The Central Bank assessed the scale of withdrawal of foreign companies and its consequences for the ruble

During the year, non-residents conducted 200 transactions for the sale of Russian businesses, 5 of them with a check of more than $400 million. Their departure increases the debt burden of buyers, increases the risks of banks, and can also put pressure on the foreign exchange market,count in the Central Bank

Since the beginning of the crisis, from March 2022 to March 2023, foreign investors have made about 200 transactions to sell their Russian assets, the Bank of RUSSIA said in a review.

The Central Bank did not disclose the volume of such sales, but indicated that 20%, or 40 transactions, were associated with the exit of non-residents from large assets, each of which was estimated at more than $100 million. Since October 2022, there have been five transactions with an average check above $400 million, the regulator said.

After the start of the Russian military operation in Ukraine and Western sanctions, many foreign companies announced their intention to curtail business in Russia, sell assets or stop investing. In response, the authorities introduced a special procedure for registering such transactions for non-residents: they can take place only with the permission of a special specialized subcommittee under the government. In August, President Vladimir Putin signed a decree banning exit deals in finance and the fuel and energy sector without a special order from the president.

According to BLOOMBERG calculations , in 2022, foreign companies that left Russia sold assets worth $15-20 billion. AK&M estimated the volume of such sales at $16.31 billion last year.

What risks did the departure of foreigners create?

As noted in the review, Russian consumers have been “impacted” by the exit from the domestic market of large foreign companies from the catering sector, as well as the retail trade in clothing, furniture and household goods. “This, in turn, had a negative impact on the commercial real estate market,” the Central Bank points out.

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According to Sberbank estimates, in December last year, the turnover of trade in 7.8 thousand shopping centers in Russia amounted to 388 billion rubles, which is 4.7%, or 19 billion rubles, below the level of December 2021. The main contribution to the decline was made by the departure of foreign brands (minus 16 billion rubles), follows from the data of the SberIndex service presented by Mikhail Matovnikov, chief analyst at Sberbank, at the All-Russian Banking Conference on April 25.

In general, the Central Bank believes that transactions by non-residents for the sale of Russian assets have increased risks.

First, the change of ownership in some cases leads to "a complete restructuring of the business model of the acquired company."

We are talking about situations where companies have to change the chains of cooperation, if earlier they were based on interaction with counterparties from unfriendly countries and depended on foreign supplies. To mitigate such risks, a government subcommittee is studying "various aspects of how the business will function in the future" before approving the deal.

“Priority is given to buyers with specialized experience in the relevant industry, as well as doing business in related industries,” the Central Bank notes. The review also mentions that the authorities are studying the plans of new owners to develop the acquired business and set KPIs (key performance indicators) for them.

However, the regulator considers the risks of changing business models after the departure of foreigners limited. The review says that a significant part of such transactions involves the preservation of the necessary licenses, patents and supplies of raw materials, materials, components. Many non-residents, when leaving their assets, “leave themselves the opportunity to return”, for example, agreements provide for appropriate options.

The sale of assets by foreigners increases the debt burden of the corporate sector.

Many of these transactions are financed by bank loans to buyers, and the sold companies themselves, as a rule, are deprived of cheaper intra-group financing from the non-resident parent structure. “All this can lead to additional risks for banks. it is important that these risks can accumulate and subsequently manifest themselves more strongly,” the review says. The Central Bank, however, did not disclose the volume of loans issued by Russian banks to finance transactions for the purchase of assets of departed foreign investors.

According to the Bank of Russia, as of April 1, the debt obligations of Russian non-financial companies amount to 45 trillion rubles. on ruble bank loans and $119.4 billion on foreign currency loans, another 9.4 trillion rubles. accounted for by the issued bonds. The debt of this group of clients to non-residents at the beginning of the year was at the level of 13.7 trillion rubles. Although the share of problem loans issued to large companies is low - only 4.7%, some borrowers are beginning to experience difficulties with debt servicing, the Central Bank points out.

“In particular, in the first quarter of 2023, delinquency on loans to commodity and construction companies began to grow,” the review says. The regulator also notes that every fifth loan to large business that fell under restructuring after the crisis began last year was restructured by banks again.

Most of the transactions of foreigners on the sale of assets in Russia were indeed financed by borrowed funds, says Boris Yatsenko, managing partner of the audit and consulting company FBK: -70%, or no more than $14 billion in absolute terms. Compared to the portfolio of corporate loans of Russian banks last year, this is not much.”

According to the expert, this method of financing could be preferable in a situation of a quick exit to a deal. In addition, buying with borrowed funds allows the buyer to “increase profitability”.

“For example, a profitable business with zero or low debt load is acquired, you can buy it with debt, and hang the debt on the asset, so the effective return on equity for the buyer will be higher. These are the so-called LBO-transactions (English leveraged buyout - redemption at the expense of a loan. - ),” explains Yatsenko.

He agrees that the sale of assets by foreigners may increase the debt burden of the corporate sector, but considers these risks insignificant.

“Still, buyers are mostly large, stable companies and funds. I do not think that such transactions greatly increased their debt load. [...] The risks of growth in the debt burden of both buyers and sold companies are not dramatic,” concludes FBK's managing partner.

Settlements with non - residents put pressure on the foreign exchange market .

As noted in the review, payments to sellers are made in the currencies of unfriendly countries, under the new conditions of sanctions, this may cause "bursts of volatility in the foreign exchange market." So far, this factor has not been a key one, but this year its influence may increase, the regulator warns.

How the departure of foreign companies could affect the ruble

In early April, the ruble began to weaken sharply against the main currencies - the DOLLAR and the euro. On April 7, the exchange rate at its peak reached 83.45 rubles. for dollars. On April 4, Kommersant reported that the Russian authorities had approved a deal to sell British Shell's stake in the Sakhalin-2 project to NOVATEK. The package was estimated at 94.8 billion rubles. As Bloomberg wrote, this information could have put pressure on the ruble exchange rate: the deal required converting a large amount, which created an increased demand for the currency. Analysts interviewed by RBC also called this version, but also mentioned other factors that could have an impact on the foreign exchange market. The Central Bank and the Ministry of Finance urged not to overestimate the effects of foreign transactions "on the way out."

“In fact, we are dealing with a market that has become low-liquid - small transactions can greatly move the course,” Matovnikov noted at a conference on May 25. According to the estimates of the chief analyst of Sberbank, at the beginning of this year the volume of highly liquid foreign exchange assets in the banking sector amounted to $52.5 billion, 19.3% more than before the crisis. “However, $10 billion is cash that does not participate in the domestic foreign exchange market, almost half of the remaining is in the accounts of foreign banks abroad that do not participate in the domestic foreign exchange market. The domestic [currency] market has actually become radically small,” he described the problem. In such a situation, even the “miserable $1.5 billion” that was required for settlements with Shell “could not be bought in sufficient quantities in dollars and euros on the market, the company was forced to buy half of the free yuan,yuan liquidity crisis ,” said Matovnikov.

The Bank of Russia pays “special attention” to controlling the risks associated with volatility in the foreign exchange market as a result of exit transactions by non-residents. “Buyers are advised to evenly distribute the purchase of foreign currency in the domestic foreign exchange market,” the regulator said in a review. Earlier, Putin instructed to set a monthly limit of $1 billion until June 1 on the purchase of foreign currency by residents in Russia in case of transactions with foreign companies.