03.05.23 Sanctions Analytics

Schrödinger's Boycott: Why Have Western Companies Not Left Russia Properly?

Oleg Khokhlov
Re: Russia
Oleg Khokhlov
In the first weeks following Russia’s full-scale invasion of Ukraine, many American, European, British and Japanese companies (as well as those from other so-called 'unfriendly countries') declared their intention to leave the Russian market. This process was active in the first few months of the war but eventually stalled. Moreover, some of the companies that had seemed to have left are beginning to return cautiously. This can in part be explained by the simple fact that the Russian authorities have placed many obstacles in the way of those companies that want to leave, even if they are willing to hand over their assets at a steep discount. But another reason is that many foreign companies ceased their operations last year, not so much for moral, but for technical reasons: old logistics chains broke down, there were complications with payments, and the ruble was unpredictable. Now that these problems have largely been solved, it is increasingly tempting to make a return to the market without making a big fuss.

The Exodus Debate

The true extent of the exodus of foreign brands became a hotly debated issue in early 2023. The most cited list of international companies that have cut (or are cutting) ties with Russia is maintained by a group of economists led by Jeffrey Sonnenfeld, Professor at the Yale School of Management (Re: Russia has covered this list before, for example here). In total, there are almost 1,400 companies on the list. Of these, more than a thousand have left the market or at least reduced their activities in Russia. The register assigns grades of activity from A (complete cessation of activity) to F (no change in activity). The authors use information from insiders and top managers, as well as official statements and publications by high-quality media outlets to compile their list. 

The Leave Russia register, compiled by the Kyiv School of Economics, operates similarly. This list contains the names of over three thousand companies, twice as many listed by Yale. According to the register, only 7% of these companies have left the Russian market entirely, less than 40% are preparing to leave, while 15% have reduced their activity. Thus, according to Leave Russia's calculations, a significant number of the companies that have not left have no intention to do so.

Finally, a paper by Swiss economists Niccolo Pisani (IMD) and Simon Evenett (University of St. Gallen) was published in January. Using the Orbis database, which contains information on 400 million legal entities from around the world, they found that almost a year after the war began, only 8.5% (120 in total!) of Western companies had sold or closed their subsidiaries in Russia. The study's authors have said they wanted to challenge the popular ‘ narrative of a mass exodus of Western companies from the Russian market’. Sonnenfeld has called Pisani and Evenett's work ‘fabricated’ and ‘pro-Putin’. Indeed, the report does contain some questionable elements. For example, while IKEA had received an A grade from Yale economists for not only closing its stores but also laying off 10,000 of its workers, this was not enough for Pisani and Evenett, as some of IKEA's Russian assets had yet to be sold by the time they compiled their list. Moreover, among the foreign companies that refuse to close their operations in Russia, Pisani and Evenett include Russian companies such as Yandex and X5 Group, as their headquarters are registered in the Netherlands. 

However, the Swiss economists are correct in their assertion that a company's statements could be fraudulent or misleading. While their US and Ukrainian colleagues are right to take into account that not all companies that wanted to leave the Russian market were able to do so quickly for various reasons. Recently, Pisani and Evenett's method was used by the independent media outlet Important Stories, but instead of taking their data from the Orbis database, they used the Russian Unified State Register of Legal Entities. They found that, by April 2023, the number of legal entities with owners from the US, EU, UK and other 'unfriendly countries' had fallen by 20%, or 2,600 entities, when compared to the number of companies registered in Russia before the war began.

The Bottleneck Approach

The exodus of Western companies could have been more significant had it not been obstructed by the Russian government. The Financial Times quoted sources as saying that some two thousand companies are still on the waiting list to leave. This means that approximately 18% of Western companies are in that queue, in addition to those counted by Important Stories, which gives rise to a very different total. However, the government's Foreign Investment Review Commission, which approves such deals, meets only three times a month and reviews no more than seven applications at any one meeting. For example, the Spanish company Inditex, which owns Zara, Bershka, Massimo Dutti among other brands, found a buyer for its Russian holdings in October but did not receive approval for their sale until April, almost six months later. 

Sometimes deals are not approved. Finance Minister Anton Siluanov has said that two conditions must be met: the relevant authority must have no objections, while the transaction amount must be at least 50% lower than the company's most recent valuation or no more than three years' EBITDA (earnings before interest, tax, depreciation and amortisation). In addition, since the end of last year, the seller has been required to contribute 10% of the deal value to the Russian state budget. According to RBC, the sale of Syktyvkar LPC, the main Russian asset of Austria's Mondi, to Pharmstandard co-owner Viktor Kharitonin at the end of 2022 was derailed because the price was too high. The anticipated value of this deal was €1.5 billion, but the government did not approve the sale. According to officials, in 2021, the EBITDA of the Syktyvkar pulp and paper mill was 334 million euros, which means that its sale price should not have exceeded 1 billion euros. 

Foreign banks are, in principle, only allowed to sell their Russian assets with the personal approval of Vladimir Putin. He issued an order to this effect in October, and there have been no deals since. Sources among the foreign banks’ negotiators are quoted by the Financial Times as saying that buyers who might be able to secure Putin's backing for a sale have allegedly offered prices to which the sellers could not agree.

