The unfair share

Sell or lose

In the 18 months of the Ukraine war, around 10% of Western companies made an exit from Russia, as calculated by institutes outside of Russia, including the Kyiv School of Economics.

The departure of Western businesses enabled Russian businesspeople to acquire large assets at huge discounts or for the measly sum of one ruble (€0.010) — virtually for free. Companies that have decided to leave Russia at any cost are forced to make such deals because of the rules set by the government which mandate discounts and contributions to the state budget.

Novaya-Europe has analysed the key transactions involving the divestment of foreign assets in Russia and identified the top 100 largest new owners, sorting them by the value of net assets received. The value of the transaction was only disclosed in a quarter of cases.

These new owners acquired the assets of 110 companies that have fully or partially left Russia. Their total value as defined by their net assets by the end of 2022 was 3.5 trillion rubles (€35 billion). This gives a rough idea of the assets’ worth, though their current market value may differ significantly.

Nearly half of all assets sold by Western countries (1.6 trillion rubles) was bought up by Vladimir Potanin, Russia’s richest businessman. He acquired Rosbank, formerly a branch of the French Société Générale, and two insurance companies.

Media have named Potanin, who also bought Tinkoff Bank back in 2022,

Potanin, along with other billionaires, also seeks to buy Russian tech giant Yandex.

In second place — far behind Potanin — is Ivan Tyryshkin. The former head of the SPB Stock Exchange acquired Home Credit Bank, a microloan provider, an insurance company, and a collection agency, all of which were owned by the Czech PPF Group. The net assets of its former companies amount to 262 bn rubles (€2.6 bn).

The top 10 includes buyers who have acquired assets in the upstream sector, gold extraction, the manufacturing industry, and financial organisations.

Three buyers from the top 20 were in the red in 2022. Among them is Avtodom, which acquired the currently inactive Mercedes factory, and the state-owned NAMI institute, which got Renault’s share in Avtovaz and Nissan’s plant in St. Petersburg for the symbolic price of €1. Renault retained the right to buy its assets back within six years.

The former McDonald’s chain, now named “Vkusno i Tochka” has also been losing money since the pullout of its American stakeholder. The business was bought by McDonald’s franchise partners in Siberia Alexander Govor and Yury Kushner, both former owners of the coal mining complex Yuzhkuzbassugol. These assets were also sold for next to nothing, but McDonald’s retained the right to a buy-back.

A total of 14 of all the buyers rated had unprofitable acquisitions in 2022.

Another way to determine who benefited the most from the departure of Western companies is to calculate the net profit of the entities acquired. This amounted to 223 billion rubles (€2.2 billion) for all transactions in 2022. 10 companies have earned over 10 billion rubles (€100 million), whereas for half of the rating their profits exceed 1 billion rubles (€10 million). To calculate this, we subtracted the share of profit that the buyers will receive depending on their share in the company’s authorised capital.

The top-10 buyers when ranked by net income differ sharply from the net assets’ top 10. The only buyers that made it onto both lists are Novatek and Sibur.

The most profitable assets went to Novatek — the share of the French TotalEnergies in the Terneftegaz project and Shell’s share in the Sakhalin-2 project. Novatek’s total net profit from these projects in 2022 reached 40 billion rubles (€400 million).

Novatek’s largest shareholders are billionaire Leonid Mikhelson, Putin’s friend Gennady Timchenko, and Total itself (19.4%). 21% of its shares are listed on the stock exchange. After the Terneftegaz deal, Total withdrew from Novatek’s board of directors. Total’s management claims that EU sanctions and Russian law prevent the company from selling its stake in Novatek. In addition, the French company does not wish to “enrich Russian investors” by divesting completely.

The Russian government estimated Shell’s share in Sakhalin-2 (27.5%) at 94.8 billion rubles (€948 million). Thus, given the exchange rate In April, when payment was allegedly effected, Shell could have earned $1.2 billion from the divestment. Net assets show, however, that Shell’s stake in the company amounted to 155 billion rubles (€1.5 billion) by the end of last year. In its reports back in the first quarter of 2022, Shell estimated losses from leaving Sakhalin-2 at $1.6 billion.

In accordance with a special decree signed by President Putin, the money from the sale of foreign stakes in the project should have gone to a Russian account, where it would have been frozen. But Shell was allowed to transfer the money abroad after Novatek owner Leonid Mikhelson appealed to Putin, Kommersant wrote.

Petrochemical company Sibur and its shareholders rank third by profitability of purchases (31 billion rubles or €310 million) and ninth in terms of net assets. Its largest owners are also Mikhelson (30.6%) and Timchenko (17%).

The top 10 ranked by net profit also includes buyers for the Russian operations of Imperial Tobacco, Lamoda, Avito, and Henkel. Here too we have a company that was sold to its own management — the oilfield service subsidiary of Halliburton.

