Western Companies Exiting the Russian Market… Not Easy
Redistribution of Assets – Western and Russian. What has Been Seized, Sold, and to Whom? Economic Impact and Global Competitiveness
Dear Subscribers,
“Barbershop Whispers….Russia” begins with “My Takeaways”on the main topic followed by the main topic discussion. The last two sections of “Barbershop Whispers…Russia” will be follow-ups from previous publications and emerging events.
In the previous issue, I discussed Russia's massive brain drain, aging population, and low fertility rate.
This week’s issue focuses on the redistribution of western and Russian assets, market exits, and who is buying? What will be the impact on Russia’s economy and global competitiveness?
My Takeaways:
EXIT COST: Western companies have lost more than $80B due to write-downs and lost revenues as they are forced to exit Russia because of western sanctions, even as the Kremlin increases the pressure on them to stay;
NATIONALIZATION OF ASSETS: Russian businesses can also come under threat of seizure and sale because of a perceived lack of public and financial support for Putin’s war. Oleg Tinkov’s sale of TCS to Potanin last year is a case in point. The Russian business elite are also being threatened;
COST TO RUSSIA: Western and Russian businesses will suffer financial losses, but the Kremlin is losing access to technology and watching the emigration of Russia’s best and brightest, who could be driving economic growth;
KREMLIN SCRAMBLING: The Kremlin’s seizure of businesses is evidence that the pressures of western economic sanctions and battlefield failure are impacting Putin’s decision-making process. He must deliver results in an increasingly fragile economy that is financing a losing war. Time is not his friend;
Western Businesses’ Costly Exits from Russia
Over 1,300 western companies have left or are in the process of leaving the Russian market since the start of the second invasion of Ukraine, according to Dr. Jeffery Sonnenfeld, Yale Professor of Management and founder of the Chief Executive Leadership Institute. These businesses, some of which have built efficient vertical supply chain infrastructures benefiting many sectors of the economy, are being sold at significant discounts. To date, the exit cost to western companies is estimated to be $80B, and this figure is only growing as the war drags on, economic sanctions are enforced, and Putin is under increasing pressure to deliver results on the battlefield and the economy.
The complexities of navigating western sanctions and Russian government restrictions adds to the difficulties and costs in finding buyers and structuring a sale, especially for companies from those countries that the Kremlin has designated as “unfriendly”. (The Russian government differentiates between “unfriendly” and “friendly” countries according to whether they have taken actions against Russia, e.g. economic sanctions, etc., or not.)
(Photo: Maxim Shipenkov/Zuma Press)
The requirements for companies from “unfriendly” countries are evolving, but they are increasingly restrictive as pressure from sanctions impacts the economy. The terms of a sale must be approved by the Russian government’s Commission on Control over Foreign Assets and contain certain prerequisites, such as:
Sale Price – Must be less than 50% of the asset value;
Exit Tax – Seller pays at least 10% of the transaction value to the local regional government;
Share Float – Buyer must float at least 20% of the acquired shares on the Moscow Exchange;
Buy-Back Option – Option expires in two years from the date of the sale.
For companies operating in “strategic sectors,” such as energy and banking, additional restrictions and terms apply and often require approval from the President.
What is being Seized or Sold, and to Whom?
In April and then again in July, Putin signed decrees authorizing Rosimushchestvo (Federal Agency for State Property Management) to take temporary control of the Russian subsidiaries of:
Uniper SE (Unipro) – German energy group (€4.4B Write-off);
Fortum Oyi – Finnish energy group (€1.7B Write-off);
Danone – French food products group (€1.0B Write-off);
Carlsberg – Danish beer group (€1.1B Write-off)
Uniper and Fortum are already under the new management of executives associated with Igor Sechin, CEO of Rosneft. Uniper was once Gazprom’s biggest customer and responsible for gas deliveries to Germany, until the second Ukrainian invasion in 2022.
Danone had been searching for a buyer since October 2022 and had narrowed it down to three local suitors. Danone submitted a request for presidential approval, but the request was never answered. Then a presidential decree was issued to seize the business, and control was abruptly transferred to Rosimushchestvo. According to Interfax, Yakub Zakriev, a nephew of Chechen leader Ramzan Kadyrov and the republic's agriculture minister, was appointed as general director of Danone Russia.
