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3 March 2022

For companies that invested in Russia, unloading toxic assets is a difficult business

Companies that have made the laudable decision to sever ties with Russia face a difficult dilemma: abandon their assets, or stay put?

By Emma Haslett

There’s a reason that company assets, such as BP’s 19.75 per cent stake in the Russian state-owned oil producer Rosneft, are called “toxic”: it’s because, like nuclear waste, they’re very hard to dispose of.

On 27 February, three days after Russia’s assault on Ukraine began, the British oil giant declared its intention to get rid of its holding in Rosneft, which is made up of shares, joint ventures and other assets. It’s a laudable decision: BP’s stake in Rosneft is worth $14bn and accounts for about 33 per cent of the total amount of oil that BP produces, according to analysts at JP Morgan. BP isn’t the only company to announce plans to pull out – shortly afterwards, Shell followed suit, saying it will exit its 27.5 per cent stake in a liquefied natural gas project and a 50 per cent stake in two oil fields in Siberia. Others have announced similar plans: Apple and Asos have both said they will cut ties with the country.

Financial markets have been still more decisive: UK-listed Russian shares (Rosneft, Gazprom, Lukoil and Surgutneftegas) have lost as much as $190bn (or 95 per cent of their combined market capitalisation) since 24 February, according to estimates from Saxo Group and Bloomberg shared by Saxo Bank’s head of commodity strategy, Ole Hansen.

But the exodus will leave behind assets that have, despite their connections, considerable financial value. Retailers will leave premises and stock; oil giants will leave assets that may generate billions of dollars a year for their owners. As the mass withdrawal began, one question became apparent: what do you do with assets that have suddenly become untouchable?

The first and most straightforward option – write off the assets – is simple but potentially problematic. Write-offs – in this case, effectively abandoning the assets – are fairly common in the corporate world, although usually they apply to companies or projects that are no longer generating adequate revenue. In this situation, most of the assets being left behind are still making plenty of money – Rosneft’s earnings, for example, hit $31.7bn last year.

In BP’s case, Rosneft’s state-owned status (the Russian government owns about 40 per cent of the company) complicates things further. Simply abandoning it would effectively put BP’s share of the company’s profits straight into the pockets of the Kremlin.

The second option is to look for a buyer, but this too is tricky, given how toxic Russian assets have become in a short space of time. Susannah Streeter, the senior investment and markets analyst at Hargreaves Lansdown, said that the types of buyers that oil companies such as Shell and BP would usually turn to are unlikely to bite in this instance. “Sovereign wealth funds would ordinarily be part of the solution, but [they] already have exposure to Russian oil, and other suitors will be highly tuned into the reputational risk despite the potential for bargains to be had,” she said.

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Even Middle Eastern states, which usually hoover up assets like this, are unlikely to be interested, Streeter continued. “Qatar already holds a significant slice of… Rosneft, but the Gulf state is unlikely to want to expand its stake right now with tensions so high,” she said, noting that “Qatar’s foreign minister has expressed his country’s concern over the violent escalations between Russia and Ukraine.” The same can be said of China, which has historically been an investor in Russia but has said it is “extremely concerned about the harm to civilians” inflicted by the crisis in Ukraine.

[See also: Our dependence on oil is paying for Putin’s war]

This option is further complicated by the fact that on 1 March, Vladimir Putin temporarily banned foreign investors from selling Russian assets. The Russian prime minister, Mikhail Mishustin, said the move was intended to prevent investors from making “decisions under political pressure”. Investors aren’t expecting this situation to last long. If it does, the Kremlin will open itself up to lawsuits, said Roman Sidortsov, an associate professor of energy policy at Michigan Tech and a senior fellow at Sussex University. “[The legislation is] not going to be carefully crafted in a way that says, ‘this is not a de facto expropriation,’” he said. “[The Kremlin] is going to be susceptible to litigation.”

That leaves the third, and most likely, option: keep hold of those assets, and hope things improve. Even without the government holding foreign-owned assets to ransom, this is probably what will happen for most companies that are exiting Russia. Anna Grosman, senior lecturer at the Institute for Innovation at Entrepreneurship at Loughborough University, suggested they may not have to worry about what to do with profits generated by those assets for long, because they will probably depreciate heavily if the occupation continues. “I’m not sure to what extent… historic numbers will continue in the coming years,” she said. “The assets and the cashflows will decrease.” That’s already showing in the oil sector, where 70 per cent of Russian oil is “struggling to find buyers”, according to consultancy Energy Aspects.

Sidortsov said that most of the companies fleeing Russia are braced to take a hit. “We are talking about, essentially, a massive shift in the composition of our entire world,” he said. “It’s possible that they have said: ‘this is so egregious, this is so monumental, that we absolutely cannot continue the way we have.’”

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