The rating includes foreign companies and nationals, both from “friendly” and “unfriendly” countries. For example, the businesses of the American Whirlpool, the Polish LPP (manufacturer of such brands as Reserved and Mohito) and Cersanit, or the British Marks & Spencer were bought up by companies from China, Turkey, and UAE. The Russian branch of the Dutch-based Kerry Group was taken over by another Dutch company owned by the head of the branch. In a similar move, German national Perry Neumann, former head of the Russian branch of Kuehne & Nagel, became its owner.

Playing with pledges

Members of foreign businesses’ local management make up a third of the rating. Companies announcing the sale of assets to local management tend to not disclose the value of the deal, or it is a token sum.

Andrey Yakovlev, a visiting scholar at the Davis Center in Harvard, and Ilya Shumanov, head of Transparency International Russia, explain that foreign businesses use this arrangement primarily to facilitate a possible return.

This is why companies are entering into a buy-back option with local management. “It is much easier to negotiate a buy-back with management than with any external players who might have had a takeover bid,” Yakovlev says. Besides, he adds, while the company is off the Russian market, local management is more likely to maintain the business standards that the company’s founders had laid down.

The new owners are linked to foreign companies not only by options, but also by pledges. This indicates that the new proprietors do not have full control over these assets, says Shumanov. “That is, they own the assets on paper, but top management can neither sell nor reassign them,” he explains.

Shumanov adds that the option clause may allow a buy-back at the same next-to-nothing price that the business was sold for. Moreover, the pledge agreement may stipulate the pledgee’s right to sign off on key decisions.

Of the 35 companies included in the rating and transferred to management, 13 have encumbered assets. At least six companies have directly pledged their Russian subsidiaries: Petro Welt, Nutreco, Publicis Group, Inchcape, Stora Enso, and Dr. Oetker.

But there may be more pledges: the companies could have failed to update their accounts, or the pledges may have been made outside Russian jurisdiction, in part because some Russian legal entities are re-registered to companies from other countries, including offshore zones.

Shumanov does not rule out that foreign companies continue to benefit from former subsidiaries now in the hands of top management, as partners may enter into additional contracts outside Russia. Parent companies, in turn, may undertake to supply equipment to Russia — as did, for example, lift manufacturer Otis.

Certain pledge schemes are more cunning. The Lithuanian agricultural holding Linas Agro sold its production facilities in Russia to the little-known and non-core firm Aventus Finance. However, its share is pledged to Kauno Grūdai AB, which is part of the Lithuanian holding. This seems to be a straw deal, the purpose of which is to retain control over the assets without obvious signs of affiliation and damage to the seller’s business reputation, experts interviewed by Vedomosti said.

Another type of pledge deals involves Russian banks as pledgees. The managers’ stakes in five companies are pledged to state banks: Amcor is pledged to Sberbank, Sylvamo and Raven Russia are pledged to VTB, Ferronordic is pledged to to Promsvyazbank, and Air Liquide — to the Russian-Kazakhstani Eurasian Development Bank.

The companies do not disclose details of transactions with pledges and options, so their intent may vary, Shumanov says. For instance, these could be cases of hidden state control over assets.

There are also bank pledges involved in deals where the new owners are not connected to top management. Here, the bank may require a pledge to grant a loan for the purchase of the asset. Banks can also demand early repayment of the loan and become the owner of the asset in case of non-payment, Shumanov explains.

War as a window for profit

Experts believe that the key foreign asset sales do not indicate that these companies are being purposefully distributed among businesspeople close to the powers-that-be.

On the one hand, the most profitable assets of Western energy companies naturally go to Russia’s biggest oil and gas companies, while the richest businessmen get the largest banking assets. However, medium enterprises have also acquired large assets, such as the McDonald’s franchise and several car factories (though these are currently unprofitable).

There have been exceptions to this rule: for instance, the controversial sale of the businesses of OBI and Starbucks, which, according to the BBC, went to a businessman close to Chechen leader Ramzan Kadyrov. One should point out, however, that a “businessman close to the Russian government” is a very vague concept. Shumanov notes that all big business in Russia has connections with the Kremlin to varying degrees.

“Those closely affiliated with Putin already have a lot of [property],” Yakovlev says. He believes that the decision to “share” the assets of companies leaving Russia with a wider scope of entrepreneurs may have been intentional.

“Such a decision would make sense because it can, in a way, create social support for the regime. Business, especially big business, has for the most part suffered great losses from everything that is going on. And from the point of view of the Russian authorities, [the acquisition foreign assets] probably looks like an opportunity to compensate for the losses caused by the isolation from the West. There are opportunities to earn money on import substitution, especially in small and medium businesses,” Yakovlev explains.