Options for Russian operations of Japanese companies

Many Japanese companies have suspended or reduced Russian operations for now or are considering doing so given the current geo-political climate. Such downscaling comes with a variety of complications, particularly if a (temporary or permanent) sale is contemplated. It is not unusual for Japanese companies to take a “wait-and-see” approach during such uncertain times, but time may be of the essence as the recently proposed Russian laws may force foreign-owned Russian businesses into administration and nationalisation.

In a nutshell, Japanese companies have three options: staying in Russia, “mothballing” the operations or exiting completely. Each option has pros and cons.

Staying. Continuing operations in Russia obviously has the benefit of retaining the economic benefits of, and control over, the operations; the potential to increase market share at the expense of exiting players; and the avoidance of a convoluted exit process, the drawbacks of which may be significant. On the other hand, various international players that have taken a “business as usual” approach in continuing their Russian operations have seen their reputations and brands tarnished. In addition, navigating international sanctions and export controls, protecting data and IP, and securing the integrity of IT in a volatile environment can be strenuous endeavours. Restrictions on moving money add to the already increased operational complexity. Retaining personnel, particularly expat management, on the ground, and paying them in the agreed currency, may also be challenging.

Mothballing. Mothballing is tantamount to removing day-to-day control from the Japanese parent, while retaining some present and/or future economic benefit and an option for re-entry into the Russian market. Some ways to achieve this include (i) warehousing the business, i.e., temporarily selling it to a trusted third party; (ii) setting up a Russian fiduciary management regime for the business; (iii) having an international trust or foundation hold the shares of the Russian subsidiary; or (iv) a buy-out by local management of the Russian business. In each case, the international seller would have an option or similar tool to call back the Russian business at a future point in time.

The biggest challenges of any of these options will be to (a) agree the valuation to apply at the time of mothballing and upon exercise of the call option; (b) strike a balance between the general waiver of control and agreeing guidelines for management during the mothballing phase; (c) overcome reputational and communication challenges; and (d) manage general counterparty risk in an unstable environment.

Exiting. If a full exit from Russia is the chosen path, the Japanese parent will broadly have five options: (i) a sale to a third party or, if applicable, a joint venture partner; (ii) a sale, or gift, to a foundation; (iii) a management buy-out; (iv) termination or sale of contractual relationships; or (v) winding up. Evidently, the exiting Japanese parent company may find it difficult to generate commensurate proceeds from a sale, as the pool of potential buyers will be shallow and are likely to leverage the “forced sale” context of the deal. Public communication around the exit will also need to be managed carefully. Importantly, while any buyer of the business will insist on acquiring fully functional operations, the seller may want to retain critical technology, software, IP, data, and other assets.

Russian government involvement. Overlaying many of the above mothballing and exit scenarios is the likely requirement for antitrust and potentially other governmental approvals, giving Russian authorities an opportunity to block the transaction. Implementing the chosen solution may therefore be somewhat of a gamble, especially in high-profile deals.