Since 2021, Russian registers have lost a third of legal entities with foreign participation

Natalya Patseva, managing partner of FTL Advisers:

— Industry sanctions apply to certain areas. Plus, those investors and foreign owners of Russian businesses who are not registered in “hostile” jurisdictions, are not part of a group that is controlled from a “hostile” jurisdiction, or are not affected by sanctions, may feel a fair degree of freedom and not feel the same restrictions , which are felt, for example, by companies from the EU – both from their countries that have adopted one or another sanctions regulation, and from the Russian Federation – and counter-sanction regulation. Therefore, in principle, there is no reason for them to leave the market – moreover, for them the degree of competition decreases, and accordingly, opportunities increase. It is in view of the above arguments that many companies from “friendly” countries, such as India, are taking advantage of the vacated niches and certainly want to expand their markets, increase opportunities and turnover. In our practice, we see and support a very large number of transactions for the acquisition of manufacturing companies, businesses in general, by investors from India, Turkey, the Gulf countries, Latin America, and in some cases, China (but, as you can see, this is not in first place).

Anton Plokhov, head of the law firm atLegal:

— Some companies left for good, others returned under new names throughout the year. Many brands changed owners, relaunched, and by the end of 2022 entered the Russian market under new names. The rebranding affected the catering, clothing, press and other areas.

Most of the companies that have come to the Russian Federation now are Turkish. Of these, seven operate in the clothing and footwear segment (Network, Club, Loft or Colin’s, Oxxo, AC&Co, Mudo, Madame Coco), and two operate in the household goods sector (Karaca Home and Kelebek). Three more new players came to the Russian Federation from Belarus: two clothing retailers (Comintern and Pizhon), as well as one brand of household goods (Swed House). One new company each came to Russia from Estonia (BonBon Lingerie), South Korea (Inni), Australia (2XU) and Kyrgyzstan (Ayal). For comparison: in past years, networks operating in the country were mainly from Europe and the USA. For example, in 2021, the French Dior Beauty, the Spanish Zara Beauty and the American Guess Activewear appeared in Russia, and in 2020 – the German Boss Woman, the Swedish & Other Stories and the Italian Ereda.

Director of the Investment and Capital Markets Department at Kept Denis Surovtsev:

— Most companies whose products or key counterparties were subject to sanctions have left Russian business. At the opposite pole are businesses providing medical goods and services, and to a lesser extent manufacturers of food and hygiene products. In the financial sector and the fuel and energy complex, there were initially many who wanted to sell Russian businesses, but now exiting these sectors is complicated by the fact that transactions require the direct approval of the president.

The vast majority of companies from Northern Europe, especially from Finland and Sweden, which are now joining NATO, left the Russian market. In Switzerland and Austria, the share of companies retaining Russian business is significantly higher (about half), and Italian owners are even more inclined to continue working in the Russian Federation (about two-thirds of companies do not intend to leave). This process is also influenced by the ownership structure: managers of public companies make the decision to leave Russia much more easily, while family businesses often aim to maintain their presence.

In most cases, companies with a significant asset base (real estate, factories, portfolios of financial instruments) exit through the sale of a business. The trading divisions, which until 2022 were responsible for the sale of the group’s imported products in Russia, are mostly simply closing. Also in 2022, the transfer of control to management was widely used, including as a tool for temporary exit with the possibility of buyback, but now the state is not inclined to approve such transactions.

New foreign investment is much more modest in size and comes mainly from Asian countries such as Turkey, China, and the Gulf states. Sectors of interest to foreign investors include assembly production (including cars and household appliances), fashion industry, extraction of raw materials, export of agricultural products, and infrastructure. In particular, investors from Asia acted as buyers of several European businesses (however, the share of such transactions is within 10% of the total volume of exits).

Partner of the Department of Taxes and Law of DRT Yulia Orlova:

— Of course, companies with foreign participation can be divided into foreign companies of completely foreign origin and ownership, and into foreign structures within large Russian groups of companies. In addition, an analysis of the origin of capital and the jurisdiction of the real place of management or beneficiaries is very useful for understanding the trends in the behavior of foreign businesses in the Russian Federation.

There are fewer companies with foreign participation today. It is important to understand here that the behavior strategy of a foreign business directly depends on the jurisdiction of management and beneficiaries. For example, companies from Northern Europe and Scandinavian countries left the Russian Federation almost entirely. The vast majority of American companies did the same. A lot of French and German companies have left the market. The same cannot be said about companies from Italy. There are still quite a lot of Japanese or Korean companies on the market. A minimal number of companies from these countries have left the Russian market. The overwhelming majority of decisions to exit the Russian market were made under the influence of the public in the countries of origin of capital, as well as under the influence of foreign sanctions. In addition, the strategy of foreign companies may differ depending on whether the company is public and lists shares on foreign exchanges, or whether the company is private. The appetite for risk, and therefore the exposure to sanctions and reputational factors, will also be different for such companies. Public companies tend to be more regulated and conservative. That is, they take into account pressure from foreign regulators and public opinion primarily, while non-public companies can be more independent in making certain decisions.

Most exits were structured through management sales. The sale to management may be accompanied by an option to repurchase by the foreign group (after foreign sanctions are lifted) or may be carried out without such an option. Sales to third parties also occur. There are frequent cases of the sale of foreign companies to companies from China with the subsequent continuation of business in the Russian Federation.

Other factors may also influence the decision to exit Russian business. Companies for which the share of Russian business is very significant in global profits are having a hard time exiting. Such companies prefer to limit the range or volume of activity in the Russian Federation, but in any case they try to maintain their presence in Russia. Another factor is the industry in which the foreign company operates. For example, foreign pharmaceutical companies mostly remained to operate in Russia. Again, they are characterized by restructuring of the range of products sold or produced.

The growth of foreign companies in the SARs is due to the migration of foreign structures of large Russian groups of companies in the process of so-called redomiciliation. The exit process is uneven due to the beneficiaries’ country of origin, the industry and variety of products sold or manufactured, and whether the parent company is public or private.

Tatiana Edovina