Russian roulette: why it’s so difficult for foreign fmcg companies to exit Russia

When the Ukraine war began in February last year, businesses faced pressing calls to exit Russia.

More than 1,000 western companies did so, including major multinationals such as McDonald’s and Heineken. But many have remained, including Unilever, Philip Morris, Nestlé, Mondelez, PepsiCo, MARS, Coca-Cola and Ferrero – to mounting criticism. So why?

As Unilever’s chief business operations and supply chain officer Reginaldo Ecclissato recently explained, exiting Russia is “not straightforward”.

The company has three options: to abandon operations entirely; to sell them to a Russia-based buyer; or to continue running its business there under “strict constraints”.

Carlsberg stymied over sale of Baltika brewery

And companies that do want to navigate a path to exit are facing fresh obstacles from the Kremlin. In what is seen as a response to western sanctions, Putin’s government has escalated the introduction of legal frameworks allowing for the nationalisation of foreign assets. The most recent victims have been major fmcg groups – Danone and Carlsberg, both of whom had their assets seized by the state last week after looking to exit the country.

Carlsberg had recently signed an agreement to sell its local brewery, Baltika, which was subject to regulatory approvals and the fulfilment of conditions determined by the state.

Read more: Unilever’s new CEO faces renewed calls to exit Russia

Danone, too, had kickstarted the process of transferring the control of its Russia subsidiary EDP in October last year, which it said was “progressing according to the expected schedule”.

Reports suggest Putin ordered the companies to be “temporarily managed” by the Russian Federal Agency for State Property Management after oligarchs close to him showed an interest in the assets.

Both companies expressed their shock at the seizures. Carlsberg said it had been “operating in accordance with rules and regulations in Russia”, and warned the unexpected development had left its sales process “highly uncertain”. Danone said the changes took place without its knowledge or approval and it was “investigating the situation”.

Read more: Russians linked to Ukrainian grain theft hit with sanctions

Neither Carlsberg’s nor Danone’s Russian operations contributed significantly to their global profits, Moody’s analysts note. But “the decision from the Russian government adds uncertainty to the process and makes it less clear what the proceeds of the sale might be”, they say. It might also compel other businesses like Unilever “to remain in the country, because exiting the market looks increasingly difficult”.

Indeed, multinational businesses fear if they either abandon or sell operations, their assets may be taken over by the state and used to directly fund the war.

For Unilever, the latest developments provide some vindication for its defence for remaining in Russia. It has expressed fears abandoning operations will result in assets being “appropriated and then operated” by the state.

Selling is undoubtedly tricky. That’s due to sanctions forbidding companies from striking deals with many businesses and individuals. Philip Morris International – which holds about $2.5bn in assets in the country – admitted earlier this year it may never sell its Russian business because Kremlin and western terms are so stringent. CEO Jacek Olczak said talks with three “serious” potential buyers fell through because “nobody knows how I can make it work”.

Read more: Food supply ‘fully dependent’ on Russian fertiliser for next decade

Abandoning assets, meanwhile, is complicated by bankruptcy law. For Unilever and companies such as British American Tobacco, there are concerns closing operations could be treated by authorities as ‘intentional bankruptcy’ – a criminal offence under Russian law, exposing staff in the country to prosecution.

Since the invasion of 🇺🇦, we've engaged with 125 companies to call for a responsible exit from Russia.

Our analysis shows: the excuses used by companies to stay are unwarranted, unsubstantiated, and, in certain cases, cynical.

Will they ever move from compliance to conscience? pic.twitter.com/ufr92HiKHX

— B4Ukraine (@B4Ukraine) July 27, 2023

Russian prosecutors have also warned western companies their workers could face jail under labour compliance regulations if they shut production of essential goods, like hygiene products and baby formula – both of which are still sold there by Nestlé and Unilever.

In a recent letter to campaign group B4Ukraine, Unilever’s Ecclissato said: “The Russian government has made it clear the employees of companies in Russia which abandon or run down their business could face criminal prosecution.”

He said even closure of its ice cream business “could be considered such a breach”.

All in all, Unilever says it has “not been able to find a solution which prevents the Russian state potentially gaining further benefit and which safeguards our people”.

Read more: The untold story of war: how Ukraine is fighting to feed itself

The latter part of that sentence is another point of debate, though. There is doubt over the ability of companies to have any control over operations, even if they remain. “No western assets are safe in Russia anymore”, Alexandra Prokopenko, non-resident scholar at Carnegie Russia Eurasia Center and former central bank official, recently told the FT.

Those concerns are exemplified by a new Russian law that requires companies there to permit conscription of employees. Unilever last week said it would have no choice but to comply with the legislation.

The admission only served to put Unilever under further scrutiny for continuing its operations in Russia.

“If this is protecting your workers, I’d hate to see what putting them in harm’s way looks like,” tweeted Valeriia Voshchevska, campaigner for the Ukraine Solidarity Project.

Unilever has also faced flak for giving money to the Federal Treasury through hefty tax payments. In 2022 alone, Unilever paid around £33m in taxes to the Russian state, according to the company.

Reputational damage

This reputational damage is bad enough on its own. But it can have huge financial consequences, as French drinks giant Pernod Ricard learned. A decision to resume exports of its Sweden-made Absolut Vodka led to hospitality businesses in the Nordic countries refusing to sell its alcoholic beverages until it was forced to fully stop exports to Russia.

That message has been backed by Ukrainian president Volodymyr Zelenskyy, who has accused businesses in the country of “sponsoring the Russian war machine”.

So for those left in Russia, the choice is looking increasingly bleak. Either they pay Russian taxes and face a very public backlash, or they make an exit and risk handing their assets to war-supporting oligarchs .

“Not straightforward” suddenly feels like an understatement.