Options for Russian operations of Japanese companies

Many Japanese companies have suspended or reduced their Russian operations for the time being or are considering doing so given the current geopolitical climate. Such downscaling comes with various complications, especially if a sale (temporary or permanent) is contemplated. It’s not unusual for Japanese companies to take a “wait-and-see” approach in these uncertain times, but time may be running out as recently proposed Russian laws could force foreign-owned Russian companies into administration. and nationalization.

In a nutshell, Japanese companies have three options: stay in Russia, “mothball” operations, or exit altogether. Each option has advantages and disadvantages.

Stay. The continuation of operations in Russia obviously has the advantage of retaining economic advantages and control of operations; the possibility of increasing market share at the expense of exiting players; and avoiding a convoluted exit process, the downsides of which can be significant. On the other hand, various international players who have taken a “business as usual” approach to continuing their operations in Russia have seen their reputations and brands tarnished. Additionally, navigating international sanctions and export controls, protecting data and intellectual property, and securing IT integrity in a volatile environment can be arduous endeavors. Restrictions on remittances add to the already increased operational complexity. Retaining staff, especially expatriate management, in the field, and paying them in the agreed currency, can also be difficult.

Mothballing. Mooring means removing day-to-day control of the Japanese parent company, while retaining certain present and/or future economic benefits and an option to re-enter the Russian market. Some ways of doing this include (i) warehousing the business, i.e. temporarily selling it to a trusted third party; (ii) the establishment of a Russian fiduciary management regime for the company; (iii) have the shares of the Russian subsidiary held by an international trust or foundation; or (iv) a local management buyout of the Russian company. In each case, the international seller would have an option or similar tool to call back the Russian business at a later time.

The biggest challenges with each of these options will be to (a) agree on the valuation to be applied at mothballing and when exercising the call option; (b) strike a balance between general relinquishment of control and agreement on management guidelines during the mothballing phase; (c) overcoming reputation and communication issues; and (d) manage general counterparty risk in an unstable environment.

Exit. If a complete exit from Russia is the chosen path, the Japanese parent company will have five options overall: (i) a sale to a third party or, if applicable, a joint venture partner; (ii) a sale or donation to a foundation; (iii) a management buy-out; (iv) termination or sale of contractual relationships; or (v) liquidation. Clearly, the outgoing Japanese parent company could struggle to generate commensurate proceeds from a sale, as the pool of potential buyers will be shallow and likely to take advantage of the deal’s “hard sell” backdrop. Public communication around the release will also need to be carefully managed. It is important to note that while any buyer of the company will insist on acquiring fully functional operations, the seller may wish to retain technology, software, intellectual property, data and other critical assets.

Russian government involvement. Overlaying many of the above mothballing and exiting scenarios is the likely requirement for antitrust and potentially other government approvals, giving Russian authorities the ability to block the transaction. Implementing the chosen solution can therefore be a bit of a gamble, especially in large transactions.

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