Page 21 - bneMag Dec22

bne December 2022 Companies & Markets I 21
bne:Deal
Sanctions unleash
a tsunami of Russian M&A deals
bne IntelliNews
The extreme sanctions imposed on Russia after the invasion of Ukraine have thrown Russian business into chaos. In the space of a week products and inputs that are essential for production simply stopped arriving even if they were not on one of the sanctions lists. Western suppliers of all sorts just cut ties with Russia.
Within a month over a 1,000 Western companies suspended operations in Russia, with many threatening to pull out
of what had become Europe’s largest consumer market altogether. Eight months on and that process is ongoing, but it is proving much harder to do in practice. Western companies have invested hundreds of millions of dollars in building up their presence and, according to a report from Yale, have a turnover equivalent to 40% of Russia’s GDP.
Departing companies don’t want to abandon their investments entirely, and some have no intention of quitting the market completely. But Russia has become so toxic that simply ignoring the war in Ukraine is not an option either. That has driven a tsunami of M&A deals as Western investors try to rescue something from the Russian debacle.
A Russian official estimated in August that three-quarters
of Western companies are still working in Russia, but the picture is muddled. According to a study by the Kyiv School of Economics (KSE), only about 50 companies have genuinely left the market completely, while others are in some sort of limbo. Other have moved their legal domiciles to “friendly countries.” Many have suspended their operations, but
have kept the option to restart them in a few years’ time when the storm blows over. And many of them are selling their businesses to their Russian management, distribution partners or opportunistic entrepreneurs taking advantage of the fire-sale that is underway.
The picture is further muddied by parallel imports. While some companies like Apple and Nike have nominally pulled out of Russia they have done so by selling their distribution chains to their Russian management, which will continue to import their products via intermediate countries like Turkey, which has seen its trade with Russia grow by 50% this year compared to what it was a year ago before the war started.
Sanctions have forced a massive restructuring of Russian business and also have resulted in a lot of bargains as leading Russian entrepreneurs snap up cheap assets as departing foreign firms try to rescue something from the debacle. / bne IntelliNews
Russians were buying 30mn smartphones in 2021 and Apple was at the top of the list, but this year the brand
has completely fallen out of the top ten brand sales list, to be replaced by Chinese brands. Former president Dmitri Medvedev said this month that it is still possible to buy the new Apple 14 in Moscow – it has been released since the war started – just it costs 20% more, is imported via Turkey and doesn’t have any of the service agreements or company guarantees Apple offers in its legitimate markets.
Like most Western brands that have started to reappear in Russia, Apple has no control over the parallel imports. They are organised by traders who do not have the capacity to handle a million unit orders but are sending smaller orders, so volumes of sales have collapsed.
With other products like high-end suitcases the total volumes are of a manageable size for traders and the distributors
that are taking over from the brand-owners will be able to continue their business more or less as normal. And often these sellers will continue to offer the same customer service and guarantees as the original producer, except taking those costs onto their own book rather than passing them to the parent company as in the past.
Apple hasn’t pulled out completely as it returned the apps of Russian internet major VK (former Mail.ru) to the App Store at the start of October after the Russian company provided proof that it’s not “majority-owned or controlled by a sanctioned entity,” The Verge reported, thus further muddying the waters.
On top of that there are currently 400 oligarchs and mini- grachs in Dubai that are scrambling to break their companies into a Russian part and an international part that can continue business, according to bne IntelliNews reporters in the Arab city, the favoured and largest financial centre still open to Russian businessmen.
Some of these are taking their know-how, resources and money to launch new international versions of their existing businesses and are just building up mirror-image of businesses they have already pioneered in Russia.
www.bne.eu