Business
Why Western Companies Are Reluctant to Exit Russia Despite Escalating Tensions
As geopolitical tensions between Russia and the West intensify, a surprising number of Western companies are opting to stay put in Russia, even as risks mount. Sergey Ryabkov, Russia’s Deputy Minister of Foreign Affairs, has signalled that the Kremlin may soon downgrade diplomatic relations with Western nations, driven by their deepening involvement in the Ukraine conflict. Despite this looming threat, there hasn’t been a mass exodus of Western firms from Russia, at least so far.
The Russian government has already acted against several Western companies. Danish brewer Carlsberg saw its Russian assets seized after announcing plans to divest. German energy giant Uniper and Finnish utility Fortum suffered similar fates, with their multi-billion-euro assets being “temporarily transferred” under state control. The latest target is UK-based Raven Russia, the country’s largest warehouse property owner. A lawsuit filed by Russia’s Prosecutor General’s Office aims to nationalize its Russian assets, alleging the company retained control of its operations despite formal selling to local management after Russia’s invasion of Ukraine.
Despite these warning signs, a large contingent of Western businesses remains entrenched in Russia. The Kyiv School of Economics reports that more than 2,000 foreign firms are still active in the country, compared to roughly 400 that have fully exited since the start of the Ukraine war.
Leaving Russia has become increasingly difficult and expensive. Companies from nations deemed “unfriendly” by Moscow face substantial penalties, including a mandatory 50% discount on any asset sales and a 15% exit tax. Additionally, securing government approval for potential buyers adds another layer of complexity.
Nevertheless, the financial rewards of staying are significant. U.S. tobacco giant Philip Morris, for example, generated over $7 billion in revenue from the Russian market in 2023. French home improvement retailer Leroy Merlin brought in more than $6 billion, while U.S.-based PepsiCo, French retailer Auchan, Austrian bank Raiffeisen, U.S. confectionery maker Mars, Swiss food giant Nestlé, and German wholesaler Metro each earned between $2.5 billion and $4 billion.
These numbers underscore the substantial financial stakes for Western companies still operating in Russia, even as they navigate a fraught and unpredictable environment.
SLB and UniCredit – Expanding Amid Retreats?
While some Western firms are hunkering down, looks like others are seizing opportunities created by their rivals’ departures.
Texas-based oilfield services company SLB, formerly known as Schlumberger, is ramping up its operations in Russia, stepping in where other Western companies have pulled back. Since December 2023, SLB has posted over 1,000 job openings in Russia, including roles for drivers, chemists, and geologists. In a further sign of commitment, SLB registered two new trademarks in Russia as of July 2024, according to local corporate databases.
Meanwhile, Italian bank UniCredit, whose Russian subsidiary is among the top 20 in the country, is challenging the European Central Bank’s directive for EU banks to accelerate their exits from Russia, taking its case to the European Court of Justice.
Hugo Boss and Hadassah – A Strategic Retreat?
Conversely, a few companies are starting to scale back their Russian operations.
German fashion brand Hugo Boss recently sold its Russian business to a local partner.
Hadassah Medical Moscow, an offshoot of the renowned Israeli medical center that launched in the Russian capital in 2018 with a $15 million investment, is reportedly on the verge of closure as geopolitical tensions escalate, as well.
Initially established to provide cutting-edge treatments under the supervision of Israeli specialists, Hadassah Medical Moscow adhered to international medical standards and employed pharmaceuticals not yet approved in Russia. However, this model has been disrupted by recent developments.
A significant shift occurred when a stake in the clinic was acquired by an entity linked to Russia’s state-owned nuclear giant, Rosatom. Consequently, the presence of Israeli doctors has diminished, and the clinic’s ability to deliver the high-calibre care it once guaranteed has faltered.
The deteriorating diplomatic relationship between Israel and Russia has prompted Israeli media to call for the clinic’s shutdown. The situation was further inflamed by reports that a Hamas militant received treatment at the facility, defying a ban by Israel’s Ministry of Health on providing care to members of the group. Moreover, concerns are mounting within the Israeli government regarding Rosatom’s growing influence over Hadassah Moscow.
These factors indicate that Hadassah Medical Moscow is likely in the process of scaling back its operations, moving away from its initial mission, and potentially exiting the Russian healthcare market altogether.
For Western companies, the decision to stay or exit Russia involves a complex calculus. The profitability of the Russian market is undeniable, but the risks—ranging from legal entanglements to reputational damage—are growing. As the geopolitical situation continues to evolve, these businesses face increasingly tough choices in one of the world’s most challenging markets.
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