47 of the 200 largest companies in the world have not yet left Russia. Now the Kremlin is preparing a “blackmail of expropriation”, says an expert

In the six months since Russia invaded Ukraine, some 300 global companies have exited the Russian market and another 700 have halted new investments and projects or held back operations in the country.

Western companies from the US and Europe dominate the long list, which includes Citi and Goldman Sachs banks, clothing brands like Burberry and Adidas, and tech giants like IBM, Intel, Snap and Twitter, according to research from the Yale School of Management.

Large-scale corporate exodus, coupled with harsh Western sanctions, has devastated the Russian economy, reversing decades of foreign investment and cooperation, despite the Kremlin’s continued influx of petrodollars and its insistence that Russia is doing well. .

But not all global companies have withdrawn from the country. About 47 of the world’s 200 largest companies continue to do business in or with Russia. The starting process, after all, can come with high costs. Now, after reviewing the Kremlin’s new moves, experts say the remaining companies are now at greater risk of nationalization as Russia struggles over how to best deal with the mass exodus of companies and seeks greater control of their economy.

Impure pause

Political and reputational pressure prompted companies to leave Russia quickly after the invasion of Ukraine.

But making a clean break with the country proved costly and complex, and many companies that previously announced their intention to leave continued to do business there as they considered how to get out of it without losing too much money.

French bank Société Générale became a cautionary tale when it took a $ 3.2 billion hit by selling its stakes in Russian lender Rosbank and affiliated branches to Russian nickel billionaire Vladimir Potanin (who has since been sanctioned). He sold his Russian assets quickly, but to a businessman tied to the government, as foreign buyers are scarce given the risks involved. As a senior banking executive told Financial Times: “We are all trying to find a smart way out of the country. But what SocGen did is not the best way to do it. There is an ethical discussion … to consider when selling, or essentially making a donation, to an oligarch. ”

But other companies, including many from Japan and China, are still all in the Russian market. Resource-poor Japan, which condemned Putin’s war on Ukraine, continued its oil and gas partnerships with the country. “Our policy is not to withdraw,” Japanese Prime Minister Fumio Kishida said earlier this year.

China’s state-owned railway and telecommunications companies, along with private tech and heavy industry companies, also continue to operate as usual in the country, although they remain cautious about triggering secondary sanctions from the west. U.S. companies that remained include Match Group, the owner of Tinder, video game developer, Riot Games’ luxury brand Tom Ford, among others, according to Yale research.

But the Kremlin’s recent moves could change these calculations and indicate that the Russian government is willing to take drastic measures against business to tighten control of the economy.

‘Expropriation blackmail’

If it was once a difficult decision for companies to stay in Russia or leave, it could become a lot easier if Putin decides for them.

On July 1, he signed a decree to allow the government to seize the Sakhalin-2 oil and natural gas project. The Kremlin order gave control of Sakhalin-2 to a new state-owned company that could deprive foreign investors of their rights if it so desires, one of the government’s most energetic moves in response to the corporate exodus. British energy giant Shell and Japanese trading companies Mitsui and Mitsubishi have double-digit stakes in the Russian energy project.

This month, the two Japanese investors took a hit of more than $ 1 billion on its Sakhalin-2 assets after writing the valuation after Putin’s decree. Mitsui and Mitsubishi have declared their desire to stay in the project but are unsure where their future will be.

The decree shows that Russia is not only willing to expropriate foreign assets, but is also positioning itself to engage in “blackmail of expropriation,” wrote Mark Dixon, founder of the Moral Rating Agency, a research organization focused on foreign companies. in Russia July report.

The Sakhalin-2 case shows that foreign investors have already been expropriated and that Russian authorities are giving them the option to accept the new terms of the new entity that now controls the energy project or to lose everything, Dixon said. Fortune this week.

“We anticipate a tsunami of expropriations or blackmailed concessions in the next couple of months,” Dixon wrote earlier this year.

Other experts agree. The Russian government will nationalize – which amounts to expropriation or confiscation by the state – “one foreign company after another” due to the lack of available options, Anders Åslund, economist, former senior member of the Atlantic Council and author of Russian crony capitalism, said Fortune. Russian assets cannot be sold easily due to the shortage of foreign buyers, and for those companies that have exited, companies cannot leave them without owners, he says.

Russia has denied that it will expropriate or nationalize the assets of foreign companies.

“We are not interested in the nationalization of companies or their removal,” said the country’s Minister of Commerce and Industry Denis Manturov recently. In addition, a bill that would allow the government to formally nationalize the activities of international companies that have left Russia has been suspended. The bill did not pass to the Russian parliament before the summer break. But Western companies continue to come under heavy pressure to make a clean break with Russia or be subject to the whims of the Kremlin, experts say.

The high risk of expropriation remains, although nationalization may be delayed, simply because the Kremlin has few alternatives, Åslund says. Many foreign investors are now gone and “the only natural option for the Russian government is to seize [the companies] or allow them to be kidnapped by Russian businessmen close to the Kremlin for little or nothing, like [lenders] Rosbank and Tinkoff Bank, ”he says.

The suspension of the nationalization bill does not “detract from the long-term direction of the Russian economy, which is towards greater state control and more Kremlin interventions to mask the structural challenges arising from Russia’s exclusion from international markets as a country. pariah, ”Steven Tian, ​​director of research at the chief executive officer of Yale Leadership Institute, the team responsible for corporate exodus research from Russia.

He attributes the pause on legislation to infighting between government officials. Some, like Igor Sechin, an oligarch who leads Russian oil giant Rosneft, are firmly in favor of Russian nationalistic policies, while others are oriented towards free market measures. “But clearly, the latter faction isn’t winning right now, even if it comes out on top in a couple of occasional skirmishes,” says Tian.

According to the Moral Rating Agency, some 47 of the world’s 200 largest global companies operating in Russia right now are at high risk of their Russian holdings being expropriated or nationalized, due to the amount of their investments in the country or current. stakes in Russian affairs. report.

European, Japanese and Chinese investors in Russian energy projects make up a big chunk of the list, which highlights BP’s 19.75% stake in Russian state oil company Rosneft, worth $ 11.2 billion, and the TotalEnergies’ Russian energy investment of $ 13.7 billion. Western consumer goods companies also made the list, including food and beverage company Nestlé, which derives 2% of its revenues from Russia, and household goods manufacturer Unilever, where Russia accounts for nearly the 2% of its total sales.

Jeffrey Sonnenfeld is a management professor and senior associate dean for leadership studies, leading Yale’s research on companies that have left Russia. He said Fortune that Putin’s recent nationalization highlights the Kremlin’s desperation now that Russia has become a “non-investable nation”. In a recent article, Sonnenfeld’s teams highlight the financial incentives companies have to get started.

“There is no incentive to stay,” he says. Companies risk losing “operational control, personnel control, brand control and reputation control.”

This story was originally posted on Fortune.com

Leave a Reply

%d bloggers like this: