The full or partial curtailing of more than 1,000 foreign companies’ operations in Russia since Vladimir Putin ordered an invasion of Ukraine on Feb. 22 has provided perhaps the most spectacular evidence of the damage the imperialist adventure has inflicted on Russia. There is, however, another side to it: It’s a potential bonanza for Russians willing to take over the assets orphaned by the Western stampede for the exits.“Potential” is the key word here.
At the start of this year, Russia had $521 billion of accumulated direct foreign investment, according to the Russian Central Bank. Much of it was into import-supporting networks such as store chains selling foreign brands, but a lot of the money also had gone into industrial and agricultural assets that are less dependent on branding. Once Putin attacked, however, many foreign companies dumped their Russian operations because retaining them could have resulted in heavier penalties from financial markets. Last month, Jeffrey Sonnenfeld of the Yale School of Management and his colleagues published a paper showing that stock market returns in late February through mid-April were, on average, positive for firms that left Russia or scaled back their presence there and negative for those that dug in or even tried to buy time.To give an example of the trade-off involved, McDonald’s Corp. had 847 restaurants in Russia at the start of the year, out of 10,785 in “operated markets” — that is, those where the corporation has a presence — outside the US. Assuming their average sales were comparable with other restaurants in these markets, their loss would mean a revenue hit of about $950 million a year, based on 2021 data. But that would be just 4% of adjusted sales; based on Sonnenfeld’s calculations, staying in Russia would have meant an average 6.8% hit to a company’s market capitalization from Feb. 23 through April 19 — in McDonalds’ case, an $11.8 billion shareholder value loss based on its Feb. 23 market cap.
The stock market is fickle, of course, but if you can count on one thing in the current crisis, it’s a constant stream of negative news involving Russia. To the Russian government, the foreign firms’ departures are a major headache, not because Russians would shed many tears for the brands but primarily because some of the companies were big employers. According to data from the companies themselves, McDonald’s had 62,000 workers, IKEA AV 12,400, and the French automaker Renault SA employed 4,400 people in its fully-owned Moscow factory alone, not counting the 32,500 people working at Russian’s biggest carmaker, AvtoVAZ, that was until recently majority-owned by Renault.
Initially, the nationalization of all the “orphaned” assets was a subject of serious discussion, with state propagandists like RT channel head Margarita Simonyan pushing it as a solution. There’s already a high-profile example: The Moscow city government took over the Renault Moscow factory, promptly restoring to it its Soviet-era brand, Moskvich. But this is not the Kremlin’s favorite option.
Neither the technocratic team in the government nor even Putin himself want to burn bridges with the Western majors quitting the market: They’re hoping for an eventual resumption of business as usual, both for economic reasons and to score propaganda points. Putin likes to mask a forced turn toward autarky with talk of international openness and entrepreneurial freedoms, as his speech to the St. Petersburg Economic Forum last week showed. As he exhorts Russian businesspeople not to “fall into the old trap” of investing in the West in search of better property protections, he wants to be able to blame Western governments for the foreign companies’ exodus — to say it was they, not he, who caused the loss of business and, potentially, Russian jobs. It’s important for him not to be seen as a confiscator as Western nations freeze oligarchs’ assets and Russian Central Bank reserves.
The Russian parliament has given its preliminary approval to a bill that would allow the authorities to put the Russian assets of foreign companies under government-appointed “external management” and eventually to sell the business if the owner shuts it down or lays off large numbers of staff. This law, however, is unlikely to be used much except as a threat. Instead, the three scenarios that have emerged since the Ukraine invasion began will be applied to an increasing number of Western firms’ Russian subsidiaries.
The first scenario — likely to be applied in exceptional cases only — involves “soft” nationalization. When the Russian Ministry of Industry and Trade took over Renault’s 68% stake in AvtoVAZ last month, the ministry granted Renault an option to buy it back within six years. This deal wasn’t exactly made in heaven, since Renault took a serious revenue hit: Even with the effect of the Ukraine war, Russia provided 894 million euros in sales in the first quarter of this year, and in 2021, it accounted for 10% of total sales. But at least the French automaker was consulted — chief financial officer Thierry Pieton mentioned the negotiations with the Russian government on the company’s latest earnings call in April — and it has not publicly rejected the option.
