Western companies that have continued to operate in Russia since Moscow’s full-scale invasion of Ukraine have generated billions of dollars in profits, but the Kremlin has blocked them from accessing the cash in an effort to turn the screw on “unfriendly” nations.
Groups from such countries accounted for $18bn of the $20bn in Russian profits that overseas companies reported for 2022 alone, according to figures compiled by the Kyiv School of Economics, and $199bn of their $217bn in Russian gross revenue.
“The figures may have grown considerably since then, although it is not possible to assess exactly how much since most international businesses operating in Russia only disclose their local results annually,” said KSE deputy development director Andrii Onopriienko, who compiled the data.
Local earnings of companies from BP to Citigroup have been locked in Russia since the imposition last year of a dividend payout ban on businesses from “unfriendly” countries including the US, UK and all EU members. While such transactions can be approved under exceptional circumstances, few withdrawal permits have been issued.
“Tens of billions in dollar terms are stuck in Russia,” said the chief executive of one large company domiciled in a country not designated as unfriendly. “And there is no way to get them out.”
The size of the revenues and profits reflects not only the enduring importance of western companies to the Russian economy but also the dilemma such businesses face over what to do with their operations in the ostracised nation.
Many foreign businesses have been trying to sell their Russian subsidiaries but any deal requires Moscow’s approval and is subject to steep price discounts. In recent days British American Tobacco and Swedish truckmaker Volvo have announced agreements to transfer their assets in the country to local owners.
Among companies of “unfriendly” origin that remain active in Russia, Austrian bank Raiffeisen reported the biggest 2022 earnings in the country at $2bn, according to the KSE data.
US groups Philip Morris and PepsiCo earned $775mn and $718mn, respectively. Swedish truckmaker Scania’s $621mn Russian profit in 2022 made it the top earner among companies that have since withdrawn from the country.
Although Raiffeisen, the largest western lender operating in Russia, has said it “does not have access” to its profits in the country, it has not written off the value of the business.
Philip Morris declined to comment. PepsiCo and Scania did not respond to requests for comment.
US-based businesses generated the largest total profit of $4.9bn, the KSE numbers show, followed by German, Austrian and Swiss companies with $2.4bn, $1.9bn and $1bn, respectively.
The KSE compiles its data from sources including the Russian company register, news reports and corporate statements.
The inaccessible funds add to the costs international businesses face from the fallout of Russia’s assault on Ukraine. The Financial Times reported last month that European companies had reported writedowns and losses worth at least €100bn from their operations in Russia since last year’s full-scale invasion.
German energy group Wintershall, which this year recorded a €7bn non-cash impairment after the Kremlin expropriated its Russian business, has “about €2bn in working interest cash . . . locked in due to dividend restrictions”, investors were told on a conference call in February.
“The vast majority of the cash that was generated within our Russian joint ventures since 2022 has dissipated,” Wintershall said last month, adding that no dividends had been paid from Russia for 2022.
Some companies have found ways around the restrictions. The Russian subsidiary of US food group Mars last year paid 56.1 per cent of dividends to its parent company by “offsetting them against its debts”, according to its annual financial statement for 2022.
The Russia division of Japan Tobacco International, the only big cigarette group that has not committed to seek an exit from the country, last year paid $180mn to its sole shareholder JTI Germany, with 20 per cent of it distributed after the invasion of Ukraine, according to the group’s Russia statement for 2022.
The company told the FT it had made the payments from its 2021 earnings, while no dividend had been paid by the Russian commercial entity relative to the 2022 results.
Philip Morris announced no dividend payments from Russia in 2022. In 2021 its Russian business paid about 6 per cent of its net revenues as dividends to its parent.
Russian officials are yet to outline “a clear strategy for dealing with frozen assets”, said Aleksandra Prokopenko, a non-resident scholar at the Carnegie Russia Eurasia Center. “However, considering the strong desire of foreign entities to regain their dividends, they are likely to explore using them as leverage — for example to urge western authorities to unfreeze Russian assets.”
The Russian ministry of finance last month eased the dividend rules but also formalised a framework of “good” and “naughty” companies, as the Kremlin calls those that want to part ways with the country.
“Allowing dividends to be distributed has long become a kind of encouragement for ‘good behaviour’, which includes making it clear that you want to stay in Russia,” said a person involved in exit deals.
For a company of “unfriendly” origin, repatriation of dividends is already “as complicated as selling a business” in Russia, said the person. “One of my clients lost hope of getting any dividends out of there and just wrote it all off.”
Even some companies from “friendly” countries are struggling to repatriate their dividends.
Russia is preventing Indian energy companies from repatriating about $400mn in dividends, according to India’s top oil official Ranjit Rath.
“We have been receiving our dividend income regularly and it is in bank accounts in Russia,” the Oil India chair and managing director said in May.
Moscow has extended the dividend payout block to Indian energy groups in response to the fact a large amount of money from the export of Russian oil is stuck in India, according to the chief executive of one big Russian company operating in India.
“The rupees used for payment cannot be converted into any other currency,” the CEO said, referring to India’s strict capital controls. “They can only be used to purchase goods in India, but buying something worth billions of dollars for export to Russia is challenging.”
Moscow “is really afraid of capital flight — look at what is happening to the rouble”, the chief executive added, referring to the Russian currency’s sharp decline against the dollar in recent months.
In March, before the rouble began its sharp fall, Russian president Vladimir Putin suggested easing dividend restrictions by allowing “reliable friends and partners” of “unfriendly” origin to withdraw some of their profits if they also wanted to invest within the country.
Instead, five months later extending the ban to them was among the proposals hastily drafted by Russia’s finance ministry to halt the rouble’s slide.
Although Russia managed to bring some support to the rouble using other instruments, a further decline might prompt a re-evaluation of capital restrictions.
Additional reporting by Peggy Hollinger, Euan Healy, Oliver Barnes and Madeleine Speed in London, Patricia Nilsson in Frankfurt, Sam Jones in Zurich, Chloe Cornish in Mumbai, Richard Milne in Oslo and Andrew Edgecliffe-Johnson in New York