What happens if Russia expropriates western companies?

Apple, McDonald's, Mercedes-Benz, IKEA, Volkswagen — the list goes on... and on and on.

At the time of publication, 400 foreign companies have reduced or completely halted business activities in Russia in protest of the country's invasion of Ukraine, according to researchers at Yale University in the United States. The move has closed down restaurants, retail locations and production facilities in Russia and halted many exports to the country.

Last week, Moscow threatened to expropriate many of these firms, saying it is working on steps to nationalize public companies owned primarily by foreign shareholders. This move is also in part a response to recent sanctions from Western governments, which have shown themselves more unified and aggressive than the Kremlin perhaps expected.

"This is a completely different animal, a completely different game," Michael Rochlitz, a Russia expert and professor of institutional economics at Bremen University in Germany, told DW, making a comparison with the response to Russia's annexation of Crimea in 2014.

In a best case scenario, with the current sanctions that are in place, Russia is looking at a 10% to 15% drop in economic activity in 2022 alone, he said.

"This is a huge blow, basically more than the 2008 financial crisis, and completely self-inflicted," said Rochlitz. "Putin expected some sanctions, but he didn't expect such massive sanctions. And now he's trying to do something in return."

See you in court

"It would take us back 100 years to 1917," Russian metal magnate Vladimir Potanin said of the move last week, referring to the 1917 Bolshevik revolution, a time of economic crisis in Russia. Potanin is a prominent Russian billionaire who, unlike many others, has not been sanctioned by the West.

"The consequences — a global lack of confidence in Russia from investors — we would feel for many decades," he wrote on the Telegram messaging app.

The Russian Prosecutor General's office has said the move is meant to protect workers affected by the closures. American fast food chain McDonald's alone employs 62,000 people in Russia. But that justification seems flimsy considering many of the companies have said they will continue to compensate Russian employees.

"Any lawless decision by Russia to seize the assets of these companies will ultimately result in even more economic pain for Russia," White House spokesperson Jen Psaki wrote on Twitter.

It's also liable to land Moscow in an international arbitration court, according to Marc Bungenberg, an international investment law specialist at Saarland University in Germany.

"Russia will most likely say: 'Well, we have specific circumstances and this expropriation was justified'," said Bungenberg. "I don't see any grounds for justification here at this point in time. It is the free choice of every enterprise to leave the country, to stop being active."

Frozen assets

However Russia sees it, if the courts rule in favor of the companies, Russia could be ordered to compensate them for losses and damages. But would Moscow pay up?

"Then it gets really difficult," said Bungenberg. Enforcement proceedings would be initiated, a process that requires finding and seizing state-owned assets abroad.

A model for this could be what happened after Iraq invaded Kuwait in 1990, said Bungenberg. Back then, the United Nations Security Council formed a commission that acted as a type of an arbitration tribunal, which then had Iraqi assets frozen. From these frozen assets, damages were given to claimants directly.

Opening empty stores

There's also the question of what Russia would do with the assets seized from foreign companies, which include both store space as well as farms and production facilities. Western retailers like Zara, H&M and IKEA have a strong presence in Russia and employ many people, but most of their products come from abroad.

"It's all imports," said Rochlitz. "So these stores are going to be empty, and then you have the personnel, but nothing to sell. It doesn't make sense."

The state could try to subsidize these people's salaries, he said, but would quickly run out of funds since sanctions currently prevent them from borrowing on international markets.

"What could work, in the short run, is food supplies," said Rochlitz, pointing to the example of international agriculture companies that produce milk and cheese in Russia, which could be nationalized with relative ease.

Closing the market

Harder to take over would be facilities run by foreign carmakers like Volkswagen, Toyota and Renault, which have spent years establishing production facilities in Russia, but which rely on imports to get most of the components they need to build their vehicles.

In a scenario where the Ukraine conflict drags on and sanctions remain in place for many years, Russia might be able to reorient production toward inputs from China, said Rochlitz.

"Then they really have to think about how to react," he said. "Eventually, they might be able to produce cars with Chinese inputs for the Russian domestic market. Not for export, however, because these cars would most likely not be competitive on a global market."

The fallout from the invasion of Ukraine has damaged Russia's competitiveness overall, Rochlitz said, more than the Russian government or people perhaps realize.

"If you expropriate [these companies] now, in the future, if the sanctions are ever over and we try to build the Russian economy again, companies will obviously think twice before they come back to the Russian market."

Edited by: Uwe Hessler