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OPINION

The Plunder of Europa. How the West can counter the nationalization of its Russian assets

Announcing the nationalization of Danone’s and Carlsberg’s Russian assets, Vladimir Putin brought expropriation to a whole new level. Previously, Russia squeezed out Western investors by forcing them to sell enterprises for peanuts, but the current method is little short of common theft. Economist Vladislav Inozemtsev believes the EU would do well to ensure the new owners cannot gain profit from the stolen assets – and has every opportunity to do so.

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Vladimir Putin’s special decree in mid-July transferred the Russian assets of two European food and beverage giants, Danone (France) and Carlsberg (Denmark), to the Federal Agency for State Property Management “for temporary stewardship”. The companies had two common traits. Firstly, they had a more significant Russian presence than most transnational corporations, with Russia accounting for 5% of Danone’s and at least 10% of Carlsberg's revenue. Secondly, both had found buyers for their Russian assets and were about to finalize the divestment deals. With Danone's aggregate investment since the company’s arrival in Russia netting at around $2 bn and that of Carlsberg exceeding $1 bn, this daring expropriation marks a new turn in the process I defined as the most flagrant plundering of foreign investors in history back in spring.

Some four months ago, I offered a brief recap of the previous episodes. The Kremlin used to squeeze investors out of the country by forcing them to sell their assets to its appointees for a tiny fraction of their real value and charging a humiliating tax on the minuscule earnings. As of April 2023, this technique yielded $30-34 bn in seized assets (30 times as much as the government earned in the notorious “loans for shares” auctions in 1996 and five times as much as transnational corporations lost in Venezuela as a result of Chavez’ and Maduro’s policies).

The Kremlin can rightfully claim the scheme as its know-how: using the nationalization framework, they presented the deals as “voluntary”, thus making it impossible for the ex-owners to challenge them in court (a common practice in the event of nationalization allowing business owners to receive court rulings on compensation from the government; the issue of enforcement is another story). However, the more Putin got, the more Putin wanted, and seized assets proved so useful in appeasing his courtier businessmen that the transition to the current forms of expropriation was a matter of time.

The more Putin got, the more Putin wanted, and seized assets proved useful in appeasing his courtier businessmen

In his take on the Danone and Carlsberg situation, Vladimir Milov remarks that the new mode of nationalization may reflect the Kremlin's desire to retain at least some of the Western companies in the domestic market. As paradoxical as it may sound, his theory is well-grounded: while over a thousand Western businesses have declared their intention to withdraw from Russia, far from all have honored this commitment, and now is the time to remind the hesitant ones that their “moral choice” has a price: a complete loss of their Russian investments. Russia is not about ethics or law. It's about money and power, and nothing else.

There was a time when the Kremlin drew a more or less distinct line between economics and politics, treating European businesses as a “fifth column” that could mitigate political response to Russia's actions. Since the early days of Putin's rule, the Russian economy was largely fueled by foreign investment, which laid the foundations of entire industries like automotive and transport engineering. Today, Putin employs a transactional approach, taking hold of idle assets in the hope that new owners can make them operational again (this is the idea behind selling enterprises to Chinese investors) or seizing fully functional assets to reward his loyalists.

In the next three or five years, Russia is unlikely to benefit from any foreign investment, so it's a free-for-all now. Hopes that Putin will stop this economic madness are as naive as dreams of his return to civilized methods in other domains; therefore, I believe the West would do well to consider a response, preferably both feasible and efficient.

In the next few years, Russia is unlikely to benefit from any foreign investment, so it's a free-for-all now

One such measure is self-evident. Considering the Kremlin intends to maintain seized assets operational – even in traditionally underdeveloped areas like the automotive industry, where it has recently been luring Chinese players – the first step would be to create conditions that make it impossible. Importantly, Putin's pals are wary of such a scenario, which is why businessmen with international ambitions aren’t in a haste to lay their hands on assets any which way they can (one such case is Leonid Mikhelson's Novatek, which offered Shell almost the market value of its share in the oil-extracting facilities on Sakhalin and even spared no effort in facilitating the conversion and export of this amount). This further justifies the decision to set up a mechanism of sanctions against entities and individuals who end up beneficiaries in the event of nationalization or serve as the key partners for the new owners of companies seized from Western investors.

