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Russia Seizes Two Western Business Operations, Raising Supply Chain Risks

August 17, 2023

Client Alert | Article

Russia took direct control of Danone’s Russian operations and Carlsberg-owned Russian brewery Baltika on July 16, 2023. Danone and Carlsberg were in the process of selling their Russian assets when the Kremlin blocked their attempts to divest and instead nationalized them.

The moves reflect an assumption that Western businesses will not return anytime soon to continue business in Russia, and that key Kremlin allies require rewards to ensure continued loyalty.

A nephew of Chechen strongman leader and key Kremlin ally Ramzan Kadyrov will take over Danone’s operations, while Taimuraz Bolloev, a personal friend of Putin with business connections to important allies of the establishment, will run Carlsberg’s Baltika brewery. Both developments are red flags for foreign ownership, control or influence (FOCI) risk in supply chains.

According to Alexandra Propenko, a former Russian Central Bank official, the decision to nationalize can be partially explained by Russia’s relinquishment of the “hope that [Western] business as usual would make a comeback and Russian companies would avoid having their assets nationalised in Europe. Putin’s decree shows the Kremlin has abandoned those hopes.”

Putin Executive Order Paves Way for Takeovers

The takeovers of Danone and Carlsberg were conducted on the basis of an Executive Order signed back in April 2023, which initially only targeted foreign state-owned companies.

Russian President Vladimir Putin signed the order, “On the temporary management of assets,” allowing authorities to place assets of firms from “unfriendly states” under the Russian state’s temporary administration. A similar law had failed to pass through the Russian parliament the previous summer.

The same day, the Kremlin nationalized the Russian subsidiaries of Germany’s Unipro and Finland’s Fortum, two large state-owned energy companies.

What Firms Can Learn from Russia’s Action

There are three important lessons that your business can learn from Russia’s decision to start nationalizing private Western companies.

1. Business risks in Russia are dynamic and require constant horizon scanning.

Risks emanating from Russia ceaselessly evolve. The journey from voluntary company sales to highly conditional discounted sales — and then forced nationalizations — reinforces the need to constantly refresh the risk of your firm’s engagement with Russia.

The incorporation of horizon scanning into a firm’s business-as-usual (BAU) work increases the chance of early detection of risks and ensures a constant awareness of changing economic and geopolitical factors. A previously minor, low-risk relationship can quickly become a serious reputational, operational and compliance issue if not monitored.

2. Protracted exits from high-risk jurisdictions carry serious compliance, reputational and operational risks.

The repercussions felt by firms remaining in Russia teaches firms to reconsider the long-term value of a high-cost but well-planned and speedy departure from unstable jurisdictions. Countless Western firms continue their operations in Russia or exist in a state of suspension or protracted withdrawal due to indecision over whether the cost of leaving is higher than the cost of staying – all while negotiating an exit only becomes more costly and cumbersome.

Although those who exited early paid a price, the eye-watering operational, compliance and reputational costs felt by those who remained in Russia teaches firms the value of a quick and conscientious exit.

3. Any remnants of connection to a Russian subsidiary brings elevated sanctions and supply chains risks for the entire business.

If a touchpoint with the newly nationalized Russian entity remains at any point in the supply chain, this could introduce risks throughout the wider business and could result in sanctions.

Endowment of CEO positions of these newly nationalized businesses to high-risk politically exposed persons (PEPs) close to Putin – like Kadyrov’s nephew or Baltika beneficiary Bolloev – only increases the risk that could be unleashed by any remaining connection with the wider business.

How Exiger Helps Reduce and Mitigate FOCI Risks

As Putin’s war in Ukraine continues to present new challenges to supply chains, Exiger can help firms navigate risks with our expert Advisory Services and unique technology solutions.

Exiger’s supply chain risk management solutions like Supply Chain Explorer can help mitigate regulatory, criminal and reputational risk in your vendor population — and reduce operational friction and cost in onboarding vendors. The platform has been used to detect, quantify and mitigate risk in under 24 hours across a number of different supply chain crises and cyberattacks — including Russia-Ukraine war supply disruptions and sanctions.

The proprietary AI and machine learning technology in the Exiger platform helps predict operational disruption to create a more resilient vendor ecosystem that can withstand and more effectively react to shocks like the nationalization of your – or a key supplier’s – foreign subsidiary.

This article was produced by Tom King in Exiger’s Financial Crime Advisory team.