If since the beginning of the Russian invasion of Ukraine, the percentage of companies that closed operations in Russia has risen sharply by mid-April 2022, in the last 10 months the ratio of those who leave or stay is virtually unchanged, although we still see a periodic increase in the share of those companies that remain in the Russian market (by adding new companies to the database, 21 were added in July 2023). However, if to operate with the total numbers in KSE database, about 35.8% of foreign companies have already announced their withdrawal from the Russian market or suspended their activity, but another 41.0% are still remaining in the country, 15.5% are waiting and only 7.7% made a complete exit³.

At the same time, it is difficult not to overestimate the impact on the Russian economy of only 255 companies that completely left the country, since in 2021 they employed 29.2% of the personnel employed in foreign companies, the companies owned about 18.1% of the assets, had 16.4% of capital invested by foreign companies, and in 2021 they generated revenue of $62.2 billion or 20.4% of total revenue and paid $3.9 billion of taxes or 15.4% of total taxes paid by the companies observed. Data on 1,470 TOP companies is presented in the table above.

As it is visible on the charts based on data for 2021 above, roughly similar % of exited is obtained based on number of companies (17%) and on share of revenue withdrawn (20%). At the same time, a totally different picture is for those who are still staying – 45% of companies represent 32% of revenue and 16% of waiting companies represent 20% of revenue generated in Russia. The conclusion could be that smaller companies with lower revenue prefer to stay and those who have higher revenue are more eager to wait, limiting their investments as an excuse (at the same time they continue to earn and reinvest their local profit).

KSE Institute has already collected and analyzed data on revenue, capital, assets and net income (profit or loss) in 2022 for ~1370 companies (about 100 companies the data of which we have collected previously have not provided their reporting) and provides below the detailed analysis, more details will be provided further, once we have complete information.

As you can see from the charts above, companies which fully exited Russia were able to generate 2.9% less of revenue in 2022 (17.5% from total volume) than in 2021 (20.4% from total volume, which is clear as most of them left the country before the year-end). Leaving companies also generated much less (-6.1%) revenue in 2022 (21.4% from total volume) than in 2021 (27.5% from total volume). Also, the group of the companies with KSE status “leave” is the only one which became loss-making in terms of net income received in 2022. At the same time, staying companies were able to generate much (+11.7%) more revenue in 2022 (43.8% from total volume) than in 2021 (32.1% from total volume). Companies with status “wait”⁴ gained almost the same share (-2.7%) of revenue in 2022 (17.3% from total volume) vs 20.0% from total volume in 2021. So the key conclusion is that money matters for those companies who are still tied with its local business in Russia.

Summarizing the first results of new data received for 2022 and comparing it with 2021 we can see the positive trends in terms of significant revenue and capital decline. Only assets have almost not changed ($277.1bn in 2022 vs $289.3bn in 2021) and will probably even increase once we receive remaining reporting for ~90-100 companies (until companies decide not to disclose it). KSE Institute has already published a large-scale study “How the income of foreign businesses in the Russian Federation has changed in 2022 and why so many companies still do not leave“. You can familiarize yourself with the English version by downloading the report at the following link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4453963.

On the chart below, share of exited and other statuses based on revenue-2021 allocation is shown. It is worth mentioning when we analyze status “leave” also pay attention to sub-statuses (suspension could be treated as a temporary pause in operations while withdrawal – is a clear sign of the company’s intention to exit Russia in full).

% of exited is 21% based on revenue allocation, those who are leaving represent 27% of total revenue (with 34% share of suspensions and 66% of withdrawals sub-statuses), % of staying companies represent 32% of revenue and 20% are waiting companies based on revenue generated in Russia in 2021.

If we take a look at the same chart based on revenue-2022 distribution – the picture will be totally different:

% of exited is 18% based on revenue allocation, those who are leaving represent only 21% of total revenue (with 26% share of suspensions and 74% of withdrawals sub-statuses), % of staying companies represent 44% of revenue and 17% are waiting companies based on revenue generated in Russia in 2022.