Another matter is that different banks have responded differently to this situation: Citibank has virtually ceased all operations, and UniCredit has significantly reduced its activity. At the same time, Raiffeisenbank has taken advantage of the fact that it is not under sanctions and has increased its revenues manifold by offering foreign exchange transactions. Raiffeisenbank accounted for half of the profits of the Austrian banking group of which it is a member. The criticism levelled at the parent company of Western Raiffeisen Bank has been described by its top management as ‘moralising from a zone of comfort’, but it has promised to hold talks on selling the Russian business. This example also demonstrates that the greater the size of a company's Russian holdings, the harder it is to leave the market without endangering the parent company. 

Dreamers, partisans and scabs

Companies that have already left the Russian market, or are making plans to do so, often envisage options for a quick return ‘should the situation change’. McDonald's is one such example, as despite removing the Golden Arches from its Russian restaurants it has kept most of the menu and now operates under the management of one of the American chain's former franchisees. Ford, Renault, Mercedes-Benz and Mazda have all left Russia in a similar manner. 

Examining the Unified State Register of Legal Entities, Important Stories found that a number of foreign companies have essentially faked their exit by changing their registration location from an ‘unfriendly’ jurisdiction into a ‘friendly’ one: legal entities from the United Arab Emirates, Turkey, Kazakhstan and China have emerged as the new owners of Russian branches of Western companies. It is unknown who the real owners are and whether these deals are real or not.

Several companies kicked up a fuss about closing down or withdrawing investments from Russia, only to change their minds later. The media occasionally picks up such cases. 

A year ago, SLB (formerly Schlumberger), one of the world's largest oilfield service companies, joined Halliburton, Baker Hughes and Weatherford in announcing an ‘immediate halt to new investment and technology deployment’ in Russia. Ultimately, while the other businesses left the Russian market, SLB stayed, even increasing its business at the expense of its competitors. According to Reuters, the share of Russian business in the company's total revenue rose from 5% to 6% in the first nine months of 2022. At the end of last year, the company hired approximately70 new employees in its Russian office to work with its key clients, Gazprom and Rosneft. 

According to media reports, Microsoft recently began working in Russia in a limited capacity. In the summer of 2022, Microsoft's Vice Chairman and President Brad Smith promised to reduce the company’s Russian business until almost nothing was left. However, in April 2023, Kommersant reported that the company was offering corporate customers the opportunity to renew their licences for previously installed software. At the same time, there were reports that Intel was also resuming its technical support in Russia. Representatives from both companies did not comment on the extent of their activities. 

Pernod Ricard, the world's second-largest spirits maker, which owns brands such as Absolut, Chivas Regal, Perrier Jouët and others, announced the resumption of Absolut vodka deliveries to Russia a month ago. It explained this decision by citing the need to protect employees in the company’s Russian office from accusations of deliberately running the company into bankruptcy. Faced with criticism in the West for its decision to resume its activities, the company reversed the decision. Shortly afterwards, The Bell revealed that Pernod Ricard had indeed been supplying Russia with vodka, whisky, gin, tequila, cognac and champagne throughout 2022. Pernod Ricard’s Russian entity’s  revenues were lower last year than in 2021, but not dramatically so. Moreover, despite claims to the contrary, Pernod Ricard did not even curtail its marketing activities. 

Burnout and adaptation 

A year ago, the statements made by popular global brands announcing a boycott of the Russian market had a powerful symbolic effect; they created a chorus, amassing to form an entire political campaign. They successfully demonstrated the extent of Western outrage at Russia's actions and indicated the profound isolation that it could face. 

Within a few months, many brands had made good on their promises. Popular clothing retailers closed, some well-known products, cosmetics and household chemicals disappeared from supermarket shelves, deliveries of car and spare parts stopped, and cinemas stopped screening Hollywood movies. But then, most of the products which had disappeared, began to return safely through parallel imports. Prices went up, of course, but not for everything. Apple smartphones, for example, are now sold at a cheaper price in Russian online shops than in most of Europe because they are imported from Asia, where taxes are lower. Cinemas have started to show American blockbusters, not pirated copies, but the official version. 

The boycott has not been 100% effective, and the political campaign has run its course. There is still news of companies leaving the Russian market. Recent examples include Match Group, which owns the Tinder dating service, and Mercedes-Benz (both companies took a while to prepare). But reports of other companies resuming their operations in the country are no less frequent. 

The experts at the Moscow-based Centre for Strategic Research are probably at least partly correct: in many cases, foreign companies have ceased operations not merely for moral reasons but also due to objective factors: high uncertainty, risks, sanctions preventing the import of products, difficulties with payments, exchange rate volatility, logistical failures, and shortages of raw materials and components. A similar pattern was observed in 2014-2015. Initially, the impact of the sanctions was significant, precisely because of the uncertainty about the risks. However, as the limits became clearer, the impact of the sanctions which remained in place began to diminish rapidly. 

The current situation suggests that the public campaign we witnessed last year has fizzled out and that companies are not experiencing supply and transaction problems. In this situation, companies will be strongly tempted to remain in the market unless there are additional incentives to leave. And, while talk of an outright ban on exports to Russia does not seem feasible, the fact that the remaining companies are paying taxes to the Russian state, and are thereby financing the ongoing war, may yet become a new point of leverage to put pressure on those who remain.