Protectionist rhetoric bodes ill for Western companies hoping for return

Russia’s parliament will next month consider legislation to allow Russian companies to deny former foreign shareholders a buyback—even if they had such an option under the terms of their exit from Russia. The law specifies Russian owners can block a buyback if the company has a “significant influence on the country’s socio-economic development.” 

What’s going on? 

Under the proposed law, reasons for ditching the buyback option could include hostile actions of the shareholders’ country toward Russia, or a contract price lower than the market rate. Owners can also refuse if the original agreement is more than two years old, and they have fulfilled all other contractual obligations. Foreign shareholders would be eligible for compensation if unable to exercise a buyback, which the government would determine. Russia’s Association of Lawyers believes at least 18 foreign corporations will file lawsuits.

After Russia invaded Ukraine in 2022, more than 1,000 foreign companies left Russia. Several (such as McDonalds, L’Occitane, and British American Tobacco) secured the option of a share buyback in the future. There was a buyback option in 21% of the deals struck with foreign companies, Reuters reported, citing figures from consultants. Only 33% of these buyback deals stipulate a buyback price based on market value. 

Cancelling such agreements between companies via legislation could see foreign investors turn to international arbitration. But the cause of preventing foreigners from returning to Russia has an influential supporter – President Vladimir Putin. 

Putin and protectionism 

“Several major companies, working in various sectors of the economy, are already coming to me to say: our partners are hinting that they wish to return. I said: let them come, but think about the terms. If it’s profitable for you, by all means bring them back; if not, let’s make it profitable. That’s it,” Putin said Monday at a roundtable with business leaders in response to a question from Oleg Paroyev, the head of Vkusno I Tochka, which took over McDonalds’ Russian assets. “If they have a right to a buyback, it is likely connected with some conditions,” said Putin. “We will surely help you, have no doubts.”

Some Russian companies fear that the return of foreign competitors could lead to a loss of market share that they gained during the war in Ukraine. The prospect of an open market is not good news for all, and business is lobbying to strengthen protectionist measures. 

Putin’s conversation with Paroyev unfolded at a highly unusual meeting between the president and business leaders. What was unusual was that we did not see the familiar line-up of tycoons and business association heads. Instead, the event was attended by entrepreneurs who filled the niches left by departing Western companies. Their key message was a request not to allow the return of foreign capital to the Russian market.

The guests were chosen based on their political loyalty, and their success in replacing Western brands. One company represented at the event, Astra, produces import-substitution IT solutions and is thriving on the back of contracts with state nuclear corporation Rosatom. A second, Unikhimtek, manufactures composite materials and works alongside the Innopraktika center headed by Putin’s daughter Yekaterina Tikhonova. Instead of discussing macroeconomic issues, the meeting focused on specific, manageable topics: protecting the domestic market from competition, state support, and limits on the work of Western IT services. The tone was pleading rather than discursive. And Putin appeared more content than usual: he seemed to enjoy hearing pleas for protectionism.

Why the world should care

The Russian government appears to be skeptical of protectionism, and its more pragmatic approach still appears to be counting on the eventual resumption of relations with Western investors. But it’s clear that Putin is fully on board with the ideology of protectionism, championed by the country’s new captains of import-substitution. They want state support, and access to state tenders. If they still harbor hopes of a return to the Russian market, foreign companies that left Russia should think again. They should look, instead, to the international courts to pursue a fight to secure value for their remaining assets.