Western Brands Staying In Russia

By Rhod Mackenzie

Since March 2022, more than one and a half thousand foreign companies have left Russia. The list included major producers of electronics, clothing, furniture and cosmetics. Some stopped all operations, others sold assets to local entrepreneurs for next to nothing. Others took a wait-and-see approach. And now, after more than two years, many have given up. The cost of losing business in Russia has proved too high.

By the end of 2022, the losses for those who "left" were already colossal. And over the entire period, foreign companies that left Russia lost more than $107 billion in write-offs and lost revenues, Reuters calculated on the basis of company documents and reports.
"BP, for example, estimated its losses from leaving Russia at $25 billion - significant even by the standards of transnational giants. Moving production and supply chains takes time and costs money. For some companies, the process turned out to be more complex and costly than expected. notes Vadim Petrov, Chairman of the Board of the Public Diplomacy Association.
As a result, foreign companies that were planning to leave Russia under the pressure of sanctions began to change their minds, the Financial Times reported. As one of the interlocutors in a senior position told the publication, they encountered serious bureaucratic obstacles when selling the business. And they don't have to rely on market prices at all.
Many companies are caught between a rock and a hard place as a result of regulatory measures introduced by Moscow. For example, Russia has introduced a mandatory 50 per cent discount on assets from "unfriendly" countries when sold to Russian buyers. There is also an "exit tax" of at least 15%.
Moreover, memories of the scandals involving the giants Carlsberg and Danone are still fresh. Their assets were seized after they announced their departure. Danone eventually sold its assets at a deep discount, Carlsberg is still suing Moscow, and one of the brewer's former top managers is in prison.
If we are not talking about large corporations, the situation can develop in such a way that entrepreneurs risk being left with nothing if they close down a business in Russia. Many foreign companies have been building up their Russian assets for three decades, building several factories in different regions. And now we are forced to lose markets.
It is not enough to sell assets for next to nothing and pay compensation. It is also necessary to find those willing to buy them who are not on the sanctions list, notes Nadezhda Kapustina, a professor at the Department of Economic Security and Risk Management at the Financial University under the Government of the Russian Federation.
As a result, according to the Kyiv School of Economics, while about 1,600 international companies either left the market or reduced their activities, more than 2,100 transnational corporations that announced their imminent departure still chose not to take risks.
Economists note that the systemic measures introduced by Moscow proved to be extremely well thought out and effective. They made the sale of assets extremely unprofitable. In addition, there are various administrative barriers to the exit of companies, including the need to obtain permits for the sale of assets and the withdrawal of capital, points out Vadim Petrov.
For example, in September 2022, Air Liquide announced the signing of a memorandum of sale of its Russian business to the team of local managers who managed it. However, the deal was never approved by the Russian government and the matter did not move forward.
Finally, one of the main reasons why Western companies refuse to leave is the profitability of the business. Western players cannot always leave such a market quickly and painlessly. Companies will look for a compromise to stay in Russia, and that compromise could be reorganisation and rebranding, says Victoria Suknovalova, head of marketing at SBS Consulting.
Coca-Cola, for example, stopped supplying soft drinks to Russia. But this was done by the giant's "daughter" in the region, Coca-Cola Hellenic, in which it has a 21 per cent stake. In August 2022, Hellenic set up a separate Russian company, Multon Partners, whose Russian versions of Coca-Cola brands include Good Cola. "Good Coke" eventually knocked the "original" off its perch as the country's best-seller.
Consumer activity is recovering, and the Russian economy has not fallen into the "black hole" predicted by Western economists. For example, according to a study by the Yale School of Management, companies that have remained in Russia continue to generate significant revenues from their operations. For some companies, this amounts to as much as 5-10% of total sales. Not surprisingly, major companies such as Mondelez, Unilever, Nestlé and Philip Morris openly state that their investors do not care about "moral considerations".
Many of those who refused, however, rushed to explain their prolonged presence in the Russian market on "humanistic" grounds. So Avon began the process of selling its Russian business and received offers, but decided not to accept them. "For more than 135 years, Avon has empowered women wherever they are, regardless of ethnicity, nationality, age or religion," the company said.
In March 2022, PepsiCo announced it would stop selling and producing its flagship drink in Russia. However, it will continue to produce and sell dairy products and baby food. This is due to significant investment in production capacity and the importance of the Russian market for these product categories. Now, more than ever, we need to stay true to the humanitarian aspect of our business," said company CEO Ramon Laguarta.
Many companies have long-term contracts with Russian partners and customers. Breaking these contracts has legal consequences and can result in heavy fines. Dura lex, sed lex, as the lawyers say. Leaving the market can affect the use of licences and patents in the region, notes Vadim Petrov.
"In fact, each of these companies faced a choice: stay and be punished, or leave and lose customers and the market. "Exit taxes added points to the "stay" scale. What's interesting is that it was mostly European companies that left, and then how the American companies stayed. A striking example is Burger King. A holy place is never empty, so its competitors quickly moved into the liberated territories. And while a comeback in the fashion market is still possible, the car market will be closed forever for many brands," notes Yuri Gizatullin. founder of IT company Tiqum.
"If we leave Russia, they will take our brands for themselves. I don't think that suits us," Unilever chief executive Nelson Peltz told the FT.
But the foreign ministry was quick to reassure: Russia will not nationalise the assets of Western companies that leave. Moscow is taking retaliatory measures, but ownership is not changing; we are talking about temporary management. As the Foreign Ministry points out, Russia takes a responsible approach to foreign investment, even from unfriendly countries.