Threats from the authorities, the sale of business for next to nothing: leaving Russia is “damn difficult”

More than 1,000 foreign companies have reported ceasing business in Russia following its invasion of Ukraine. However, leaving the country was far from easy.

For example, cigarette maker Philip Morris International began the exit process in March, but progress has been slow. The company has to keep up with ever-changing regulations, try to avoid mistakes that would allow the Russian authorities to take over its business, protect employees from arrest. Philip Morris wants to sell the Russian division and has been negotiating with interested suppliers. The search for a buyer has been going on for three months – but things are still there.

CEO Jacek Olczak said The Wall Street Journal:

For many of those who do not have production facilities in Russia, it turned out to be easy to wind down the business. Apple, for example, simply stopped supplying appliances. Others have taken a break. So, McDonald’s immediately closed the restaurants and continued to pay salaries to employees until it agreed to sell about 700 restaurants out of 850 that worked under its brand to Alexander Govor. He previously operated 25 McDonald’s restaurants in Siberia under a franchise.

Govor told Reuters that he paid McDonald’s a “token” amount, and the company signaled that it did not intend to exercise the buyback option within 15 years (such a condition is in the deal agreement). McDonald’s told Reuters it had “completed the sale of its Russian business and exited the market.”

But negotiating a sale is very difficult. The buyer cannot be someone who is under Western sanctions, which greatly limits the choice. In addition, the question arises of how to value a business in a market that is suddenly cut off from the rest of the world. “What is the future of Russia? Half? 10%?” Olchak argues.

Renault was forced to give 68% of AvtoVAZ shares for 1 ruble and a 6-year option with the right to buy out to NAMI Federal State Unitary Enterprise, and a stake in the Moscow Automobile Plant to the Moscow government. Societe Generale quickly sold Rosbank to Vladimir Potanin’s Interros and was forced to write off the value of assets by 3.1 billion euros. And UniCredit refused to give the Russian business to Potanin for nothing and began to exchange assets with Russian financial institutions that have them abroad.

In total, the companies leaving Russia wrote off $59 billion, follows from their financial statements for the first quarter and public statements.

Philip Morris acted cautiously. In early March, it announced a reduction in production due to supply issues and canceled the planned launch of the IQOS Iluma tobacco heating device with new technology that the company did not want to leave in Russia. She quietly took foreign employees out of the country and took steps to protect her data, Olchak said.

It was only then that Philip Morris announced her final departure and even after that continued to pay salaries and made it clear to the authorities that the decision was made by the company’s management in Switzerland, and not by local managers.

Shortly after the outbreak of the war, Danish AP Moller-Maersk, the world’s largest container carrier, suspended all flights to and from Russia, stopped buying Russian fuel and decided to divest assets and operations. “In practice, it turned out that it is not so easy to stop a business in a country like Russia,” CEO Søren Skou said at a meeting with shareholders in March.

At that time, the company was transporting more than 50,000 parcels to Russia. She tried to deliver them quickly, but some were diverted or stopped due to sanctions. In addition, the company had about 50,000 containers in Russia and wanted to pick them up. By June, the number had dropped to 14,000, but the process is slow because communication with Russia is severely limited, an AP Moller-Maersk spokesman said.

The situation is different for Philip Morris, which sells Marlboro cigarettes outside the US. She started working in the USSR in 1977, now she has a factory in St. Petersburg and sales offices in about 100 cities.

In 2021, Russia accounted for almost 10% of global sales in units and about 6% in money terms (total revenue amounted to $31.4 billion). By the end of March, the company had more than 3,200 employees and $1.4 billion in assets in Russia. But in May, Philip Morris agreed to buy smokeless tobacco maker Swedish Match for $16 billion, which will allow it to enter the US market and increase sales after winding down business in Russia.

In terms of market share, Finnish tire manufacturer Nokian Tires is in one of the most difficult positions. In money, the share of sales in the Russia and Asia region was 19.6% of the company’s global indicator, follows from the reporting for 2021, or 335.6 million euros. However, the lion’s share in production – 17 million tires per year – falls on the plant in Vsevolzhsk, from where two-thirds of the production is exported to other countries. The capacity of the plant in the Finnish city of Nokia is 3 million, in the USA – 4 million tires per year.

In addition, the Russian division is the second largest: 1612 employees at the end of 2021 (in Finland – 1782, in the USA – 391). On March 22, the company announced that it did not intend to close the Russian plant, as it wanted to “be sure that it will be managed and controlled by Nokian Tires in the future.” However, there will be no new investments in production, although back in early February, the general director of Nokian Tires Russia, Andrey Pantyukhov, announced plans to expand capacity and even build a new plant in the medium term.

At the same time, Nokian Tires announced an increase in the capacity of factories in Finland and the USA in order to diversify production.