In a significant development a new law is steaming ahead in Russia which allows the state to take control of local businesses of western companies that decide to exit from the Russian market following its invasion of Ukraine; the move will raise the stakes for multinationals who are mulling an exit from the Russian market.
The new law, which could be in place within weeks, gives Russia sweeping powers to intervene in areas where there is a threat to local industry or jobs; it makes it more difficult for western companies to disengage from the Russian market without taking massive financial hits.
The new law comes in the wake of a slew of Western companies leaving Russia, including Starbucks, McDonald’s, AB InBev, to name a few. It increases pressure on those who are thinking to leave.
It comes at a time when the world is seeing worrying signs of recession and double digit inflation.
Incidentally, many western companies such as Austrian bank Raiffeisen, Italian lender UniCredit, furniture brand IKEA, fast food chain Burger King, as well as hundreds of smaller firms continue to do business in the country.
IKEA, which has paused its operations in Russia, said it was closely monitoring the development.
Raiffeisen said, it was assessing all options, including a carefully managed exit.
UniCredit declined comment.
Burger King did not immediately respond to requests for comments.
The bill paves the way for Russia to appoint administrators over companies owned by foreigners in “unfriendly” countries, who want to exit the Russian market.
“The government is interested in preserving jobs and tax revenues,” said Sergej Suchanow, a lawyer with risk management and compliance consultancy RSP International. “First and foremost, the government will apply the rules to big companies. To avoid an administrator, companies must show they are not leaving their Russian businesses in the lurch.”
According to Ulf Schneider, a consultant who works with German companies in Russia, he and others are working on proposals to allow foreign companies to voluntarily hand over control to a trustee of their choice. This is aimed at convincing Russia that they are a responsible company; at the same time they are also distancing themselves.
“Sale is an option but the conditions for a sale are not good,” said Schneider.
The draft law outlines how Russia could appoint an administrator to firms where at least 25% of the shares are in “unfriendly” foreign hands. It lays down a wide range of criteria for intervention, such as when a company plays a critical role as a local employer or provides important services.
The state-appointed administrator would also be allowed to sell the confiscated business, while its former owners would be barred from doing business in Russia. A court or the Ministry of Economic Development could decide to put an administrator, such as Russia’s development bank VEB, in charge.
The new law passed its first reading in the lower house of parliament, earlier this week and now faces two more readings as well as a review in the upper house before it is sent to President Vladimir Putin for signing.
This could potentially take several weeks. In a statement, Russia’s economy ministry said, it would pick out companies only in ‘critical cases’ where it was necessary to shield production or jobs.