Putin blocks withdrawal: Russia chains western companies to itself

The “list of shame” is longer than previously thought – many companies continue to operate in Russia. The Russian state and the economic situation often make it difficult to leave the country. And many companies secretly hope that trade relations will improve again in the future.

The “List of Shame” lists global companies in six categories. In the best category are the companies that have completely withdrawn from Russia. The worst category, hence the list’s namesake, includes companies that continue to do business with Russia – as if the country hadn’t been waging a bloody war of aggression against Ukraine for a year. There are now more than 1000 companies in Category A on this list. But the list of companies that stayed is also very long.

Longer than previously assumed, as the results of a new study by the St. Gallen University of Economics show. Accordingly, less than eight percent of western companies have completely withdrawn from Russia. That means: All subsidiaries have been sold, all production sites have been closed. So why are so many companies still in Russia?

The most obvious explanation is that they run humanitarian or vital businesses and are therefore not affected by the sanctions. This includes most pharmaceutical and agricultural companies. “The harvest comes every year, regardless of whether there is a war,” says a German agricultural company in an interview with ntv.de. Pharmaceutical companies argue similarly. While German exports to Russia in November 2022 were more than 50 percent lower than in the same month last year, exports by German pharmaceutical companies to Russia increased last year. For example, the pharmaceutical company Bayer justified its business activities in Russia with ethical obligations.

Putin doesn’t want it

Other non-essential companies not affected by the sanctions are often tied to Russia for economic reasons. The list of foreign companies wanting to leave Russia is getting longer and longer, says Michael Harms, director of the Committee on Eastern European Economic Relations, ntv.de. But closing stores in Russia is becoming more difficult every day.

Russian President Vladimir Putin has little interest in letting the Western economy go. “The Russian legislature has already thought about it carefully,” says Harms. Every sale has to be approved by the Russian government – in some cases by Putin himself. In December last year he ordered that Western company shares may only be taken over at 50 percent of the market price.

With many companies wanting to exit the market but only a limited number of potential buyers, potential buyers in Russia can currently acquire foreign property very cheaply. Interested parties come primarily from Russia itself, but there are also Chinese, Turkish or Arabic buyers whose countries do not sanction Russia, as ntv.de learned from business circles.

Severe conditions in the Russian market

Theoretically, there would be enough interest in companies that would be sold at a discount of 50 percent, the association representative continued. But the difficult conditions in the Russian market – sanctions, brain drain and rising inflation – are quickly dwindling interest.

So if no suitable buyer can be found or if Putin doesn’t agree to the sale, the Russian assets will have to be given away in practice – and the losses then written off on the domestic balance sheets. For example, French carmaker Renault sold its Russian subsidiary Avtovaz for a symbolic ruble. The company accepted a write-down of two billion euros for this. Wintershall Dea was also more or less “expropriated”, as Wintershall boss Mario Mehren said in an interview with “Welt”. After long pondering, but apparently also difficulties in Russia, the BASF subsidiary is now leaving the country. But BASF had to accept a deficit of around 1.4 billion euros, as the Dax group announced.

Small businesses can’t afford it

But not all companies can afford this. Small and medium-sized companies in particular cannot cope with such a loss. According to a study by economic researchers from the IfW, these companies are very dependent on the Russian market. Economic circles told ntv.de that many medium-sized companies in the agricultural sector in particular are so firmly anchored in Russia that they cannot write off these businesses without jeopardizing their entire existence. Even a sale is currently not a realistic option.

Even if a company can or wants to absorb all losses, there are still legal aspects. As long as contractually binding agreements such as maintenance or refurbishments exist, a company must maintain at least one satellite company in Russia. The employees at the Russian locations cannot be dismissed so easily either.

Therefore, many companies would only stop as much activity in Russia as they can handle – and continue the necessary business within the framework of the sanctions, a company from the agricultural sector told ntv.de. According to business circles, many entrepreneurs still have hope that the situation will improve in the future and that trade relations with Russia can be resumed. Not so much time has passed for the economy since the outbreak of war in Ukraine. Even if the political situation does not improve for three or four years, it would not be worth withdrawing for many companies.

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