The Russia-Ukraine war – withdrawing from Russia?

The reasons for (partially) withdrawing from Russia are manifold. Such a measure may be necessary, for example, to avoid reputational damage or an expropriation by the Russian government. The fact that new sanctions must be expected at any time may also prompt companies to give up their business operations in Russia.

What should companies consider when withdrawing from Russia?

Before the withdrawal, companies should ensure that their Russian and non-Russian operations can run autonomously. To that end, legally separating the Russian activities into individual legal entities through intra-group spin-offs and restructurings may be required. Intra-group supply and service arrangements may need to be replaced with equivalent business relationships with third-party providers or performed by each individual entity. This relates not only to the supply of intermediate products for example, but also to administrative tasks, cash-pool financing arrangements and IP and IT issues. Any know-how and data that is located or stored only in Russia must be "secured".

There are a variety of options for structuring how a withdrawal from Russia could take place. For instance, Russian operations could be transferred to a third party temporarily. Reliable, long-term business partners in particular should be considered as potential transferees in these scenarios. The transferee would need to be based in a state Russia deems "friendly", like China, India and the United Arab Emirates. In this case, the state that is selected ideally should have previously concluded a bilateral investment treaty with Russia. Companies frequently have several options as regards the legal structure. If a company opts for a foundation or a foundation-like legal form such as a trust, a beneficiary must be named. However, the beneficiary cannot be the company that is seeking to withdraw from Russia. By contrast, the options involving intra-group solutions (such as replacing the parent company of Russian subsidiaries with a group subsidiary that is based in a state Russia deems "friendly") are limited. Opting for such a solution entails the risk of it being misinterpreted as an evasion of sanctions or a publicity stunt.

How can companies prepare for possibly reversing their withdrawal?

Companies may, for example, consider leaving open the possibility of buying back their Russian operations using call options once the political situation has improved. Alternatively, a retransfer covenant could be agreed already at the time of withdrawal. In addition, companies may also consider granting financial incentives. For instance, payment of the purchase price could be deferred and the company's shares may be pledged as security for payment of the purchase price. Caution is advised, however, where sanctions have been imposed on certain business activities. Keeping the option of a buyback open might be interpreted as a circumvention of sanctions.

Considering these scenarios, how can companies  prevent their businesses from being managed in the interim in a way that is detrimental?

They may consider incorporating binding requirements into the articles of association or into the transfer agreement, but they will need to factor in the risk that these requirements might not be enforceable. Appointing trustworthy board members and granting financial incentives may therefore be more expedient than taking corporate-law measures. If payment of the purchase price is deferred, the transferring entity, in its role as the lender, might be granted rights to wield influence. Financial incentives, too, may be used to incentivise the acquirer to manage the business going forward as successfully as possible, for instance by making the call option price dependent on the value of the Russian business operations at the time the option is exercised.

As the situation is evolving rapidly, our assessment of this issue might change. If you have any specific questions, please feel free to contact one of our experts directly.