Russia Exit Tricky for Firms One Year After Ukraine Invasion

Companies that pledged to leave Russia almost a year ago in response to the Ukraine invasion are wading through heightened risk and complex terrain as they gradually pull the plug on their business ties.

Companies including McDonald’s Corp withdrew from Russia this past summer, citing the humanitarian crisis in Ukraine as well as the impact the war is having on its fast-food franchises. But others including BP P.LC., Dutch mobile provider Veon Ltd. and Philip Morris International Inc. have faced a much lengthier and cumbersome process exiting Russia.

“Russia is a market where it’s easier said than done to practically leave,” said Daniel Tannebaum, who leads the global anti-financial crime practice at consulting firm Oliver Wyman.

As the war wages on, lawyers and consultants say many of their clients planning to leave Russia remain entrenched in contractual obligations or legal barriers. Companies remain concerned about US sanctions risks, reputational harm, the fate of their Russian employees, and potential repercussions from the Russian government, corporate advisers say.

“I don’t think it’s surprising that it’s taking this long,” said Britt Mosman, a Willkie Farr & Gallagher partner who previously worked at the Treasury Department’s Office of Foreign Assets Control.

Meanwhile, those companies that still want to operate in Russia face “a whole raft of sanctions and export controls restrictions of multiple international regimes on top of everything else,” Mosman said.

A Slow Retreat

A January report from professors at the Swiss IMD Business School and the University of St. Gallen paints a stark picture: less than 9% of Western firms have divested at least one of their Russian subsidiaries. This report sparked headlines as well as a clash over the findings from critics including Jeffrey Sonnenfeld, senior associate dean of leadership programs at the Yale School of Management.

It’s not always clear what a company has done to leave Russia after it’s pledged to cut ties. Sonnenfeld said companies need to be more vocal and transparent about what they’ve accomplished and the roadblocks that remain.

“They should preemptively volunteer it instead of waiting” until activists or the media ask questions about how their exit is going, he told Bloomberg Law. A database compiled by Sonnenfeld says that more than 1,000 companies have publicly announced that they are curtailing operations in Russia beyond what they are required to do by international sanctions.

Investors also have an interest in how a company’s retreat from Russia is going, according to one of the biggest firms that advises shareholder voting. Shortly after the war began, the proxy advisory firm Glass, Lewis & Co. said that companies operating in Russia face increased scrutiny of their approach, which could “escalate to material reputational damage that could affect shareholder value.”

Some corporations are reluctant to “telegraph their moves publicly,” said Tannebaum.

But others have felt the need to address some of the time-consuming barriers they face in leaving Russia. Energy giant BP, for example, has issued updates about its plans to exit.

The company faced pressure from the UK government over its 19.75% stake in Russia’s largest oil company Rosneft. BP’s ability to sell its stake “is constrained by Russian legislation and the Russian government, who have effective approval rights on any buyer, as well as by limitations resulting from international sanctions,” the London-based company said in December on it website.

“It was anticipated that this would be—and it is proving to be—a drawn-out process,” BP said.

‘Pretty Complicated’

Cigarette maker Philip Morris International Inc. also has spoken out about departure problems. The company’s CEO Jacek Olczak told Bloomberg Television in July that the company’s exit is “a pretty complicated process” that would take several more months. Olczak referenced the pressure of meeting the expectations of stakeholders including employees, shareholders and government regulators. He also spoke about the complexity of operating conditions in Russia.

Dutch telecom company Veon also has had a lengthy departure. The Russian government reportedly didn’t approve its sale of its Russian arm Vimpelcom until last week. Veon said it concluded a deal to sell its Russian mobile network towers in December.

Ford Motor Co. sold its 49% stake in its joint venture with the Russian manufacturer Sollers in October. The move finalized Ford’s exit from Russia after the company suspended its operations earlier last year. But the company also said at the time that it will retain the option to buy back the shares within a five-year period “should the global situation change.”

The report form the Swiss professors said such buy-back clauses have been part of similar Russian divestment deals involving companies such as McDonald’s and Nissan Motor Co.

Steven Tian, director of research for the Yale Chief Executive Leadership Institute who works alongside Sonnenfeld, said that repurchase options are common in divestments and asset sales.

“Until a company has actually shown any interest in re-buying their operations, which none have, this diversionary red herring should not distract from the fact these companies have fully exited Russia,” he said.

Still Here

Companies which have left Russia often divulged the risks that prompted their departure. French industrial company Legrand SA, for example, said last month that it decided to divest its Russian operations “in view of recent developments, including rising operational complexity and uncertainty.”

Scores of others, including US-based restaurant chains Sbarro, LLC and TGI Fridays, for example, still have an ongoing presence in the country.

TGI Fridays issued a statement shortly after the war began that any exit plans from Russia would be made by local, independent franchisees.

But for those companies that do stay, it’s not quite business as usual.

“It’s still possible to do so but it is extremely complex legally speaking,” Mosman said. Companies that are still willing to “thread that needle” have the headache of ensuring compliance with a litany of mounting Western sanctions and export controls on Russia, she said.

The sprawling range of sanctions and export controls issued by the US and EU restrict transactions with Russia’s Central Bank, imports of Russian oil and other energy products, imports of raw materials, gold and seafood, and a host of export controls on sectors including defense, technology and aerospace—to name a few.

Some banks aren’t willing to take the risk of facilitating any corporate financial transactions connected to the country, said Terry Gilroy, a partner at Baker McKenzie who previously headed Barclays’ financial crime legal team. Banking options in Russia for Western companies “are becoming more and more limited,” he said.

As the practical difficulties in operating a subsidiary in Russia take hold, Gilroy said some companies feel like they’re “jumping through hoops and spending a lot of money on compliance.”