“If Russia achieves a growth of 20% of GDP, then a lot of Western companies will want to return” (September 23, 2022)

“Expert” talked to Kirill Lapin, managing partner of the consulting group Seitenberg (Austria), which has offices in Vienna, London, Tallinn and St. Petersburg.

– How was the situation with the introduction of anti-Russian sanctions after the start of the special operation in Ukraine perceived by the foreign business represented in Russia? Who decided to leave and why? Does perception change over time?

— Managers of Western companies that have worked and are working in Russia are quite well accustomed to crises. The composition of top management is pioneers. Those of them who, after all the crises of past years, remained here and continued to work have rather strong nerves. Therefore, any decisions in this situation were taken thoughtfully.

In the context of leaving the Russian Federation, companies can be divided into three groups. The first is global companies that are traded on the stock exchange and make decisions in terms of political PR. First of all, those whose share of the Russian market in the turnover is low. It should be noted that in Russia it is often overestimated. Yes, for many this is an important market, but its loss is often non-fatal. That’s why they left in the first place.

The second group – companies that were directly on the Russian market. That is, equipment suppliers and so on. They have somewhat different motives relative to the first group. There is an interesting point here. Over the past 20 years, Russian business has become very spoiled in the sense that in all companies working with Russia, you will find Russian-speaking employees, you will find all catalogs in Russian. Companies adapted to the wishes of Russian businessmen, it was a very convenient environment in which they invested in the hope of further development. For example, you are a German company that manufactures equipment, you have two hundred employees. Among them there was always an employee who spoke Russian, he came to Russia to help the company adjust to Russian partners. Now this is no longer the case.

The third group is the so-called family companies, they have a strong tradition, even if they are traded on the stock exchange, and the planning horizon is about thirty years on average. Here they understand that no matter how long the current situation lasts, in the end it will lead to something. There will be either normalization or a complete change in the rules of the game. Therefore, it makes sense to try to maintain its potential in the Russian Federation. For example, Russia may become a new Vietnam in thirty years or earlier. This country is a good example of how one can get out of political isolation by separating economic and ideological politics and become a very important player in the world market. But it is important to choose the right place to invest and what to focus on.

– What other aspects are taken into account when making decisions about leaving or not leaving the Russian Federation?

— There is a strong misunderstanding of the real impact of sanctions. For example, before February, you had a hard time finding a lawyer who specializes in sanctions, despite the fact that sanctions have been in place since 2014. It still remained a narrow topic and concerned Iran, Cuba, North Korea and a little bit other countries. That is, it was not a topic that lawyers often encountered.

If the lawyer does not know the topic well, then he will answer you superficially – yes, there are risks. If you don’t know exactly where it’s all going to go, and they can’t explain to you how it works, then take action accordingly. In addition, the situation is seriously affected by PR. Public opinion in Europe has a significant impact on large companies. The human factor cannot be ignored either. At the same time, most European companies are associated with a team of residents that has developed and has been working here for quite a long time. Often there are divisions that work not only for the Russian branch, but for the entire global structure of the company. Therefore, we see an active desire to leave an outpost here, from which it will be convenient to start returning in the future.

What were the moods like in February-March? Were there any forecasts of nationalization?

– There were similar moods, some companies immediately wrote off their Russian divisions “to zero”. Discussions about nationalization frightened many. But most of all, those who were in headquarters in Europe were frightened. And those who were here understood that not everything is so simple. In such a diverse economy as the Russian one, to nationalize something is a very difficult process from the point of view of the bureaucracy.

To be honest, I can’t say which country would have coped with the nationalization of not one, not ten, but a huge number of enterprises. Technically, this is quite problematic.

— What specific steps are foreign companies taking to leave the Russian market with minimal losses or stay on it?

– Many contractors believe that you should not declare that you have a Russian office. Since there are customers who will react negatively to this. Our situation is simpler, we are working on solving problems, and now there are many problems and it is clear why we are working with Russia.

In terms of PR for Western companies, there were unpleasant moments. So, journalists came to the offices of large companies that had divisions in Russia and asked them a question: how do you plan to proceed further, are you ready to leave, and so on? Everyone had to speak out, but there are a number of companies that, in my opinion, made a very good decision. They just didn’t comment. This wave as a whole has passed, now it is time for a solution. But those companies that depend on tenders in countries that speak out sharply about cooperation with Russia can get into huge problems at any moment.

– In those countries that we have defined as unfriendly?

