Stay, leave, or hand over the keys: Why foreign firms find themselves in a squeeze if they want to pull out of Russia

Russia | On 24 February, Russia invaded Ukraine. The West has since responded with a barrage of sanctions and appeals to boycotts, which aim to cripple the world’s 11th-biggest economy, stall the war effort, prod ordinary Russians to protest, and deter other foes (namely China) from similar escapades. What are the results?

To date, the Yale School of Management has recorded more than 1,000 companies from around the world, which have disengaged to varying degrees from Russia, either as a result of sanctions or in protest of Russia’s invasion of Ukraine.

The Yale log lists brewers AB-InBev, Heineken and Carlsberg under the heading “withdrawal” because of their pledges made in spring, whereas Turkish brewer Anadolu Efes, AB-InBev’s joint venture partner in Russia and Ukraine, is shamed for “digging in”. Efes is not alone. According to Yale’s researchers, 240 foreign companies are “digging in”, conducting business as usual with no announced plan to dial things back.

If the moral case against President Vladimir Putin's attack on his neighbour is undeniable, the business arguments for and against pulling out of Russia can be more complicated. Plenty of firms have balked at leaving Russia, as they face government restrictions, rock-bottom valuations for their assets and another round of moral outcries should they be forced to sell to a Russian buyer linked to Mr Putin’s circle.

Cancelling beer exports

Over the course of spring, Western brewers have wound down their beer exports. It would have been tough, as they had to honour contracts with their Russian importers. Although beer is on the EU’s sanctions list of luxury goods, they only apply to beer with a unit price of EUR 300 per bottle, can or keg. In the case of beer, the sanctions are really pointless.

Still, most of the big German brewers cancelled their exports, while taking a hit to their profits. German beer ranked highest among Russia’s imported brands. Two million hl beer was shipped to Russia in 2021. From what we hear, not all have heeded the boycotts. Some brewers continue to put money before morals and profit before people.

The stakes are highest for Heineken, Carlsberg and AB-InBev, which all have operations in Russia. Combined they control over 70 percent of the beer market. The three have since announced multi-billion-dollar charges and impairments. Heineken will take a EUR 400 million hit, AB-InBev USD 1.1 billion and Carlsberg USD 1.4 billion.

Dancing with the devil

Not enough, they will have found themselves between a rock and a hard place. On the one hand they have felt the pressure to take a stand against Russia’s invasion, or face consumer boycotts in the West. On the other hand, they have the Russian government to contend with, which has since set up all kinds of hurdles to prevent foreign firms from withdrawing. In fact, companies trying to exit Russia have to dance with the devil.

Shortly after Russia’s invasion of Ukraine and even before the EU imposed its first lot of sanctions, the Russian Ministry of Finance created a “subcommittee for issuing permits for transactions between residents and foreign persons and foreign exchange transactions”. It basically means that Russian companies, whose owners are headquartered in what Russia calls “unfriendly” countries, have to apply to this government subcommittee for permission to carry out a transaction. Heineken, Carlsberg, and AB-InBev, too, will need to seek approval by this subcommittee.

The subcommittee has far-reaching powers: it will determine if the price of the transaction is right and if the proposed buyer is to its liking. Ultimately, the subcommittee can approve or reject a transaction.

The price is right?

These days, it is nearly impossible to determine a price for the brewers’ Russian businesses that will pass muster with this subcommittee. Western analysts seem to work on the assumption that a buyer could be willing to only pay an EBITDA multiple of 1 (!) for their assets. They arrive at this measly valuation after applying several discounts from the global average trading multiple of 12x EBITDA for brewers. If Efes were to listen to Western bankers, it would offer AB-InBev something like USD 300 million for its 50 percent stake in the joint venture, based on the joint venture’s 2021 EBITDA of an estimated USD 600 million. In normal times, the joint venture would have been valued at USD 5 billion, or 8x EBITDA.

Moreover, even this rock-bottom valuation is no guarantee that the subcommittee will accept the price tag. Therefore, plenty of firms have decided to give their businesses away for next to nothing to be rid of them. For example, the leading German chain of DIY stores, Obi, which operated 27 stores in Russia with an annual turnover of some EUR 400 million and some 4,900 employees, sold them for a total of EUR 10 (!) to a Russian buyer in August. The Russian investor, who is reportedly friends with Obi’s owner Christian Haub, will hold a 60 percent stake. Nothing is known about who owns the rest, which has led to all kinds of rumours and speculations. Even this free gift needs to be authorised by the subcommittee.

Wait and see

Meanwhile the war in Ukraine continues. It could drag on for years, The Economist argues, as Russia’s isolation from Western markets will only start to cause havoc on a three- to five-year horizon.

Some observers concur that Heineken and Carlsberg are best advised to bide their time and not to sell their Russian businesses in a rush, even if they are willing to give them away for free. Heineken already hinted as much in March, when they said: “We will not profit from any transfer of ownership.” Otherwise, they run the risk of becoming implicated in the large-scale transfer of assets to the Russian state and its tycoons that we see happening right now.

Alternatively, brewers could go for a management buy-out, involving trusted local executives. This could be Heineken’s plan. It said it wants to pull out of Russia before 1 January 2023. Advisors to GTAI, a German trade agency, say this can prove a faster route than an outright sale. Besides, it offers the advantage that it can prevent Kremlin-affiliated oligarchs from gobbling up Western assets at ridiculous prices. Again, brewers will need to determine a fair price, or the Russian tax man will put his foot down.

Weakening Fortress Russia

It is ironic that boycotts, which have won the most publicity, could prove counterproductive. If foreign firms are forced to sell their businesses to a Russian oligarch or any other party deemed acceptable to the subcommittee, they will merely strengthen Russia’s crony capitalism.

The brewers’ conundrum shows that doing the right thing can have unintended, even immoral consequences. When Western firms announced their exits from Russia, their aim was not to allow Russia’s kleptocratic elite to benefit from the invasion. After all, Mr Putin and his cronies should be weakened by the boycotts and withdrawals – and not given valuable assets gratis.