Key conclusion could be the following: on the general background of falling revenue in 2022 companies which made the decision to leave earned less than those who stayed and more companies migrated from the “suspension” sub-status to “withdrawal” showing their increased intention to cut ties with Russia.

More infographics and analytics see in the special section of our website at the link https://leave-russia.org/bi-analytics

Key updates from the latest Russian news:

Against the backdrop of massive anti-Russian sanctions imposed in connection with the invasion of the Russian Federation into Ukraine, it became known that Russian business was given the opportunity to buy the assets of the departing companies at a significant discount.

As “Novaya Gazeta Europe” reports⁵, after the start of the war, more than 100 new large owners appeared in Russia. Assets of Western companies bought – as a rule, for nothing – already brought them at least 223 billion rubles (or more than $ 3 billion) of net profit last year.

Even before Russia’s attack on Ukraine, Western companies began to announce their departure from the Russian market, but in reality only about 10% of foreign brands left it.

Nearly half of all assets sold by Western countries (1.6 trillion rubles) was bought up by Vladimir Potanin, Russia’s richest businessman. He acquired Rosbank, formerly a branch of the French Société Générale, and two insurance companies.

Media have named Potanin, who also bought Tinkoff Bank back in 2022, “buyer of the year”. That deal was also a consequence of the war — the bank’s founder Oleg Tinkoff openly opposed the Russian invasion of Ukraine and said that he was forced to sell his company at a huge discount. Potanin, along with other billionaires, also seeks to buy Russian tech giant Yandex.

In second place — far behind Potanin — is Ivan Tyryshkin. The former head of the SPB Stock Exchange acquired Home Credit Bank, a microloan provider, an insurance company, and a collection agency, all of which were owned by the Czech PPF Group. The net assets of its former companies amount to 262 bn rubles (€2.6 bn).

The top 10 includes buyers who have acquired assets in the upstream sector, gold extraction, the manufacturing industry, and financial organizations.

Three buyers from the top 20 were in the red in 2022. Among them is Avtodom, which acquired the currently inactive Mercedes factory, and the state-owned NAMI institute, which got Renault’s share in Avtovaz and Nissan’s plant in St. Petersburg for the symbolic price of €1. Renault retained the right to buy its assets back within six years.

The former McDonald’s chain, now named “Vkusno i Tochka” has also been losing money since the pullout of its American stakeholder. The business was bought by McDonald’s franchise partners in Siberia Alexander Govor and Yury Kushner, both former owners of the coal mining complex Yuzhkuzbassugol. These assets were also sold for next to nothing, but McDonald’s retained the right to a buy-back. McDonald’s estimated its losses from leaving Russia at $1.2 billion. Its net assets in Russia at the end of 2022 were estimated at 41 billion rubles (€410 million).

A total of 14 of all the buyers rated had unprofitable acquisitions in 2022.

Another way to determine who benefited the most from the departure of Western companies is to calculate the net profit of the entities acquired. This amounted to 223 billion rubles (€2.2 billion) for all transactions in 2022. 10 companies have earned over 10 billion rubles (€100 million), whereas for half of the rating their profits exceed 1 billion rubles (€10 million). To calculate this, the experts of “Nova gazeta Europa” subtracted the share of profit that the buyers will receive depending on their share in the company’s authorised capital.

The top-10 buyers when ranked by net income differ sharply from the net assets’ top 10. The only buyers that made it onto both lists are Novatek and Sibur. The most profitable assets went to Novatek — the share of the French TotalEnergies in the Terneftegaz project and Shell’s share in the Sakhalin-2 project. Novatek’s total net profit from these projects in 2022 reached 40 billion rubles (€400 million).

Also, as reported by “Vedomosti”⁶,

the Russian authorities have formed 10 conditions for the exit of foreigners from Russian business.

