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Russia considers nationalizing foreign businesses that fled over Ukraine invasion

March 10, 2022

Japanese clothing retailer Uniqlo and US chain Victoria’s Secret also joined the list by announcing they will temporarily close Russian stores, prompting long lines as shoppers queued for what might be their last chance for months to purchase the goods. Similar lines have formed at Ikea, McDonald’s and other departing companies as Russians grow anxious about losing access to consumer products.

During a meeting with government officials Thursday, Putin said Russia must “introduce external management” on departing companies “and then transfer these enterprises to those who want to work,” endorsing a legislative proposal that would create a pathway for the government to take over and eventually sell businesses that quit the country.

Russian President Vladimir Putin said on March 10 that Russia would emerge stronger after overcoming the difficulties caused by the West’s sanctions. (Reuters)

Putin’s remarks are another sign of the economic distress hitting Russia in the wake of unprecedented Western sanctions. The ruble has lost more than 40 percent of its value since the invasion began two weeks ago, prompting Russia’s central bank to restrict trade of the currency to try to halt its fall.

The central bank this week also placed limits on withdrawals from foreign-currency accounts as Western sanctions limit the nation’s supply of dollars and euros, prompting Russians to form long lines at banks to try to withdraw their hard-currency savings.

The signs of consumer panic are early symptoms of turmoil that will grow sharply in the coming weeks, said Maxim Mironov, a Russian economist at IE Business School in Madrid.

As global shipping companies halt cargo deliveries to comply with sanctions, Russia will eventually run short of imported food, clothing and other goods, Mironov said. Russian manufacturers and airlines won’t be able to get the imported components they need to maintain operations. And the ruble’s sharp fall means any imports will be much more costly, he said.

The effect of sanctions and corporate departures “is not like a bomb hitting a house that destroys it immediately,” Mironov said. “People can still buy stuff, people still have some money, people still can at least travel within Russia. But very soon it’s going to be very much different. It’s going to be a disaster.”

Putin on Thursday told his cabinet that Russia “must get through this period.”

“The economy will, without doubt, adapt to the new situation,” he said. “We will continue import substitutions. And all of this will lead to the strengthening of our independence, self-sufficiency and sovereignty.”

The nationalization proposal would allow the government to request a court order to impose external management on the factories, shops and other facilities that departing companies leave behind to “prevent bankruptcy and preserve jobs,” Putin’s party, United Russia, said in a statement this week .

External management would last for three months, after which the government would put the businesses up for auction, the party statement said.

The rule would apply to companies in which “unfriendly nations” own more than 25 percent and which “stop operations” in Russia, Putin’s political party said.

Companies will be able to halt the nationalization process if they restart their businesses within five days of the court order or sell their assets in a manner that preserves the business activity and jobs, the party said.

The proposal is one of several that Russia has floated or approved in recent days to retaliate against “unfriendly nations.” One government decree issued this week essentially allows Russian entities to violate Western patents, a step Russia could take to try to produce “devices and technologies that disappear from the Russian market or will be in short supply,” the law firm Baker McKenzie said.

The companies have cited several reasons for fleeing, including outrage over the Ukraine invasion and difficulties processing payments and importing supplies into Russia because of Western sanctions.

Uniqlo said it is facing “operational challenges” in Russia and is opposed to “all forms of aggression that violate human rights and threaten the peaceful existence of individuals.”

Goldman Sachs said it is “winding down its business in Russia in compliance with regulatory and licensing requirements.”

McDonald’s, which is temporarily closing 850 restaurants, will continue to pay its 62,000 Russian employees and make lease payments on its locations in the country, Kevin Ozan, the company’s chief financial officer, said in a meeting with analysts this week.

He estimated those payments and other costs associated with closing down business will total $50 million a month.

“We expect this to be temporary, and we certainly don’t take this decision lightly,” he said.

Vyacheslav Volodin, speaker of the lower house of parliament, the State Duma, said Thursday that Russian-branded restaurants should take over McDonald’s locations.

“They announced they are closing. Well, okay, close. But tomorrow in those locations we should have not McDonald’s, but Uncle Vanya’s,” he said. “Jobs must be preserved and prices reduced.”

Mironov, the economist, said many Russian leaders don’t grasp what it would take to continue running these companies.

Ikea “furniture is not growing inside the stores. … Many officials don’t understand how the modern economy will run,” he said. “If you have a BMW factory but BMW will not ship you components, what is the point? If you seize Ikea and Ikea isn’t going to ship you products, it’s not going to work!”

Douglas MacMillan contributed to this report.

Russia considers nationalizing foreign businesses that fled over Ukraine invasion

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