Thanks to the tangible thaw in US-Russian relations, Russian President Vladimir Putin has ordered the government to work out the conditions for firms to return. The list is ready, The Bell reported on April 10.

A special government commission will assess all applications for market re-entry, with approval contingent on fulfilment of a range of industrial and political criteria. Without this authorisation, companies will not be permitted to resume operations in Russia. No one has applied to return so far, but a few firms have expressed an interest.

Putin opened the door for the return of Western companies towards the end of February, but made it clear that they could only return on the Kremlin’s terms and in a way that was beneficial to the Russian economy.

On the downside, any firm that took sides against Russia in the Ukraine conflict would be barred from operating.

On the upside, the Kremlin is going to force companies to localise production of inputs – something that the Kremlin was trying to get companies to do for years, especially in the automotive sector – without much luck. The goal is to accelerate the modernisation of Russia and promote import substitution, something the Kremlin has not made much progress with.

Specifically, the conditions, reported by Russian business daily RBC, include:

• Obtain approval from a special government commission (without which re-entry is not possible);
• Guarantee localisation of production within Russia;
• Commit to technology transfer and creation of research centres;
• Establish performance indicators for investment in development (KPIs);
• Comply with requirements for the level of robotisation in production;
• Form joint ventures with:
  • Existing Russian shareholders of the former business, or
  • Systemically important Russian enterprises;
• Prioritise inclusion of products in the Ministry of Industry and Trade’s list of 329 items for import substitution;
• Allow Russian businesses to pre-assess risks and vote on the advisability of a foreign firm’s return;
• Demonstrate previous compliance when exiting the Russian market:
  • Fulfilled financial obligations (e.g. paid salaries, no outstanding debts)
  • Did not support foreign agents, the Armed Forces of Ukraine or other hostile entities.

 

Many companies left Russia, selling their businesses to their local management in widespread MBOs, and many of these deals included a buy-back option should relations improve. However, the Kremlin has indicated these options will not be respected.

In the case of the Renault carmaker that was in a joint venture with Russian automotive titan AvtoVaz, the French firm sold its stake for a reported RUB2, but with an option to buy it back for the same price. However, a few days after Putin’s comments, AvtoVAZ president Maxim Sokolov said that Renault would have to pay $1.3bn if it wants its shares back, the amount of “extra” investment the Russian car company had to invest as a result of Renault’s departure.

In other sectors, especially retail, requests by foreign companies to retake control of their franchises will simply be ignored. McDonald’s, for example, spent three decades building up its chain, which was taken over by Vkusna i Tochka (Tasty. Period), including its flagship outlet on Pushkin’s Square in central Moscow. Since then the new owner has continued to invest, rolling out new stores in Russia’s regions and reported that the chain had become more profitable than the original after the first year of operations.

Most of the new owners have little incentive to sell them back to their original owners. During the exodus Russia saw one of the biggest transfers of wealth and property in its history, where entrepreneurs and managers picked up mature and profitable businesses with hundreds of thousands of dollars of turnover at very deep discounts. Franchises such as McDonald’s, if it returns at all, will be forced to start from scratch.

Encouraging foreign direct investment (FDI) is a classic goal of any government, as it brings not only the transfer of technology, but also management skills. But the Kremlin has been frustrated by the reluctance of international companies to set up full production lines in Russia. In the automotive sector just under two thirds of car parts continue to be imported from the European Original Equipment Manufacturers’ (OEMs) Western European parts plants as a way to prevent the authorities usurping their industry. In other businesses, like the French DIY retailer Leroy Merlin, the international companies have been more proactive, making investments in light manufacturing production after Chinese wages, a major source of product cost, overtook Russian labour wages. One of the most active foreign investors was Swedish furniture retailer IKEA – it refused to leave Russia after the invasion of Ukraine – which set up a credit scheme to finance the construction of Russia-based factories to make their products. However, the bulk of Russian FDI is the reinvestment of profits earned by multinationals operating in the market – a quirk of Russian national accounting is this reinvestment is counted as FDI, which is not the case in most markets – and not true FDI, which remains small by most emerging markets’ standards.

Now the Kremlin intends to force international firms that want to return to make these commitments by fiat rather than market forces.

In addition to the localisation of production, a key requirement includes the establishment of research centres, and the setting of specific investment performance indicators. Authorities will specifically evaluate technological contributions, such as the level of automation: Russia currently operates just 19 robots per 10,000 employees, compared with the global average of 162 and will set KPIs relating to the number of robots used in a new factory.

Foreign firms must also form joint ventures with Russian partners – either existing shareholders from their previous Russian operations or state-designated “systemically important” companies, but this will be done in terms of delivering as yet undefined “benefits” for the domestic economy.

The Ministry of Industry and Trade will prioritise applications from companies making products on the list of 329 items crucial for import substitution, but their domestic partners will also have a say in the process.

Applicants will also have to demonstrate their neutrality on sanctions and the Ukraine conflict. Moreover, they will need to prove they settled outstanding wages and cleared debts during their exit.