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Leaving Russia: the key issues for multinational companies

Volodymyr Zelenskyi’s message was blunt. Western companies must leave Russia immediately “because it is flooded with our blood,” Ukraine’s president told the US Congress last week. Those who stayed would fund Russian President Vladimir Putin’s war.

have multinationals withdrawn from Russia at a speed and scale without precedent. Some, like Danone, have stopped new investments but insisted they would stayciting a responsibility to “the people we feed [and] the farmers who supply us with milk”.

Many are exploring more radical options. That’s what Jeffrey Sonnenfeld, a professor at the Yale School of Management who follows the “business deadlock,” appreciates more than 400 have now pledged to reduce operations, cease operations or withdraw altogether.

Behind the barrage of announcements, “the execution is very complicated,” he noted.

Interviews with executives, consultants, and academics suggest that even companies that have announced plans to pull out of Russia entirely face dilemmas related to their employees, their assets and liabilities, and their short- and long-term options in the country.

The human problem

“It would be pretty easy for me to say that we are leaving Russia – we all want that,” UniCredit’s chief executive said Andrea Orcel. However, the bank employs around 4,000 people there.

Some companies like Spotify have pulled people. A few have closed their businesses in Russia despite being a large local employer, such as Accenture, whose exit will affect nearly 2,300 jobs. After the closure of its St. Petersburg plant, Toyota is gradually allowing its expatriates and their families, a total of 48 people, to return to Japan.

Most employers struggle to strike a balance between distancing themselves from a suddenly toxic market and protecting workers on their payrolls.

“You have places like McDonald’s and IBM with you [large local] Employees and they don’t want to act as punishment for people who were part of their family,” Sonnenfeld said.

Even when McDonald’s shut down its 850 Russian restaurants, it promised to keep paying its 62,000 employees there.

But Sonnenfeld noted, “The question is how long McDonald’s and IBM can continue to pay people not to do anything: how long they will put up with it and how long the general public will appreciate that they are pouring money into a rogue economy.” pump.”

Secretly, executives express concern about possible retaliation. Russian prosecutors have warned that business leaders who criticize their government risk fines and jail terms, while companies that go out of business could be found guilty of “fraudulent or intentional bankruptcy”.

Exterior of the Toyota car factory in St. Petersburg
After the closure of its St. Petersburg plant, Toyota is gradually allowing its expatriates and their families, a total of 48 people, to return to Japan © Anatoly Maltsev/EPA-EFE/Shutterstock

Another auto executive said: “We deliberately cited supply chain issues as the reason for the halt [production]. We deliberately don’t get involved in politics, no matter what we think, because the situation is very, very delicate. when you stop [the plant] whatever reason you’re on their radar.”

Some companies have cited staff concerns as a reason for staying. Dave Robertson, Chief Operating Officer of Koch Industries, written down that it employs about 600 people in two glass factories in Russia. “We will not leave our employees there or hand over these manufacturing facilities to the Russian government for them to operate and benefit from,” he said.

The threat of expropriation

As Robertson has indicated, some Western companies are concerned that the stalled operations could be confiscated by the state. Putin has warned that the Kremlin will find “legal solutions” to transfer assets from multinationals avoiding Russia “to those who actually want to work.”

An executive at another automaker said: “If we feel we are stopping operations without good reason, we could face nationalization, bankruptcy or insolvency and asset confiscation if you don’t resume operations.” “

HEC Paris law professor Alberto Alemanno said companies were now “paying a lot of lawyers to assess what they can do about it to protect their investments”.

Her concerns have reached the White House, where Press Secretary Jen Psaki tweeted that “lawless” seizures would lead to legal claims. Russia’s embassy in Washington dismissed such fears as “Russophobic hysteria.”

Sonnenfeld said the risk is limited as most non-industrial companies have few hard assets in Russia.

When Disney said it would “pause” all of its operations in Russia, it added that “contractual complexities” meant it would take time to break away from others, such as its television networks.

McDonald’s also has ongoing obligations, such as restaurant leases. All in all, Chief Financial Officer Kevin Ozan said this month that they will keep costs in Russia at around $50 million a month.

