Following on from yesterdays’ Russia Briefing, which contained data from the University of Kiev concerning Western businesses exiting Russia, further analysis has arisen by economists from Switzerland’s University of St. Gallen.
That broadly follows on from the Kiev research, which stated that ‘fewer than 10%’ of foreign investors in Russia had actually left the Russian market. That aligns with the St. Gallen University analysts, who in a separate study estimated that fewer than 9% of companies from the EU and G7 nations that owned subsidiaries in Russia have left the country since the introduction of sanctions in March last year.
To identify the number of Western equity investments in Russia, St. Gallen researchers used the internationally-recognized ORBIS database, which contains detailed information on over 400 million (public and private) companies across the globe and is widely regarded as one of the most comprehensive and reliable record of equity investments by foreign firms. The extensive coverage of this database accounts for it being a workhorse in international business research – it has over 5,680 citations in the Google Scholar database. The Baker Library of Harvard Business School describes this database in these terms: “ORBIS, a global company database, produced by Bureau van Dijk, is unique in breadth of geographies and extent of companies covered as well as the availability of private company financial information.”
Data on approximately 36,000 firms with active operations in Russia was downloaded from the ORBIS database on 22 April 2022. To be included in the St. Gallen analysis, a business must have had at least US$1 million operating revenues in Russia for at least one of the years 2017 to 2021, years that precede any economic disruption to the Russian economy that followed the Ukraine conflict.
Once Russian-owned firms were removed, this left 3,444 subsidiaries of foreign companies for which information was available in the ORBIS database. Of those 3,444, a total of 2,405 were subsidiaries of companies located in members of the G7 group of nations or in member states of the EU.
Several foreign companies have more than one subsidiary that are commercially active in Russia. For example, Renault had 22 subsidiaries listed in the ORBIS database that met the operating revenue filter mentioned above. For this reason, St. Gallen distinguished between the total number of EU and G7 “subsidiaries” and the total number of EU and G7 “foreign companies” that own them. A total of 1,404 foreign companies headquartered in the EU and G7 countries with commercial activities in Russia were found in the ORBIS database.
For each of the 2,405 EU and G7 subsidiaries that were commercially active in Russia, St. Gallen checked if any post-invasion exit from Russia could be confirmed, and separately searched relevant company websites for announcements and, where available, their financial statements. Particular weight was given to statements concerning completed sales of subsidiaries where the buyer was named, and other pertinent transaction details mentioned (such as reporting the value of the transaction).
Of the total of 1,404 EU and G7 companies with commercially active equity investments in Russia before sanctions, St. Gallen could confirm that, by the end of November 2022, a total of 120 (8.5%) had actually left the Russian market. Of the 2,956 foreign companies tracked, the study found that 143 of them had “exited”. Put differently, the study showed that 4.8% of all foreign companies tracked have left Russia. That exit percentage is higher – yet unsurprising given the analysis was confined to EU and G7 companies which had faced pressure at home to leave.
There has been some debate to attempt to talk up the impact of sanctions, that the 8.5% of exiting Western firms with equity investments constitute the lion’s share of Western investment in Russia.
However, this appears not to be the case. Confirmed exits by EU and G7 firms that had equity stakes in Russia accounted for just 6.5% of the total profit before tax, of all the EU and G7 firms with active commercial operations in Russia and that appeared in the ORBIS database. These findings imply that, on average, the exiting Western firms tended to underperform in terms of profitability and had larger workforces (which in turn may have contributed to their higher public profile). Some had incurred losses or lower than normally expected profit levels because they had begun to reinvest what would have been dividends back into expanding their Russian operations.
This implies that most planned Russian investment by Western investors putting profits back into the Russian end of the business has also been lost.
Since the ORBIS database reports the type of foreign investor, the nation their headquarters is located in, and the sector of economic activity, it is possible to conduct stability checks as well as provide additional information concerning the commercial footprint of exiting firms.
The key findings are as follows:
St. Gallen also checked the 74 companies that are included in the “exited” list (143) which did not appear in the list of 120 confirmed exits. Eleven of them are companies that are not headquartered in the EU or a G7 nation. A further 56 of them are companies that are not associated with any of the 1,404 EU and G7 companies, while for the rest, no applicable information on any equity divestment was available.
Finally, 7 of them could be linked to companies included in our sample of 1,404 EU and G7 companies but, based on our assessment of the information retrieved, were not deemed to have confirmed exits.
Nevertheless, a number of prominent international firms have stopped operating in Russia due to sanctions pressure. The list includes American, European, and Japanese automakers (Ford, Renault, Toyota), energy majors (ExxonMobil, Shell), banks (Deutsche Bank, Société Générale, Citi), consulting firms (McKinsey, KPMG), retailers (IKEA), restaurant and hotel chains (McDonaldʼs, Starbucks, Marriott), and clothing brands (H&M, Nike), among others.
As an example of the overall attitude towards remaining in Russia, Vittorio Torrembini, the President of the Association of Italian Entrepreneurs in Russia stated this week that Italian companies will continue to operate in Russia despite “enormous” difficulties and pressure from the EU.
Only two Italian companies have sold their businesses in Russia thus far, including state-owned energy giant Enel, Torrembini said. “Except for the oil and gas sector, all others have stayed. Some have reduced the number of employees, but nobody has left Russia,” he added.
Enel, Europe’s largest utility company, sold its entire 56.4% stake in PJSC Enel Russia in October to local giant Lukoil and the Gazprombank-Frezia investment fund for €137 million, and is estimated to have lost more than €1 billion because of its exit.
Torrembini insisted that Italian businesses remain keen on the Russian market and have no plans to leave. He suggested that new investment plans are even being made, particularly in the construction and food retail sectors, but declined to disclose the names of these companies.
He acknowledged that firms working in Russia are facing “enormous” logistical, financial, and banking difficulties due to mounting pressure from Italian and EU authorities but asserted “Our companies are strong enough to defy the influence of restrictions.”
“The Russian market is of great geopolitical and economic importance” Torrembini argued, stating that “this is not Nepal, this is Russia” – explaining why Italian companies are seeking to maintain their presence.
The Russian upper middle class consumer market is estimated to be about 60 million – larger than that of the UK. Russia’s average per capita annual income (PPP) is just over US$30,000.
Source: Russia Today