Companies trying to get out of Russia must ‘dance with the devil’

After weeks of silence about the future of its operations in Russia, Société Générale has presented a bleak blueprint for other multinationals that have pledged to leave the country.

Bank of France said at the beginning of AprilI believe they will sell their Rosbank network to Vladimir Potanin, one of the richest men in Russia and a nickel baron who has avoided EU or US sanctions, for a sum of 3.1 billion euros in the process.

The transaction stunned some rivals and underscores the difficulty that groups from oil companies to auto companies want to withdraw from Russia after the Ukraine invasion: few potential buyers, Expensive exit options and uncertain prospects for any future comeback.

“We are all trying to find a smart way to get out of the country. But what SocGen did is not the best way to do it,” said a senior executive at a bank with domestic operations. “There was a discussion about ethics. . . There is a reputation risk to consider when selling, or essentially donating, to a tycoon. “

“They’re basically giving out one. . . gift for Potanin. OK, he’s not punished, [but] Is it the right thing to do? ” added the banker.

Vladimir Potanin, Russian billionaire and owner of OAO GMK Norilsk Nickel acquired SocGen's Russia operations
Vladimir Potanin, Russian billionaire and owner of OAO GMK Norilsk Nickel has acquired SocGen’s Russia operations © Jason Alden / Bloomberg

Many Western companies have found themselves caught between the prospect of being expropriated by Russia, selling to sanctioned locals, or trying to seek investment from Chinese or Middle Eastern buyers who may be able to find themselves on their own. more to make transactions but so far has shown little interest.

SocGen is one of the few Western corporations that has agreed to successfully sell its Russian businesses. Rosbank, which first took a minority stake in 2006, has long been a source of internal tension amid fierce questioning by investors. Despite the fact that it finally turned a profit in 2016, investment bankers hailed the sale – which the bank negotiated itself – as a clean and efficient way to get out.

“Can’t continue in Russia, and there’s hardly anyone you can sell. Everyone else is punished; you can’t really sell to Chinese buyers if they’re told to stay neutral. [SocGen] did a great job,” said a person close to another industrial company trying to get out.

Company advisers are closely studying successful prison breaks as hopes fade for a quick resolution to the war. “A lot of people think they just need to say the right thing, keep the lights on and they’ll be back by Christmas,” said one consultant, but “horizons are moving.”

The cost of a fire sale can be substantial, as Renault showed this week after it emerged that it was in talks to sell its majority stake in manufacturer Lada Avtovaz to the state. . for a ruble.

Under a deal proposed by Denis Manturov, Russian Trade Minister – something the French carmaker did not confirm – Renault would have the option to buy back the shares in five or six years at a price that takes into account any investments whichever is next.

The divestment means Renault will give up investments over 14 years, during which time it bought a 68% stake in Avtovaz, oversees 40,000 people and generates 10% of revenue and half of profit margins. automotive operating profit last year. It warned of a write-off of up to 2.2 billion euros.

A New York executive with employees in Russia turned down the Renault model. “We will not negotiate with the Russian government,” he said. But limited options mean some have to rethink.

A restructuring expert who advises a number of companies on sales said: “Some people have made very rhetorical statements about ‘we will never do this and we will never do this. there’ and now they’re thinking ‘oh bugger’. The reality is that for most of these escapes, you’re going to have to dance with the devil at some point. “

For those on exit, the cost and complexity are high. Tobacco production machine Imperial Brands last week said it was turning over its Russia business to investors based in the country and estimated the cashless outlay would fall by around £225 million. The Russian company said British American Tobacco will soon complete the transfer of its operations to SNS in Moscow. Neither group will say if the money changes hands.

Last month, Canada’s Kinross Gold made a deal to transfer its Russian assets to Highland Gold, a company controlled by mining magnate Vladislav Sviblov, for $680 million in cash payments. cash. He takes control of Highland in 2020 after buying a 40% stake from tycoon Roman Abramovich and other investors. Before the war, analysts valued Russia’s Kinross mines at $1.6 billion.