– I would also divide unfriendly countries into those that have a calm approach, like Germany and Austria, and those that behave aggressively in this matter. For example, some local deputy begins to ask why his country should “feed” Russia by giving an order to a company operating in it. This shows a lack of understanding of how corporate structures work and that it is not possible to change everything overnight. But such sentiments exist, and we must fight them.

So what about those who decide to stay?

“First, we need to change the organization of work. Some companies are trying to sell their assets in Russia. Often these assets are written off “to zero” due to the specifics of the balance sheet legislation, but in fact there is an attempt to sell. These companies often have a large percentage of third-party capital. By the way, I have not heard that anyone really sold their assets for the ruble, except for significant companies from the automotive industry. Nobody gives away property for free. It will not be possible for a Russian entrepreneur to call a fictitious Nestle and agree on the sale of its Russian assets for a nominal fee. We all understand that, for example, real estate in Moscow, St. Petersburg or Samara costs money. And local management is engaged in its implementation. But I would not overestimate these assets.

On the other hand, there are companies that depend on their systems approach. They have an interest in selling their Russian assets to someone who will continue to develop them. For example, a company has finalized production in China. That is, components from the Russian Federation are supplied to China, but this process has not yet been fully organized, since the crisis has not lasted so long. Those companies that have balance sheet assets are trying to sell them either to partners from Russia or to management, but with bank financing, with guarantees. This is done with the hope that the success of the business model of the enterprise will continue to depend on the support of the central office. Accordingly, it will not work to develop the company by interrupting ties with the headquarters. Local management, often, is not happy with such a development of events, but, nevertheless, is ready, figuratively speaking, to jump into a cold river. That is, often the CEO is not particularly happy that he became the owner, since it is not a fact that he will be able to keep the company at the level that it was before.

This is where the problem of bank financing arises, because if you kind of leave the Russian market, the classic financing scheme, in which there is a Russian bank, which is a division of an international bank, there are guarantees from a Western parent company, and there is a Russian division that receives financing, stops working. If you want to show the West that you have seriously left Russia, then difficulties will arise in order to provide guarantees for a Russian company, which, it seems, is no longer yours. But there are industries where financing, for example, project financing, is simply necessary. This is a very subtle point. Owners and management may be held personally liable. And the amounts we are talking about run into tens of billions of rubles.

These are questions that are difficult to resolve, which depend on the situation. Someone solves them through intermediaries. There are companies that agree on a real sale, rather than transfer to management in trust, start working with him as partners, but then the deal falls through due to the fact that it is impossible to find a bank that will finance this structure, since there are no guarantees from the head office . And I know that in five companies there is a fight going on between COOs and CFOs at the head office in Europe, because they do not know how to secure funding. At the same time, everything looks great from the outside: the buyer got a huge group of companies for a ruble. But if we are talking about logistics companies, companies that are engaged in some kind of big sales, then it all hangs on financing, which rarely remains at the same level without guarantees from abroad. And in this case, firms are close to bankruptcy.

– Are there many who left, but expect to return in the near future?

— There are those companies for which the return will not cost much, and they are waiting for a change in public opinion in Europe or the general political situation in order to return to a safe environment. But in the management of those companies that had serious assets here, but eventually left, it will be quite difficult to find people who will vote for the return on the boards of directors. Although, theoretically, if Russia achieves growth of, say, 20% of GDP per year, then, of course, there will be a lot of people who want to start working in the Russian Federation again.

– Can any of the representatives of Western business theoretically win something as a result of what is happening?

– It’s too early to say, but there is a global cleansing of the market. I would say that all those who decided to stay proceeded from the formula: the cake has become smaller, but there are also fewer eaters, which means our piece will become larger. However, in some industries, the question is whether Russian business will have the opportunity and desire to buy, for example, some kind of equipment in such volumes that Western companies would be interested in it. Take the production of sausages. Let’s say that one third of the companies that import equipment for this will remain. But if Russian enterprises decide to switch to Chinese counterparts, then she will leave.

– What is the general forecast for the development of the situation?

– As they say in Russia, it is clear that nothing is clear. I do not want to go into politics, I will say this: based on the last 6 months, those who are able to think clearly without panicking live pretty well. Russia is a huge market for 150 million people. Everyone who is serious about the situation understands that there will be a slowdown in growth, but they are still interested in the market because of its size. Many Western companies have already proved their willingness to adapt by the very fact that they have remained on the Russian market. I think they do it pretty well. In general, I would predict this: it will be difficult for everyone, but our company is betting on the Russian market. We believe that it will export not only natural resources. People who are ready to work in high-risk markets will be interested.

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