(Yakub Zakriev and Ramzan Kadyrov: Credit: Afonina Yelena/Tass/ABACA)
Akhmed Dudayev, Chechnya's minister for national policy, foreign relations, and information, wrote on his Telegram channel:
"Choosing [Zakriev] as general director of Danone Russia shows that representatives of the team of Chechen President and Hero of Russia Ramzan Akhmatovich Kadyrov are talented and successful managers,”
As with Danone, Carlsberg had shortlisted buyers and was awaiting presidential approval when Putin decreed seizure of the assets. Several sources have reported that Dmitri Patrushev, Russia’s Minister of Agriculture and the son of Putin’s national security muse, Security Council Secretary Nikolai Patrushev, influenced the president's decision to seize the assets so they could be transferred to Putin insiders. Ultimately Rosimushchestvo installed Taimuraz Bolloev as head of Carlsberg Russia. Bolloev is an old friend of Putin and the Kovalchuk brothers, and ran Baltika (the core of Carlsberg’s Russia assets) in the 1990s.
Other foreign business subsidiaries that have been sold off for a song, such as just €1 for Heineken, include Renault, Starbucks, McDonalds, Dominos Pizza, and Papa John’s.
(New Stars logo vs. Starbucks logo: Photo:Natalia Kolesnikova/AFP via Getty Images)
The seizure of western assets is only beginning and transcends the FDI community. Assets owned by Russians, be they the questionable acquisitions of oligarchs in the 90s (when Putin agreed they could keep their assets as long as they stayed out of politics) or the legitimate businesses of successful entrepreneurs, such as Oleg Tinkov (TCS Group) or Sergei Petrov (Rolf Group), are under threat of seizure or forced sale. Both Tinkov and Arkady Volozh (Yandex) have already been forced to exit.
Russia’s richest man and fertilizer magnate, Andrei Melnichenko, appears to be the latest to appear in Putin’s crosshairs. The prosecutor’s office has demanded the seizure of Sibeko, an energy company Melnichenko purchased in 2018, on the grounds that the transaction was corrupt.
Economic Impact and Global Competitiveness
Putin’s justification for seizing western assets is economic sanctions against Russia — a tit-for-tat retaliation against “unfriendly” countries.
Additional economic sanctions enacted by western countries after the second Russian invasion of Ukraine in 2022 also accelerated the exit and sale of Russian companies from western markets. as discussed in the BWR issue of 5 August 2023. From Sberbank’s presence in Europe to Evraz’s mining and manufacturing in North America, the footprint of Russian business has dramatically receded over the 18 months. Most of these assets have been sold or are in the process of being sold, in an orderly manner, with the proceeds going to the sellers. Some assets have been seized, however. In the case of Rosneft Deutschland and Gazprom Germania, the businesses were seized by the German government because of national security concerns. However, while day-to-day control of the businesses has been transferred to the German government, ownership remains with Rosneft and Gazprom. This contrasts with the sale of western assets in Russia, in which the proceeds from the sale and terms are dictated by the Russian government.
There is evidence that the Kremlin is accelerating the forced sales and seizure of Russian businesses at home, similar to what is happening to western companies. The pretext for this action is these businesses’ (or their owners’) failure to support Putin’s war, publicly and/or financially. Oleg Tinkov’s forced sale of TCS to Vladimir Potanin is a case in point. As per Tinkov, the TCS sale was a “take it or leave it” offer at a heavily discounted value. Melnichenko’s lack of public and financial support for the war appears to be catching up with him, as evidenced by the prosecutor general’s action on Melnicheko’s purchase of Sibeko. Apart from public statements supporting the war, as reported in the 25 August issue of BWR, some oligarchs provide financial support by supplementing the salaries of regular soldiers through private military company (PMC) contracts.
Putin’s action against both western companies and Russia’s business elite reflects two needs: cash to finance the war and revenue-generating assets to keep his inner circle satisfied. These assets are being redistributed among Putin’s supporters. The seizures are also evidence that western economic sanctions are impacting Putin’s actions and the Russian economy.
From Putin’s perspective, private wealth is in the temporary stewardship of the owners — it is never really owned by them.
Follow-ups & Quick Bites:
Follow-Ups:
Alfa Nero Back on the Market:
After winning the auction for the Alfa Nero, Eric Schmidt cancels his purchase of the super yacht after legal actions to stop the sale continues to delay the sale. This purchase of the Alfa Nero was discussed in the 5 August 2023 issue of BWR “Great Russian Fire Sale”.
Quick Bites:
From G8 to R2 (Rogue Two):
Kim-un Jong travels by slow armored train to Vladivostok to discuss weapons supply with Putin. At the end of the trip, Kim invites Putin to North Korea and Putin accepts. A growing bromance between Putin and Kim, certain to break someone’s heart.
Chechnya President Ramzan Kadyrov
Kadyrov is reported to be in a coma. He has been reported to be ill for some time, and if he is in fact incapacitated or dies, this will have consequences on Putin’s ability to control Chechnya.
His death has been reported many times in the past and he has managed to evade the Grim Reaper each time. He is looking a bit puffy in this photo which was posted on his Instagram account when he was last reported to be dead.
Vol 1, No 11 - BWR 16.09.2023
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