The following two cases can prove my point. Avilon and its partners recently disclosed the amount they’d generously paid to Volkswagen for its plant in Kaluga: €250 mln, with an initial purchasing price of over €570 mln. Unable to operate the plant, which mostly assembled cars from European units and parts, the Russian owners leased it to the Chinese manufacturer Chery, which intends to use it for several of its car models. One of China's largest by international presence, this corporation sells almost 500,000 cars a year outside the PRC; furthermore, it intends to market its new electric car, Omoda 5EV, in Europe, focusing on Germany, Spain, and Italy, and its main design center is located close to Frankfurt am Main.

To my mind, European regulators could easily impose sanctions on this company, restricting its European business activities and access to European goods and services. Otherwise, the situation would be ridiculous: making exorbitant profits on the stolen German assets in Russia, the Chinese giant would enjoy an unfair advantage, squeezing German electric cars off their domestic market. Not to mention the fact that Europeans, who delivered a powerful blow to Russia’s automotive industry, are unlikely to stand by and watch its revival facilitated by the use of stolen European equipment.

Europe should impose sanctions on companies whose Russian profits originate from stolen European assets

Admittedly, not all schemes are that simple. Take Danone or Carlsberg, for instance: the companies cater to the domestic market and are largely independent of export. And yet, as many tend to say these days, it's not all black and white. Upon entering Russia, Danone (a fact the new chairman, the nephew of Chechen leader Ramzan Kadyrov, might not be aware of) created a new starter culture supply line, monopolizing this market: 80% of these ingredients are provided by Danone’s French asset Danisco and a Danish manufacturer called Chr. Hansen А.S.

The brewing industry is even more intriguing: Russia boosted its hop harvesting in 2022, only to reach 200 tonnes a year against the industry's needs of 9,000 tonnes (calculate the demand for import substitution for yourself), and the rest had to be imported from the Czech Republic and Germany. Neither starter cultures nor hop are on the list of banned exports to Russia because the current sanctions do not concern foods. However, why not sanction these specific products as well, in response to the Russian government nationalizing Western assets in the dairy and brewing industries? And give a hint that any industry Putin may choose to expropriate from inside his bunker would be dead in the water without the supply of essential raw materials.

Countering nationalization with sanctions appears to be the most natural and legitimate response Proposed by the countries whose companies sustained the biggest damage, such sanctions could be imposed on the EU level, becoming an efficient and sustainable mechanism. This way, the EU would sustain minimal losses while “knocking out” Russian industries with multi-billion turnovers and making the impact tangible for tens of millions of “blameless” Kremlin subjects.

Countering nationalization with sanctions appears to be the most natural and legitimate response

The next logical step would be to draw up a register of losses incurred by European businesses in Russia, similar to the already ongoing process of recording and assessing the damage Russia has inflicted on Ukraine. The residual book value of such assets as of early 2022 is indicated in the companies’ accounting statements, which form part of the parent corporations’ reporting, so one should have little difficulty in calculating the damage by subtracting the amounts paid. At the European level, a compensation fund could be set up – and since G7 leaders recently committed to keeping Russian assets under sanctions until Russia repairs the damage inflicted on Ukraine, a similar decision could be made regarding companies whose Russian assets ended up nationalized.

The frozen European assets of Russian entities with public ownership, including the Bank of Russia, would cover their value in full. This step would enable European governments to fend off pressure from domestic entrepreneurs, who may well express their discontent with the EU's sanctions policy, which may have triggered, to some extent, a“pushback” from Russia (at the very least, Putin presented the nationalization of Fortum and Uniper in early 2023 as a “response” to Germany’s actions). European governments ought to send a clear message that requisitioning foreign property in Russia is not an “issue concerning businesses involved” but an act that will trigger a specific response from the EU and the home countries of the injured companies.

Europe ought to send a message that requisitioning foreign property in Russia is not an “issue concerning only businesses involved”

The innumerable sanctions packages adopted by the European Union since Russia unleashed a full-scale war in Ukraine have dampened the impact of new sanctions: essentially, they are being imposed as punishment for violating earlier sanctions (although such punishment should have been integrated into the initial decisions). However, Putin’s shameless strong-arming of European and American companies into staying in Russia by seizing their non-earning, for-sale assets can and should give rise to a new generation of sanctions designed to curb the Kremlin's economic policy against the backdrop of the war in Ukraine rather than the war itself. I have no doubt that the European business community can lobby for such measures and that Russian society would notice them much sooner than many of the restrictions imposed over the last six months.

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