The second scenario involves the handover of a foreign company’s Russian business to its local management or partners. The Finnish packaging manufacturer Stora Enso Oyj, for example, has sold its business to management, giving up 3% of its sales but taking care of 1,100 Russian workers. Even though Stora Enso chief executive officer Annica Bresky stated bluntly on the company’s latest warnings call that “we do not see Russia as a business partner for the future,” such arrangements are by their nature relatively open to reversal, given that the parties worked together quite smoothly before Putin attacked Ukraine.
McDonalds’s decision to sell its restaurants to Alexander Govor, whose company ran 25 of the establishments in Siberia, fits the same pattern despite the rather unfortunate rebranding as “Tasty. Period” that the chain has received under the new owner. (Simonyan, for one, hated the new name, sarcastically suggesting “It Runs, So What the Hell” as an alternative name for the former Renault operation.) If McDonald’s ever comes back, it’ll be as easy for Govor to plaster its logo all over the restaurants as it was to scrape it off: At any rate, the US company has left all the equipment behind, and the staff using it are largely the same.
Like Govor, the Russian firms that have acquired, or are bidding for, the assets of big retail companies such as IKEA or OBI Group Holding SE are about to try running brand-dependent businesses without their household-name brands. Any losses they incur, however, may well be recouped if the infrastructure can be sold back to the companies that built it, preferably sometime soon.In such deals, the sale price likely is low enough to write off the assets’ entire value, or most of it. That’s what it takes to keep the door open for a return to the Russian market either when Russia is a normal country again in some benign version of a post-Putin future — or, as the case may be, once the world is less shocked by Russian atrocities.
The third scenario is the sale to a Russian business that won’t be likely to sell it back at any point in the future. This is what Canadian-based gold mining company Kinross Gold Corporation has done with its Russian operation, divesting it to the Russian firm Highland Gold Mining Ltd. The companies initially agreed that Highland would buy the gold mines for a deferred payment of $680 million, $670 million of which Kinross promptly announced it was writing off, given the uncertainties the Russian economy faces. But the Russian government commission on foreign investment only agreed to the deal if the price was no higher than $340 million. There was some upside to this for Kinross: The cash payment was no longer deferred.
In an interview with the daily Izvestia, Deputy Industry and Trade Minister Viktor Evtyukhov explained the ministry’s policy regarding such deals. If a foreign seller wants anything approaching the full market price for its assets, the seller should get it in rubles “and do whatever it wants with it in Russia.” But if it agrees to a 50%-60% discount, the payment can be made offshore, in other currencies.
Only in this last scenario does the Russian buyer immediately harvest some value — in the form of the discount on what the tangible assets, such as gold mines, were worth before the Ukraine invasion. Other kinds of deals are essentially caretaker arrangements that represent, for both sides, bets on normalization — and the Russian buyers hold the riskier end of these bets. While the seller can just take an impairment, and shareholders will not ask too many questions about it, given the reason for the divestment, the buyers agree, implicitly or explicitly, to maintain jobs without the marketing clout and the global supply chains that the Western brands had brought to the businesses.
The billion-dollar question for them is whether Russia will ever be normal again.
• The Weakness of Putin’s Economic Show of Force: Clara Ferreira Marques
• China and Russia Are Now More Inseparable Than Ever: Minxin Pei
• Putin Prepares to Declare Himself a Conqueror: Leonid Bershidsky
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Leonid Bershidsky, formerly Bloomberg Opinion’s Europe columnist, is a member of the Bloomberg News Automation Team. He recently published Russian translations of George Orwell’s “1984” and Franz Kafka’s “The Trial.”
More stories like this are available on bloomberg.com/opinion