That deal highlights challenges in extracting sales funds due to Western restrictions on dealings with Russian banks. Kinross said its proceeds will be paid out between late 2023 and late 2027, backed by “an extensive security package that includes stock pledges, financial guarantees, and escrow accounts.” .

When Otis Worldwide, the elevator manufacturer, said this week that its growing concern about the sustainability of its operations in Russia prompted it to consider finding a new owner, an analyst noted. asked: “Can you get your bat back? Or [the Russian authorities] basically will strangle you, so it’s a hole in the end? ”

    Renault abandons more than 14 years of investment in manufacturer Lada Avtovaz
Renault is giving up more than 14 years of investment in manufacturer Lada Avtovaz © Andrey Rudakov / Bloomberg

Some companies are looking to circumvent transactions with sanctioned companies. French shipping group CMA CGM recently acquired logistics group Gefco from Russian Railways by structuring the transaction into two phases. Gefco bought back its shares first, allowing CMA CGM not to have to hand over the money directly to the Russian group, two people familiar with the deal said. No group responded to a request for comment.

Others who have succeeded in selling to local management teams include Schneider Electric, Publicis and Inchcape, which have divedted their transportation and sales operations to BMW, Toyota and Jaguar Land Rover in Russia for a price. 63 million pounds.

Duncan Tait, chief executive officer of Inchcape, said: “Overall [from shareholders] is that you will get nothing out of the business, and there is a concern that it will actually cost you money if you keep the business and run it. “

Many businesses are concerned that dealing with any official Russian counterpart, or other individuals or groups, may be subject to sanctions. “It’s like the walls are closing. . . What comes first? Do I make the deal or am my buyer sanctioned? ” said an advisor.

The situation is further complicated by the fact that many Western executives have reused themselves from any discussion surrounding a sale that may have personally led them to violate sanctions.

The alternative to divestment is to find international contractors. But restructuring experts say there has been less than they expected. “Everybody wants this to be solved by the Chinese, the Indians and the Turks because it’s clean and easy, but the bigger reality is, [the buyers] is Russian. ”

Shell is in “early negotiations” with CNPC, CNPC and Sinopec on sell 27.5% of its shares in the Sakhalin-2 liquefied natural gas project, but one industry veteran called it a “nightmare negotiation” as any Chinese deal is likely to be heavily discounted and requires a deal. bilateral political agreement between Russia and China.

A Turkish energy adviser suggested that Italy’s Saipem could transfer its stake in a company that helps build Arctic LNG 2, a natural gas development project, to its Turkish partner Ronesans. Belgian Brewers Anheuser-Busch InBev is in negotiations on the sale of its shares in the Russian and Ukrainian joint venture with Anadolu Efes to the Turkish brewer.

However, Turkish businesses are now cautious, expressing concern about the complexity of financing the acquisitions, which mainly come from Western banks.

The final option for multinationals is to stay the same. One adviser warned of the complications of continuing to operate in Russia. “The procurement can be done outside of Russia, financial transactions and licensing of brands, intellectual property – how do you handle that?” he say.

So far, many foreign companies have rejected any public withdrawal announcements – if only while they look for the least painful option. Professor Jeffrey Sonnenfeld at the Yale School of Management commented: almost 200 from the 750 . list that he classified as refused exit or reduced activity in Russia.

TotalEnergies, The company, which holds a 19.4% interest in gas producer Novatek PJSC and a stake in large LNG projects, has said it will stop new investments when it starts withdrawing, although it has stopped tries to sell its shares in projects unless sanctions are enacted. upward.

It is the only oil corporation that has openly expressed doubts about leaving Russia, or at least selling it to oligarchs. “We never said we would stay in Russia,” said CEO Patrick Pouyanné. “We’re just not saying that we’re leaving Russia, which is a bit different,” after stressing that leaving earlier would hand back valuable resources “for free to Mr. Putin.”

Additional reporting by Nikou Asgari, Peter Campbell, Judith Evans, Ian Johnston, Neil Hume, Laura Pitel and Tom Wilson

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