Western companies in no hurry to return to Russia despite Kremlin's efforts, Bloomberg says

Russian ruler Vladimir Putin has instructed officials to develop a legal framework for companies willing to return to Russia, but so far, "nobody is knocking on the door yet," highlighting the caution with which companies are approaching the possibility of resuming operations in the country.

Source: Bloomberg

Details: Bloomberg spoke with lawyers, bankers and risk experts who had previously worked with the Russian market. In recent weeks, clients have been approaching them with questions about what might happen next in this changed market, where the risk-to-reward equation has shifted dramatically since 2022. One expert noted that some companies were already "scenario planning".

"They’re all doing due diligence," said Chris Weafer, CEO of Macro Advisory, a consulting firm specialising in Russia. He said the firm had received dozens of enquiries. "They're all looking at their options. There’s a lot more scrutiny being paid to Russia since Trump’s inauguration," Weafer stated.

However, he added, most companies will not consider returning until there is a lasting peace. "Nobody wants to come back too soon and then have to exit again," Weafer explained.

Putin instructed the government to develop a new system back in March, and Russia’s Ministry of Finance has already prepared initial proposals.

According to two officials, the proposals envisage that foreign companies would be required to localise part of their production and agree to transfer technologies to improve productivity. Russian businesses would also be granted a say in allowing foreign companies to enter specific sectors.

While Anatoly Aksakov, the Head of the Financial Market Committee in Russia’s Parliament, claims that "all new investors … will receive the most favourable working conditions", those companies that left Russia and now want to reclaim their assets at a low cost will have to pay full market value.

In March, Putin made it clear that Western companies that left the country after the war began and sold their Russian divisions at "a throwaway price" should not be allowed to buy them back cheaply. These remarks cast doubt on the effectiveness of buy-back clauses that some companies had included in their exit agreements.

South Korean LG Electronics recently conducted a test launch of its household appliance plant in Russia, which had been suspended after the start of the war. A company representative in Russia reported that this happened after "signs of a possible end to the conflict" had emerged.

Italian company Ariston Holding NV plans to resume operations at its Russian factory after Putin handed back control to the manufacturer on 27 March.

For other companies, a return may be much more difficult. McDonald’s, whose opening in Moscow in 1990 symbolised a new era of cooperation after the Cold War, included a buy-back clause in its sale agreement with the current licensee, Alexander Govor. This now complicates the company’s potential return.

The chain, now operating under the brand Vkusno i tochka, doubled its revenue in rouble terms in 2023 compared to the pre-war period – reaching RUB 187 billion (US$2.3 billion), according to financial reports.

In other cases, assets were transferred for almost nothing. For instance, in 2023, Hyundai Motor Co. sold its stake in a Russian production unit controlling two plants together with Kia for a nominal US$111 but retained the right of first refusal.

The Hyundai Kia Automotive Group is monitoring the situation in Russia and "whether there would be any sanctions afterwards," said Kia Corp. CEO Ho Sung Song in an interview in April.

Kirill Dmitriev, Putin’s envoy for economic relations, met in April with members of the American Chamber of Commerce in Moscow. He said that over 150 American companies still operating in Russia attended the meeting.

"The risk-reward equation has changed" noted Charles Hecker, author of Zero Sum, a book about the arrival of international business in post-Soviet Russia. In the 1990s and 2000s, it was possible to earn "astronomical" profits in Russia. "Now I don’t think any company can anticipate the pot of gold that they found in previous decades," Hecker said.

Background:

• Putin ordered his Cabinet of Ministers to prepare for the return of Western companies to the Russian market.
• After the recent intensification of negotiations between the US and Russia, one Western company reportedly received calls inviting it to return to the Russian market.

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