Analysis-Russia prepares to seize western firms looking to leave -Breaking
By John O’Donnell
(Reuters) – Russia is advancing a new law allowing it to take control of the local businesses of western companies that decide to leave in the wake of Moscow’s invasion of Ukraine, raising the stakes for multinationals trying to exit.
This law could become effective within weeks and give Russia broad powers to interfere in areas where there’s a risk to jobs or industry. It will make it harder for west companies to get out of their own way quickly, unless they are willing to take big financial hits.
Following a exodus western businesses such as Starbucks (NASDAQ;), McDonald’s(NYSE:) or brewer AB InBev (NYSE:), the law that allows foreign investors to take over property increases pressure on companies still in existence.
This comes at a time when the Russian economy is being increasingly cut off by western sanctions and plunges into recession with double-digit inflation.
Italian lender UniCredit, Austrian Bank Raiffeisen and the largest furniture company in the world, IKEA, are just a few of many other Russian companies that have businesses. This is a tough line for anyone who wants to move.
IKEA said it had halted operations in Russia and was following closely the situation. Raiffeisen stated that it is evaluating all possible options including an carefully planned exit. UniCredit refused to comment, and Burger King didn’t immediately reply to my request.
Russia can now appoint foreigners from “unfriendly” nations to manage companies. This is a way to allow Russia to leave Russia in the face of the economic downturn caused by the Ukraine conflict.
Moscow refers to “unfriendly countries” when they impose economic sanctions against Russia. This means that any companies in the United States or European Union are at risk.
On Wednesday, the European Commission suggested that it would be more aggressive in its stance against Russia. This would make violating EU sanctions against Russia criminal and allow EU governments to seize assets from individuals or companies who have evaded restrictions against Moscow.
In a sign that Moscow could be closer to default, the Biden administration declared it wouldn’t extend the waiver that allowed Russia to repay U.S. bondholders.
Russian politicians have been angered by the departures of west-based companies. Russia’s former President Dmitry Medvedev was the current deputy chairman for Russia’s Security Council. His vocal criticism of west companies that left has included attacking “enemies trying to restrict our development and ruin lives”.
Sergej Suchanow (a lawyer at RSP International’s risk management and compliance consulting RSP International) stated that “the government is interested in conserving jobs and tax revenue.”
“First, and foremost the government will apply rules to big businesses. Companies must prove that they will not abandon their Russian business in distress to avoid being placed under administrative control.
Ulf Schneider, a consultant to Russian companies and an expert on the region, is currently working to develop proposals that allow foreign corporations to voluntarily give control over to a trustee.
Russia could feel that they are responsible and yet be distant.
Schneider stated, “Sale is possible but conditions aren’t favorable for sale.”
In the draft law, Russia is able to appoint an administrator in firms with at least 25% foreign ownership.
The law outlines a broad range of intervention criteria, including when the company is a vital local employer or offers important services. This clearly demonstrates that there are many grounds for the state to take control.
While the bill gives an example of medical device companies, it also mentions a number of other sector such as energy and transport, along with any firms whose closure might increase shop prices.
Also, the state-appointed administrator could sell the confiscated company while former owners were barred from Russia.
The Ministry of Economic Development or a court could choose to appoint an administrator such as Russia’s VEB development bank.
This week the bill received its first reading at the Duma lower house, but it will still need to go through two additional readings before it is signed into law by Vladimir Putin.
It could take many weeks. Russia’s economic ministry stated that it will only pick companies in “critical situations” where production is threatened or job protection is necessary.
Since Putin started what he called a “special army operation” to demilitarize, “denazify” Ukraine in February 2016, a number of foreign businesses have threatened temporary shut downs of their factories and stores. It was dismissed by Ukraine and its allies as a pretext for war.
Michael Loewy of Federation of Austrian Industries stated that Russia had been “isolated” and was no longer of any interest to investors. This law will only make it worse.