Russian President Vladimir Putin has opened the door to Western companies’ return to the Russian market, but only on the Kremlin’s terms and only after sanctions are lifted, the Russian president said on February 21.

Putin ordered his cabinet to prepare for the potential return of Western companies to Russia, while ensuring domestic businesses receive preferential treatment as compensation for sanctions imposed by the West.

The order is the first time since Russia invaded Ukraine three years ago that the Kremlin is open to restarting commercial relations with international companies and comes only days after ceasefire talks to end the Ukraine conflict began in Riyadh on February 18.

That meeting went well as Secretary of State Marco Rubio, who led the US delegation, also suggested that the US was willing to restart business relations with Russia. He said there was an opportunity to “unlock a historic US-Russia economic alliance” if a deal could be struck. Russian Foreign Minister Sergei Lavrov, who led the Russian delegation, also suggested that part of the deal might include sanctions relief.

European leaders were blindsided by US President Donald Trump’s decision to exclude Europe from the talks and have been disconcerted by the warm relations and talk of restarting business relations from the US delegation.

In particular, jointly developing oil and gas projects in the Arctic was on the agenda. "It was more a general discussion – maybe joint projects in the Arctic. We specifically discussed the Arctic," Kirill Dmitriev, the head of Russia's sovereign wealth funds, the Russia Direct Investment Fund (RDIF), told journalists after the meeting.

Another member of the five-man Russian team was Vladimir Proskuryakov who works in the Russian Embassy in Canada. A low-profile diplomat, in the company of Soviet-era veterans Russian Foreign Minister Sergei Lavrov and Yuri Ushakov, Putin’s top foreign policy advisor, Proskuryakov is a specialist in Arctic affairs. Pre-war US oil company ExxonMobil was developing oil and gas projects in Russia’s Arctic regions, but exited the market after the war began.

The oil and gas sector is the one sector where the Kremlin is still dependent on Western technology. Russia’s privately-owned Novatek LNG-champion has been trying to develop a second train at its Arctic LNG-2 plant, but progress has been stymied by US sanctions on the sale of specialist equipment that is totally controlled by the US. Lifting these sanctions would allow Russia to fulfil plans to triple LNG production in what remains an undersupplied market. The US for its part is interested in regaining access to Russia’s vast deposits in the Arctic region.

But the return to the Russian market for most companies will be difficult and for some impossible after they have given their market shares away to rivals from countries like China. Speaking at a forum in Moscow on February 21, Putin said Russian firms should have “certain advantages” over “those that return to our market.”

 

Many Western companies would be happy but many Western companies would be happy to return. While not always their biggest foreign investment, Russia has consistently proven to be one of the most profitable, multinational country managers have told bne IntelliNews over the course of the years.

“It looks bad from the outside, but it’s a gold mine” the French head of Russian subsidiary of DIY chain Leroy Merlin told bne IntelliNews in an interview a few years ago, which has defied sanctions and remained in Russia.

Most of the European Original Equipment Manufacturers (OEMs) carmakers have exited Russia and had their factories taken over by local companies and entrepreneurs. Their market share has also been snapped up by Chinese and Iranian rivals and will be almost impossible to recover. Renault-Nissen exited its joint venture to run the Russian automotive giant AvtoVaz and was paid a nominal two rubles. While it has an option to buy its stake back for the same amount, analysts say it is very unlikely to be readmitted to the Russian market as the car making business has now fully recovered from the sanctions-crash and is dominated by Russian and Chinese producers.

McDonalds famously was a very early entrant to the Russian, opening its first iconic outlet on Pushkin’s Square in the heart of Moscow in 1990 before the Soviet Union fell. After the Ukraine war started it exited the market and was taken over by Vkusna I Tochka (Tasty. Period), which has claimed in the meantime to have overtaken the American company’s sales record in the first year of operations and has continued to expend its chain in the Russian regions. KFC also sold its franchise back to its Russian partner Rostiks and will also struggle to establish itself on the Russian market. The story is similar for a raft of retailers and FMCG goods producers.

However, companies like Boeing will be very happy as Russia remains its only viable source of titanium that is essential in the manufacture of planes. At the conference last week First Deputy Prime Minister Denis Manturov told reporters that Russia is ready to consider restarting cooperation with Boeing in titanium purchases if the US producer is ready.

"As regards cooperation with Boeing, it was traditional for a long time, before the special military operation. When Boeing decided to leave the titanium valley, where relevant production facilities were actually created for primary titanium processing, they purchased in large quantities not merely ‘blanks’ but ready items, ready parts for their airplanes. If they want to return, we are ready to consider," Manturov said, TASS reports.

"But let sanctions be cancelled at first, and then it will be possible to talk about the return," Manturov said. "So far, nobody asked for anything.”

Dmitriev claims that US businesses lost $324bn by pulling out of Russia. However, KSE estimates that US companies held only $52bn in assets in Russia and generated $36bn in revenue from 2021 to 2023, the Financial Times reports.

Reluctant to leave

White House and Brussels have imposed extreme sanctions on Russia and tried to break off all commercial ties, Western companies have been less enthusiastic about exiting the largest consumer market in Europe. Less than 9% of western companies working in Russia pre-war have actually left the market, or 472 foreign companies have completely exited the Russian market, while another 1,360 have scaled back their operations, according to Kyiv School of Economics (KSE).

Some western companies like French supermarket chain Auchan have simply refused to leave, having invested billions of dollars into their Russian business and turning over multiples of that in sales each year.

Other businesses, like Raiffeisen Bank, have dragged their heels, saying it is having problems finding a buyer for the business that is willing to pay a reasonable price.

But the vast majority of those that have left simply sold their businesses to their local management team in a wave of MBOs, with an option to buy the business back should sanctions be lifted. Many of these companies continue to sell the same goods as before, which they import independently via third party traders.

Many of the high profile multinational producers of FMCG (fast moving consumer goods) goods and consumer electronics closed their Russian franchises, but their products quickly reappeared on the shelves in Moscow as traders took over. Following the release of the latest Apple phone 14, it was available in stores in Moscow before it was released in London. These imports come via the so-called friendly countries like Turkey and Kyrgyzstan, where the volume of trade has risen by hundreds and even thousands of percent.

Russia has been enjoying a consumer boom since the war started, driving up real disposable incomes up to record highs. Germany’s luxury car makers were lobbying Brussels for exemptions on export sanctions to Belarus last summer, where top-of-the-line cars are transshipped before arriving in Moscow.

Russian companies have also become more adept at avoiding sanctions by building long supply daisy chains of intermediary making it impossible to check where the goods are ultimately headed. One EU study found that Russian importers can set up as many as 40 intermediate shell companies scattered around the world to facility the imports of sanctioned goods. Last year, KSE found that Russia imports a third of its battlefield technology form Western companies. The volumes of non-sanctioned goods arriving in Moscow are now as much as before the war, or higher.