For more detailed information: https://www.vedomosti.ru/economics/articles/2023/07/14/985254-vlasti-sformirovali-10-uslovii 

Previously, the Minister of Finance Siluanov announced⁷ that “new owners of companies that left the Russian Federation will be obliged to place 20% of shares on the stock exchange”. More details:

https://www.vedomosti.ru/business/news/2023/06/23/981909-vladeltsev-ushedshih-kompanii-obyazhut-razmeschat-aktsii

WEEKLY FOCUS: Russian pharmaceutical market under Western sanctions

The development of the pharmaceutical market is a priority socio-economic task of any country, since, firstly, medicinal products affect the health of the population and the quality of labor resources, secondly, the pharmaceutical industry affects the state of health care, education and other spheres of activity.

Even before the beginning of the Russian-Ukrainian conflict in 2014, many Western pharmaceutical companies had long been present on the Russian market, in particular, they analyzed the Russian market, hired relevant marketers, imported medical goods and localized relevant production in Russia and even transferred some of their own technologies.

In 2014, after the annexation of Crimea, the economic sanctions imposed by the United States and its allies against Russia affected almost all spheres of life, and the medical industry was no exception. However, despite the absence of a direct ban on the supply of medicines and equipment, it is possible to trace the decrease in the volume of supplies of medicines from Western countries to the Russian market. As a countermeasure, the Government of Russia developed the State Strategy for the Development of the Pharmaceutical and Medical Industry until 2020.

As a result, from 2020 to 2022, there is a steady increase in the import of medicinal products. If in 2020 medical products were imported to Russia in the amount of 10.6 billion US dollars, then in 2021 – by 13.2 billion US dollars, and in 2022 by 15.2 billion US dollars⁸.

In 2014, Western countries did not prohibit Western manufacturers from supplying medical equipment to Russia. Thus, by 2022, the Russian medical equipment market could be compared with the German market, which is one of the largest in the world, in terms of the volume of consumption of certain types of medical products. For a number of foreign manufacturers, supplies to the Russian market accounted for a significant share of turnover.

After the start of the full-scale Russian-Ukrainian war in 2022, Western sanctions launched processes of structural changes in many branches of Russian industry.

Since February 2022, the Russian health care system, despite the fact that the sanctions of Western countries did not directly affect it, faced a number of difficulties in the purchase and supply of necessary materials, medical products and equipment, since the majority of the medical component of the Russian market is represented by products of foreign manufacturers. At the same time, prices for a number of foreign medicines have risen, or even stopped their supply altogether, the emigration of Russian medical specialists and problems with import substitution of Western medical equipment and components, etc.

Difficulties with logistics appeared, the delivery time of medical products increased, and many Russian medical products began to be produced from imported raw materials, which already provoked an increase in the corresponding prices. Russian doctors faced the suspension of membership in international organizations, the problems of exchanging experience, and communication with foreign specialists.

Another challenge for Russian medicine was the influx of wounded Russian soldiers to hospitals on the territory of Russia and in the territories occupied by Russia.

For reference: Russia is struggling with a military health crisis after losing an average of about 400 people a day for 17 months. It is likely that up to 50% of Russian combat casualties could have been prevented by providing proper first aid. Russia’s military losses have undermined the normal provision of some Russian civilian medical services, especially in border regions near Ukraine⁹.

Another issue that hit clinical medicine quite hard is the suspension of foreign international clinical research in Russia. At this time, in Russia, access to testing, to the study of new molecules, new medical products is actually closed, which in the future may greatly affect the quality of the provided medical services. Before the war, Russian manufacturers accounted for about 60% of the medical products that were on the Russian pharmaceutical market. 80% of active medical substances in Russia are imported by foreign and Russian pharmaceutical companies from countries that are not “friendly” to Russia, and after appropriate registration and packaging in Russia, these medical products are considered Russian. Also, 90% of Russian medical firms use Western equipment and need Western support at least in order to properly package the dosed medicine. Currently, very serious changes are taking place in this market. Supplies from the countries of Western Europe, the USA, and Switzerland are being replaced by supplies from India and China. But not all medical products can be replaced by Russian ones or imports from China, India and Turkey.