Some companies may decide that the reputational risks of continuing to pay business partners in Russia are too high, he said Derek LeatherdaleManaging Director of the geopolitical risk consultancy GRI Strategies.

“Theoretically, the companies that pull out would keep legal obligations and financial obligations within Russia,” he said. “Presumably some reckon that even if the Russian authorities try to enforce them, nothing can be done. It falls into the category of a theoretical risk outweighed by the public relations benefits of an exit.”

Western companies seeking professional advice face new difficulties as international law firms and accounting firms shut down their local offices themselves, or at least temporarily isolate them from their global networks. Laws aimed at avoiding any “evasion” of sanctions limit the advice they can give to companies with Russian counterparties and obligations or trying to sell assets or collect payments.

A lawyer warned that while companies could legitimately stop doing business with sanctioned organizations, those that voluntarily suspended contractual obligations were at significant risk. “Going beyond sanctions is hugely risky,” he said. “There will be many lawsuits from suppliers, joint venture partners and investors that will be heard in English courts.”

An elderly couple on their way to an Ikea store in Moscow
Ingka Group, whose 17 Ikea stores, nine planning studios and distribution center in Russia employ 12,000 people, said it expected the shutdown to last many months © Maxim Shipenkov/EPA-EFE/Shutterstock

Can sellers find buyers?

company incl bp and Shell have announced plans to sell Russian assets. For some, existing partners or franchisees are logical buyers. But they’re struggling to find buyers who aren’t on Western sanctions lists and wondering how sales proceeds can be repatriated.

cigarette manufacturer Imperial Tobacco and British American Tobacco transfer their operations to Russian companies. Kingsley Wheaton, BAT’s chief marketing officer, told the Financial Times that there had been “a real possibility” that the “false bankruptcy” rules being discussed in Parliament could lead to criminal charges.

However, he said negotiations could take months as transferring management of BAT’s 2,500 employees in Russia, its St Petersburg manufacturing facility and supply chains is a “complicated endeavour”.

“It’s not a classic coffee-table-book M&A,” he said. “M&A of this kind would take a long time in and of itself. Add in the idiosyncrasies of the current environment, it will only make it an even more complicated, complex situation.”

keep options open

Those companies that have retained some or all of their original operations in Russia, more than 80 by Sonnenfeld’s count, are dealing with a flagging economy, disrupted supply chains and a depreciated currency. Some are struggling to access cash to support their operations.

As James Peters, Whirlpool’s chief financial officer, said, “You’ve got declining demand, you’ve got sanctions now that are going to make it difficult to get components. We don’t know how it looks in the long and medium term as for that.”

Ingka Group, whose 17 Ikea stores, nine planning studios and a distribution center in Russia employ 12,000 people, said it expected the shutdown to last many months.

“We aim to provide long-term employment stability to all of our employees and recognize that the situation in both countries is dynamic and changing rapidly. We are working on a six-month plan, but since our announcement of the temporary break, we have guaranteed three months’ salary in Russia,” the company said.

The risk of a return

Even as companies face the challenges of honoring their exit promises, those hoping to one day return to Russia need to think about how they would do so, says Michael Useem, a Wharton professor specializing in risk management.

“When I’m at McDonald’s headquarters, I think, ‘One day we’ll be back. . . What would be the context, the circumstances, the moment, the political climate that would mean we can legally return?’” he said.

Boards must oversee a strategy for how their companies could re-enter Russia in a way that is convenient for their stakeholders, Useem said. “That has to be [informed by] dedicated analytics.”

A number of companies are looking at ways to divest but stay, for example by using purchase options to buy back assets temporarily divested to trusted local partners. But as one lawyer said: “Selling is never easy and it is very difficult to find a buyer. When you’re selling to a trusted third party, enforcing a purchase option isn’t easy. If you let go of an asset, you may never see it again.”

By Andrew Edgecliffe-Johnson and Andrew Jack, starring Peter Campbell, Philip Georgiadis, Ian Johnston, Richard Milne, Michael O’Dwyer, Antoni Slodkowski and Eri Sugiura

https://www.ft.com/content/86144c9c-2258-4b9c-a0ad-ea8d63b7000f Leaving Russia: the key issues for multinational companies

Adam Bradshaw

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