Taking Stock of Russian Operations in Uncertain Times: 5 Tips for Western Companies

 By Kyle Davis, Of Counsel, Capital Legal Services

 Even after four years of sanctions imposed against Russia by the United States and Europe, Western companies still retain billions of dollars of operations and assets in Russia. Although a number of companies (including some U.S. law firms) have pulled out of the Russian market since the first Ukraine-related sanctions were announced in 2014, for many Western multinationals their Russian operations remain very profitable with higher growth than in their home markets. 

The political developments in recent months have required legal departments of Western companies – regardless of their exposure and whether their operations in Russia are profitable or lossmaking – to take stock of these operations and explore options in the event of a management decision to wind them down or restructure on a short notice. In light of the recent announcement by the U.S. 

State Department of pending sanctions under the Chemical and Biological Weapons and Warfare Elimination Act of 1991, which could potentially include suspension of diplomatic relations with Russia and ban on all trade with Russia, the most drastic sanctions options are now officially on the table and there is no choice for market participants but to take them seriously.

1. Decide who’s in the loop, and who’s out. Your stock-taking exercise and the resulting decisions will be of interest to your company’s competitors, potential M&A partners, suppliers, customers, local management, employees, and other stakeholders. Thus, one of the first decisions you need to make is who will be involved in the review – cutting people out of the loop later is likely to cause problems. When deciding on information flows, a threshold issue to consider is whether your local management or business partners are likely to buy or take over your operations, as happened in 2015 when a new Russian media ownership law forced foreign publishers to sell off or close their Russian operations.

2. Develop a menu of best options early in the process. Start the exercise by developing several confidence-inspiring, orderly contingency scenarios aimed at maximizing value, minimizing legal and financial risks, maintaining business continuity to the extent possible, and preserving 8 reputation and relationships. The relative advantage of the current geopolitical situation is that any responsible Western company would naturally be reviewing their Russian operations on an ongoing basis, so having contingency plans is expected, not extraordinary.

3. Keep meticulous records – but beware of local legal requirements. A stock-taking exercise is going to involve a transfer of a massive amount of information and records from Russia to the company’s home office. You should consult with Russian lawyers to ensure that this data transfer is in compliance with Russian data protection laws restricting cross-border transfers of personal data, including data contained in the local office’s HR files.

4. Ask forward-looking, hypothetical questions. Although sanctions are implemented through legislation and regulation, they remain a tool of foreign policy, and thus the logic of when, how and against whom they would imposed is not always apparent to business decision-makers. Also, up until the moment sanctions are implemented, the activities prohibited under those sanctions usually remain lawful. This creates a challenge for legal departments and outside counsel tasked with assessing “potential exposure”– the further evolution of sanctions is a political question, and lawyers generally deal with the implementation and compliance. To deal with political uncertainly, counsel must consider the most likely developments in sanctions potentially affecting their company’s Russian business and request reviews of contracts and business relationships based on hypotheticals. For example, ask: what if the six top “oligarchs” in Russia are sanctioned by the U.S. and E.U.? Of course, many drastic sanctions proposals never come to fruition. But “gaming out” some worst-case hypotheticals will develop data points that assure management that all relevant factors have been considered.

5. Don’t burn bridges. It is easy to forget how quickly things change in political and economic relations between Russia and the West. For example, Pepsi started doing business in the Soviet Union in 1972, less than 10 years after the Cuban Missile Crisis. Goldman pulled out of Russia entirely after Russia’s 1998 sovereign default and ruble crash. Eight years later, in boom time 2006, Goldman decided to return to Russia but found itself struggling to compete with other Western investment banks that had spent years building up their infrastructure, team, and networks. Although the current tensions between Russia and the West are serious, and might not be resolved quickly, if history is any indication, within a decade things will have changed substantially.