Moscow money comes at a price for Western businesses staying put?
12:04, 4 April 2022
‘The capitalists will sell us the rope with which we will hang them.” The quote is attributed to Vladimir Lenin, founder of the former Soviet Union. Will he be proved right?
The butchery of retreating Russian troops against innocent citizens in Bucha, 24 kilometres northwest of Kyiv, revealed over the weekend, reinforces the profits-at-any-cost risk companies are paying to remain in Russia.
More rope?
Let’s count the names: Hertz, Koch Industries, Ritter Sport, Avis Budget Group, Nature’s Sunshine (NATR), Tchibo to name six. These are Western brands digging in for the long-term, according to the Yale School of Management.
Then there’s businesses scaling back but not fully out. Like Bosch (suspending some shipments and plants but not all), Microsoft (MSFT) (sales suspended but access to services open), Whirlpool….
There’s sub categories too ‘Buying Time’ (Abbvie (ABBV), Glencore GLEN, etc.) and ‘Suspension’ (Airbnb ABNB, VW, Disney (DIS) and Visa V) before reaching Full Exit (Carlsberg, BAT BAT, Heineken HEIN and Spotify SPOT).
Cutting Russia from much of the global financial arteries has been on medium boil for a month.
Today, President of the European Council, Charles Michel, says further sanctions and support are “on their way”. The EU “is assisting Ukraine & NGOs in gathering of necessary evidence for pursuit in international courts”, he added in a tweet.
Companies with meaningful plant and manufacturing operations remain, meanwhile, heavily embedded.
What is your sentiment on MNDI?
Capital cost challenges – financial, physical and human.
- Buyouts from local employees may be possible – but how can this be financed safely? Especially if this requires Western legal input?
- What about businesses with Russian cash assets, now frozen – could these be confiscated or nationalised? Even passed onto a new wave of oligarchs?
- Foreign subsidiaries normally pay their employees by revenues generated from inside the country – which is problematic when revenues are cut.
For retailers like ASOS, Russia and Ukraine contributed 4% of revenues last year as well as £20m in profits.
Tearing away not easy
Take FTSE 100 packaging company Mondi (MNDI). It generated 20% of underlying earnings in Russia in the last three years; it also employs more than 5,000 staff in the region.
Mondi’s biggest Russian facility is a wholly owned pulp and packaging paper mill in Syktyvkar (Komi Republic), 800 miles north east of Moscow, plus it has three converting plants in Russia.
“All these facilities,” Mondi said on 10 March, “primarily serve the domestic market and have continued to operate through this time of heightened geopolitical tension”.
Mondi shares were worth around 1,908p in late February but have slipped to 1,511p since, bottoming at 1,318p a month ago.
On the flip side, inflation is surging – and Mondi should be able to pass on these price increases without too much trouble.
Beyond sanctions
There’s also indirect concern of Russian shareholders controlling significant interests of Western companies.
Russian billionaire Alexei Mordashov, blacklisted by the EU, managed to nip around the first wave of sanctions by selling his 29.87% stake in global tourism giant TUI (TUI) to a British Virgin Islands company.
Not every oligarch will have been so quick. Some won’t even need to act.
By buying UK real estate via British Virgin Islands companies, offshore oligarchs can conceal their identity; this has been a straightforward transaction for many years.
Some are simply beyond sanctions. Even if no other major economy has been slammed so hard by economic weaponry.
US not taxing
There are other loopholes. Transparency International says oligarch Alisher Usmanov, close to Russian President Vladimir Putin, has had his $19m Sardinian villa seized by the Italian government.
But Usmanov has “only a 49% stake in his main business conglomerate, making it a difficult target because the US Treasury uses a 50% threshold when imposing sanctions.”
Usmanov claimed the arrangement a “coincidence” in an interview with the FT.
German divide
While more sanctions noise increases, Poland’s prime minister Mateusz Morawiecki is increasingly worried about Germany. “[it’s] Germany that is the main roadblock on sanctions,” the Telegraph reported this morning.
So far, Berlin is refusing to place an embargo on oil and gas imports from Russia, even if this line is challenged by Germany’s defence minister, Christine Lambrecht.
The EU must consider banning Russian gas Lambrecht said in an interview with broadcaster ARD yesterday, EU Today reported.
Putin boost in Hungary as Orbán wins
UK Secretary of State Liz Truss travels to Poland today and may push for tougher action ahead of G7 and NATO talks in Brussels later in the week.
But the victory of Viktor Orbán, one of President Putin’s closest allies, winning a fourth term as Hungarian prime minister, is a setback for the EU.
Orbán is only European leader that supports Putin. Hungarian consumer price growth came close to a 15-year high of 8.3% in February.
Hungarian energy prices and an opposition to Russian gas and oil sanctions clearly resonated with voters.
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