to new sources of revenue.
To be sure, selling up is not straightforward and comes with hefty penalties. Companies are obliged to sell their assets at a 50% discount to market value and pay the Kremlin a sizable fee. US companies would need permission from the Treasury to pay such a fee, according to guidance issued by the Office of Foreign Assets Control in March.
Western sanctions against almost 2,000 individuals and entities further complicate the picture, making it hard to find legitimate buyers.
The ‘least bad’ option
“We do not intend to further contribute to the capacity of the Russian state,” Unilever CEO Hein Schumacher told journalists Tuesday.
With that objective in mind, the company — which paid 3.8 billion rubles ($42.2 million) in taxes to the Russian government in 2022 — had not been able to find a “viable solution” involving a sale of its operations in the country, he added.
Deserting its business in Russia, which has €800 million ($884 million) in assets, including four factories, would only increase the risk of nationalization, which leaves Unilever with no other option but to keep operating, Schumacher said.
“None of the options are actually good but… operating in a constrained manner is the least bad.”
A spokesperson for Nestlé, which has six factories and around 7,000 employees in Russia, told CNN it had “drastically reduced” its range of products in the country to provide only “essential and basic foods for the local people.”
Procter & Gamble did not respond to a request for comment, but the company previously said it would “focus on basic health, hygiene and personal care items needed by the many Russian families who depend on them in their daily lives.”
Mondelez said in June that it planned to “have the Russia business stand-alone with a self-sufficient supply chain” by the end of the year. “If we suspended our full operations, we would risk turning over our full operations to another party who could use the full proceeds for their own interests,” it added.
But the Kremlin’s actions toward Danone and Carlsberg — and before them German energy company Uniper and Finland’s Fortum Oyj, whose Russian utilities were seized in April — highlight that even companies staying put could find themselves targeted for nationalization.
For Yale professor Jeffrey Sonnenfeld, who leads the team tracking foreign companies’ responses to the war, leaving is the only legitimate choice. “The idea is to increase the level of discomfort, so [the Russian people] start to ask who the author of their misfortune is,” Sonnenfeld told CNN earlier this month.
— Olesya Dmitracova and Anna Chernova contributed reporting.
Source: CNN
