Is it difficult for Western businesses to 'say goodbye' to the Russian market?

Immediately after the Russia-Ukraine war broke out on February 24, 2022, a series of European and American businesses simultaneously announced that they would limit their operations or leave the Russian market in response to Moscow's military action against Kyiv, as well as to avoid sanctions. However, more than a year has passed but only very few Western businesses have done this. Currently, there are still many European companies from mid-sized to blue-chip companies (large companies) that remain in the Russian market.

Surprising reality

A study by the University of St. Gallen (Switzerland) published in February showed that between February and November 2022, less than 9% of European Union (EU) and G7 companies divested at least one subsidiary in Russia. The companies that withdrew were mainly those with lower profits and higher workforces than those that remained.

Carlsberg factory in St. Petersburg

Recently, the Kyiv School of Economics (KSE) statistics show that out of 3,141 foreign companies in Russia that are monitored, only about 211 companies have left the Russian market (less than 7%) since the outbreak of hostilities. Meanwhile, 468 companies have announced plans to withdraw, 1,228 companies have stayed and more than 1,200 companies have reduced the scale of operations or left their options open. Of the remaining companies, 19.5% are from Germany, 12.4% are from the US, and 7% are from Japan.

According to The Washington Post , as soon as the war broke out, Coca-Cola announced that it was "temporarily suspending its operations in Russia." However, Coca-Cola HBC, a Swiss-based bottled water company with a 23.2% stake held by Coca-Cola, converted its Russian subsidiary Coca-Cola HBC Eurasia into Multon Partners in August 2022. Multon Partners continues to operate 10 factories in Russia that produce drinks under other names such as Dobry Cola, Rich and Moya Semya.

Meanwhile, PepsiCo, despite announcing it would stop selling Pepsi-Cola, Mirinda and 7-Up in Russia and produce only essential items such as dairy products for humanitarian reasons, continues to sell potato chips in the country. Similarly, Unilever is selling Magnum ice cream in Russia. Although Swedish furniture giant Ikea has announced it is leaving Russia, its Mega shopping malls continue to operate there. Pharmaceutical giant Pfizer has stopped investing in Russia but continues to sell a limited range of products and directs profits to Ukrainian humanitarian groups. Hotel chains Accor and Marriott have also said they have suspended the opening of new locations in Russia, but existing locations managed by third parties remain open.

Some other companies are even leaving open the possibility of returning to the Russian market. Carlsberg aims to cease operations in Russia by mid-2023, but CEO Cees 't Hart said the company is working on a buyout clause that could allow it to return to the Russian market later.

The sign of an Apple store in Moscow in a photo taken in 2021

Dilemma

The reason why many Western companies are hesitant or unable to leave the Russian market stems from many reasons, both subjective and objective.

First, the Russian government has done everything it can to stem the tide of Western companies leaving the market. The process of leaving Russia is complicated and time-consuming, with the Kremlin imposing regulations that require Western companies to seek permission from the Russian state to sell assets. Russia also seizes assets and prohibits foreign banks and energy companies from selling shares without the personal approval of President Vladimir Putin.

In December 2022, the Russian Finance Ministry announced a number of measures against the sale of assets by investors from "unfriendly countries", including a 50% discount on the sale price and a 10% tax.

A former McDonald's restaurant in St. Petersburg

For example, just four days after the war broke out, Shell announced that it would leave Russia and sell its nearly 27.5 percent stake in Novatek’s Sakhalin-2 liquefied natural gas (LNG) facility in the Far East for $1.6 billion. However, Russian media reported in early April that President Putin had only allowed Shell to receive $1.2 billion from the sale. Moreover, moving Shell’s money out of Russia is not an easy task.

Many foreign companies are unable to leave Russia in the usual way, said Andrii Onopriienko, project manager at KSE. Pressure from Russian policies has forced them to “hold their breath and wait.” However, the longer companies wait, the more complicated and costly their efforts to leave the Russian market become. Many companies will lose the ability to sell their businesses, continue to incur losses, and may eventually have their assets nationalized or bought out at a bargain price.

Second, the divestment efforts of Western companies are more complicated than expected. In addition to the Russian government's "hand-tied" regulations as mentioned above, some Western companies do not want to risk giving market share to companies from China, India, Turkey or Latin America, which are "eyeing" their assets and shares in Russia. Lawyer Olivier Attias of the August Debouzy Law Firm based in Paris (France), assessed that Russia is a big market for many companies, so the decision to "leave" is very difficult and the process of "leaving" is even more difficult.

Third, Western companies are heavily dependent on doing business in Russia and the costs of exiting are likely to be greater than those of staying. The Russian economy is still performing better than expected, shrinking by only 2.1% in 2022, and the long-term opportunities for Western companies in this market are considered to be huge.

Fourth, Russian consumers still have a strong appetite for Western brands. Although BMW, Mercedes, and Apple have announced that they will stop selling in Russia, their products and those of other Western luxury brands remain popular in Russia, including black market imports. Ivan Fedyakov of the market research firm INFOLine says that Russians know that there is no substitute for a BMW, Mercedes, or iPhone.

A former Renault factory in Moscow

Challenges for those who stay

Leaving the Russian market is very complicated and not as easy as initially stated because it involves many issues. However, staying in the Russian market also causes many challenges for Western businesses.

Many Western companies that have not left face accusations of undermining US and Western efforts to increase pressure on the Russian economy through sanctions. “The tax money paid by foreign companies is partly helping Moscow maintain its military activities, while allowing Russians to enjoy amenities and a quality of life that is not much different from before,” Onopriienko said.

Auchan supermarket in Moscow. French supermarket chain keeps 230 stores in Russia

Furthermore, Western companies that sell food or personal products are vulnerable to being implicated in the war effort, especially as Russia moves toward a “wartime economy.” For example, French corn and bean producer Bonduelle was forced to deny supplying canned food to the Russian military in December 2022 after images of Russian soldiers holding the company’s products appeared on social media.

In addition, according to Bloomberg, multinational companies are said to have lost a lot of manpower because of local employees joining the army and emigrating. Although Kremlin spokesman Dmitry Peskov denied that businesses would be forced to participate in the military campaign, some reports said that during the partial mobilization last fall, many notices were sent to foreign companies - where Russians worked.

Experts predict that the more intense war situation in the coming time will cause Western businesses remaining in the Russian market to continue to face more difficulties and challenges.

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