The number of businesses that have completely withdrawn from the Russian market remains relatively small, although at one time many companies announced their intention to leave the Russian market in protest against Russian aggression. 

The withdrawal was supposed to be a sign of moral condemnation of the aggressor by private business. In economic terms, it was expected to have two consequences: refusal to support the aggression by paying taxes and limiting Russia’s foreign economic relations.

But how have foreign companies in Russia de facto reacted to the full-scale war with Ukraine, and what conclusions can Ukrainians and the international community draw from this reaction? Igor Burakovsky, Chairman of the Board of the Institute for Economic Research and Policy Consulting, told NV.

Read the full column here.

In response to the full-scale aggression of the Russian Federation against Ukraine, on February 24, 2022, the progressive international community imposed unprecedented economic sanctions in terms of number and scale. Their goal is to undermine the aggressor’s economic capacity to wage war and thereby force it to change its behavior. At the same time, in Ukraine and other countries, the public has begun to actively demand that foreign companies leave the Russian market, even from sectors that are not subject to sanctions.

According to Yale Business School estimates, as of April, 215 companies continued to operate in Russia as usual, 174 only suspended investment programs and business development plans, and 153 curtailed some activities but kept others. Interestingly, 505 went into a sleep mode, i.e. stopped all or a significant part of their operations, but are ready to resume full operations at the earliest opportunity. Finally, 542 companies have completely ceased business or left the Russian market.

As you can see, a significant number of companies have responded to Russian aggression in one way or another. However, the number of businesses that have completely withdrawn from the Russian market remains relatively small, although at one time many companies announced their intention to leave the Russian market in protest against Russian aggression. At the same time, some Russian experts estimate that more than 10,000 companies with foreign participation have left Russia.

This process requires a detailed analysis. But we can already make some preliminary observations, although for obvious reasons the relevant information is fragmentary.

1. As practice shows, the companies that exited in 2022 could do so relatively easily, but, of course, both then and now, such an exit was not free. Thus, according to Reuters, since the beginning of Russia’s aggression against Ukraine, foreigners have lost more than $107 billion by leaving the Russian market. We are talking about asset write-downs, losses, and loss of expected income.
2. In 2022, the Russian president issued a decree that explicitly prohibits investors from “unfriendly” countries from selling their stakes in so-called “key” energy projects and banks without special permission. And then the relevant requirements were only made stricter. Such requirements directly violate Russia’s obligations under international investment protection agreements.
3. It should be noted that the Russian Federation has also managed to make money from the exodus of investors. Thus, as of March 15 this year, “fugitive” companies have paid 35.7 billion rubles (or $387 million) to the Russian budget since the beginning of the year. At the same time, it was planned to receive only 2.1 billion rubles in such payments for the whole of 2024.
4. According to Forbes, in 2022, the total gross profit of foreign companies that “passed” to new owners exceeded 470 billion rubles. But in general, the fate of companies (assets) previously owned by foreigners varied. The biggest problems were faced by those companies whose operation was critically dependent on foreign technologies, components, and financing. And this was “provided” by foreigners. We are talking, in particular, about automotive companies. Their exit immediately became a challenge for the new owners in terms of finding new logistics and financial schemes. At the same time, in several cases, the new owners were able to establish production of the respective goods at the “inherited” production facilities, although not without problems. An example is the fast food chain “Vkusno i Tochka”, based on McDonald’s.
5. Given that the decision to withdraw is made at the level of the President of the Russian Federation, foreign assets were distributed among their own or close to the government people, who became direct beneficiaries of the foreigners’ withdrawal from the Russian market. This to some extent strengthens the loyalty of the relevant business circles to the Putin regime, as it can be seen as a kind of compensation for sanctions losses. At the same time, representatives of China and the former Soviet republics (including Belarus, Kazakhstan, and Kyrgyzstan) have been actively entering the Russian market by setting up new companies. But it is also clear that Russian businesses and foreign companies that remained in Russia began to enter the vacated market niches, although they failed to completely replace the “old” investors.
6. It is clear that foreign investors are trying to minimize the costs of exit by ensuring that they can return to the Russian market in the future. For this purpose, they concluded agreements on the sale of assets to Russian management, which provided for the possibility and mechanism of buyback. The exact number of such agreements and their content are not known due to confidentiality, but it is interesting to know under what circumstances the former owner can initiate a buyback procedure.

And now for the questions and conclusions.

First, the exit of foreigners from the Russian market will only work if the global business community boycotts Russia. Such a boycott contributed to the fall of the apartheid regime in South Africa more than economic sanctions.

Second, whether foreign investors are ready to defend their interests in court with the political support of national governments.

Thirdly, whether national governments are ready to impose sanctions against Russia in one format or another in connection with the attack on the rights of their investors.

Fourth, whether Russia will try to make the issue of foreign investors part of a package of political trade with “unfriendly” countries.