By Elliot Smith, CNBC, 1/31/23

After Russian troops invaded Ukraine in February 2022, companies across the G-7 major economies and the European Union announced plans to cease business operations in Russia.

Yet by the end of the year, very few had fully delivered on that promise, according to new research from Switzerland’s University of St. Gallen.

The report published earlier this month documented a total of 2,405 subsidiaries owned by 1,404 EU and G-7 companies that were active in Russia at the time of the first military incursion into Ukraine.

By November 2022, fewer than 9% of that pool of companies had divested at least one subsidiary in Russia, and the research team noted that these divestment rates barely changed over the fourth quarter of 2022.

“Confirmed exits by EU and G7 firms that had equity stakes in Russia account for 6.5% of total profit before tax of all the EU and G7 firms with active commercial operations in Russia, 8.6% of tangible fixed assets, 8.6% of total assets, 10.4% of operating revenue, and 15.3% of total employees,” professors Simon Evenett and Niccolo Pisani wrote.

“These findings mean that, on average, exiting firms tended to have lower profitability and larger workforces than the firms that remain in Russia.”

More U.S. firms were confirmed to have exited Russia than those based in the EU and Japan, Evenett and Pisani noted, but the report still found that fewer than 18% of U.S. subsidiaries operating in Russia were completely divested by the end of 2022, compared with 15% of Japanese firms and just 8.3% of EU firms.

Of the EU and G-7 companies remaining in Russia, the research found that 19.5% were German, 12.4% were American owned and 7% were Japanese multinationals.

“These findings call into question the willingness of Western firms to decouple from economies their governments now deem to be geopolitical rivals,” Evenett and Pisani wrote.

“The study’s findings are a reality check on the narrative that national security concerns and geopolitics is leading to a fundamental unwinding of globalisation.”

Pressure to exit will build

Europe’s status as a laggard in the push for Russian divestment was also highlighted by Barclays in a note on Jan. 20.

The British lender’s European consumer staples analysts said that while most of the companies they cover had pledged to exit Russia, partly in response to ESG-related pressure from stakeholders and the threat of sanctions, few have managed to do so yet. Various companies told Barclays that there was a host of challenges to fully divest.

“In addition to the lack of clarity over what assets there might be worth, the list of potential buyers is short, and the list of potential buyers who are sanction exempt is even shorter,” Barclays analysts noted.

“There have also been suggestions that the assets (including intellectual property) of companies that leave Russia will be nationalised.”

Barclays suggested that with no end to the conflict in sight, the disconnect between pledges and outcomes will need to be resolved, and will force companies into some tough decisions.

“If exiting Russia at anything approaching a fair valuation is highly challenging (if not outright impossible), then the choice facing companies is whether to exit at an unfair valuation (or indeed for nothing at all), or remain in Russia,” the analysts said.

“Few commentators seem to think a near term end to the conflict is likely, and we suspect pressure to make good on pledges to exit may build as time goes on.”

They added that companies that have paused advertising and reduced product assortments but still intend to stay in Russia will be increasingly challenged by wider stakeholders and tightening sanctions.

In particular, Barclays named CCH, Henkel, PMI, JDE Peet’s and Carlsberg as having the largest sales exposure to Russia within the European consumer staples sector.

Henkel has repeatedly stated its intention to exit Russia and been transparent with the investment community on the likely impact, since around 5% of sales and 10% of EBIT (earnings before interest and tax) are derived from Russia. Barclays’ Henkel forecasts assume no contribution from Russia for full-year 2023 and beyond.

“While country level EBIT data is hard to come by, we assume that given that most companies have stopped advertising in Russia, it is currently disproportionately profitable,” Barclays said.

“Henkel has been explicit about the likely impact to earnings of a Russia exit (5% sales, 10% EPS) and this should be well known to investors, but we suspect that Russia deconsolidation may be a source of margin mix headwind elsewhere in Staples.”

Of the 29 consumer staples firms the unit covers, 15 have committed to exiting Russia, but Barclays analysts are only aware of six that have actually done so.

Henkel, CCH, Carlsberg, JDE Peet’s and PMI did not respond to CNBC’s request for comment.

‘Writing off isn’t selling off’

A new report from a U.K. think tank last week highlighted that some of the world’s biggest companies have announced their planned exists by writing off assets rather than selling them, thereby making “announcements of accounting entries instead of making Russian exits.”

“Many people think that when something is written off it has been lost. A write-down or write-off just means the owner has put a lower or zero value on an asset at that point in time. It is a paper value that can be revised at any moment at the whim of the owner,” said Mark Dixon, a London-based mergers and acquisitions consultant who founded the Moral Ratings Agency think tank in February following the Russian invasion.

“If the company drags its heels long enough and doesn’t leave Russia, it can write up the value whenever the world situation changes.”