Valuable Pawns: Western Companies as Bargaining Chips in Wartime Russia

Of the many great costs imposed by Russia’s invasion of Ukraine, attacks on international businesses operating within Russia may receive the least sympathy with Western audiences. Consumers have very little patience for companies that have remained, or whose exits have taken longer than anticipated to negotiate. But they also have very little understanding of the crushing and complex barriers that the Russian government has built blocking those exits, using bureaucracy to punish the investors who once inspired hope that the Russian economy could be fully integrated with the West.

Nationalization, asset seizure, expropriation and “temporary management” are all are terms for the same fear—and already a reality for some. Assets are up for grabs and will be a major bargaining chip in future negotiations, both as Russia puts pressure on the West to walk back sanctions, as well as domestically as the Russian government works to shore up support with wealthy Russians who have lost access to their Western assets. For companies that did not, or could not, make the rapid decision to leave the market in 2022, the risks of exposure are growing exponentially in the coming months.

Russian tactics targeting Western companies seeking to exit the market have expanded in scope and complexity over time as the government’s relationship to these assets has shifted. In the early months of the war, Russia sought to put the private sector at odds with Western governments, touting the number of businesses that had kept operating in the market while “naming and shaming” lists like the compilation by the Yale School of Management tracked the thousand international companies who voluntarily withdrew or suspended operations in the market.

But compounding pressure on the Russian economy and the realities of a long-term war changed the calculus. Globally recognized consumer brands, state of the art factories and large manufacturing hubs all had value as political pawns. The Russian government began imposing conditions to limit the economic impact of these market exits, requiring companies obtain consent from the government to sell an asset and to discount the value at least 50 percent. The list of restrictions has expanded further—companies selling assets can only include buy-back clauses that are limited to two years and would be required to pay market value to regain control of the business, companies must pay 10 percent of the transaction value to the Russian government and companies are banned from withdrawing funds abroad if they are from “unfriendly countries,” just to name a few.

The Russian government then raised the stakes even further. In April, President Putin signed a decree allowing the government to introduce “temporary” state control over assets owned by “unfriendly states” and immediately used the decree to seize Russian subsidiaries of two European energy utility companies, Fortum Oyj (Finland) and Uniper (Germany). In July, the Russian government seized control of the Russian subsidiaries of Danone (France) and Carlsberg (Denmark). While many expected a move of this nature in the energy sector given its strategic importance, the targeting of consumer brands was more surprising, especially since both were in the process of selling their stakes to Russian buyers. The Kremlin’s spokesperson, Dmitry Peskov, commented that the decree was basically an insurance policy, targeting assets “to form a compensation fund for the possible application of reciprocal measures in response to the illegal expropriation of Russian assets abroad.” But in the case of Danone and Carlsberg, the seizures also had immediate benefits, shoring up support with allies by transferring control to individuals close to the Kremlin.

What’s Ahead? Plenty of Risk and no Easy Choices

So where does that leave the companies that remain in Russia? As operating risks grow in Russia, so do reputational risks abroad. Ukraine’s National Agency of Corruption Prevention (NACP) is listing companies that have continued operating within Russia as “International Sponsors of War” due to their indirect contributions to the Russian budget via taxes and supply of non-sanctioned goods to the market. While not a sanctions list, inclusion has had an impact with some governments and consumers, including via targeted boycotts. As the sanctions regimes continue to expand, remaining in Russia also poses operational challenges to navigate the tightrope of legal ways to continue operating in the market.

For companies that have not left Russia, both leaving the market and staying will become even harder with time. Russia will continue making it even more difficult to leave while also increasing the risk of expropriation for staying. Western governments will continue to impose sanctions that further restrict transactions with the market and further enforce those sanctions, closely tracking any violation of the current policy. And consumers will vote with their wallets, converting reputational costs into potentially meaningful losses.