Another challenge for the Russian pharmaceutical market was the buying/selling ratio of the Russian ruble to the US dollar in 2022. The exchange rate of the US dollar affects the price of foreign and Russian medical products, in particular, Russian medical products, since substances used by Russian pharmaceutical companies are mostly purchased in Western Europe.

Considering this, Russian pharmaceutical manufacturers are looking for new options for relevant purchases in China, India, Turkey and other countries. They do not have to wait for the redistribution of the market in favor of the domestic segment due to logistical problems. The main suppliers of raw materials for the manufacture of medical preparations are India and China. Also, most of the medical equipment and components are products of European and American companies. Even without a direct ban on the use of these technologies on the territory of Russia, the volatility of the ruble exchange rate will lead to an increase in the price of the use of these technologies, and, as a result, medicine will be less and less accessible to ordinary citizens of the country.

Sanction measures related to the military and political events in Ukraine did not directly affect the medical supply of the Russian population, but were of an indirect nature. The main task that the participants of the Russian market had to solve was logistical. At first glance, the Russian pharmaceutical industry was not affected by Western sanctions – only 21 pharmaceutical companies announced their exit or suspension of operations from the Russian market in 2022, including such global giants as the American companies Bristol Myers Squibb and Eli Lilly, Japanese company Takeda, Swiss Sandoz etc. At the same time, at least 139 companies continue to work on the Russian market (data from the Kyiv School of Economics as of the middle of July 2023). In 2022, they earned at least 14.3 billion US dollars in revenue (and it was almost unchanged from 14.4 billion US dollars in 2021). At the same time, a number of foreign pharmaceutical manufacturers are making great efforts to continue working with Russia.

For reference: five global pharmaceutical companies are currently operating in Russia, which did not leave after the beginning of Russia’s large-scale invasion of the territory of Ukraine. Each of them paid tens of millions of US dollars to the Russian budget last year, in particular, this is the company Stada (Germany), the amount of taxes for 2022 is 53.6 million US dollars, this is the company Servier (France), the amount of taxes for 2022 is $46.2 million, this is the company KRKA (Slovenia), the amount of taxes for the year 2022 is 42 million US dollars, this is the company Berlin-Chemie (Germany)/Menarini Group (Italy), the amount of taxes for the year 2022 is 36.9 million US dollars, this is the Gedeon-Richter company (Hungary), the amount of taxes for 2022 is 32.6 million US dollars. Thus, the total amount of taxes paid to Russia by these five foreign pharmaceutical companies last year amounted to more than 211 million US dollars¹⁰.

Pharmaceutical products currently account for about a third of all Swiss exports to Russia. Since the full-scale invasion of the Russian Federation into Ukraine, it has grown by approximately 40% to two billion Swiss francs. Many large pharmaceutical companies are registered in Switzerland, including Novartis and Roche ¹¹.

The revenue of the key Russian branch of Novo Nordisk – Novo Nordisk LLC in 2022 amounted to 15.39 billion rubles, of which the net profit was 690 million rubles, in particular, an increase of 15% and 131%, compared to 2021, respectively¹².

Considering the above, it is worth noting the following. During the war and the introduction of Western sanctions, only some Western pharmaceutical companies decided to significantly limit their work on the Russian market. At the same time, more often than not, alternatives were found for the medical products that the Russians lost. However, the collapse of the clinical research market became a real problem. Because of it, Russia risks facing the denial of new medicines into the country. Also, during the year, the prices of medical products, the cost of which is not regulated by the State, increased significantly.

For reference: during the war, the prices of medical products in Russia, which are not controlled by the State, increased by an average of almost 18%¹³

It has become much more difficult for hospitals to repair and purchase foreign equipment, as well as to buy the corresponding consumables, since, in some cases, medical products are subject to sanctions regarding the ban on the export of dual-use products and, above all, the war of Russia against Ukraine is a ticking time bomb that laid under Russian hospitals, polyclinics, pharmacies, under the very future of Russia.