Growing fear EU firms in Russia to be forced to fund war

EU countries are preparing to help their companies to exit Russia, amid a growing risk they will be taxed to fund Russian president Vladimir Putin's war.

Proposals for the 11th round of Russia sanctions, seen by EUobserver, include special new permits for financial transactions and legal services designed to help European companies to get out, EUobserver  reports.

The EU has imposed an asset-freeze on more than 1,600 Russian individuals and entities since the war began.

The 11th round will add about 100 more names to the pile.

But under the new proposal, EU countries will now be allowed to authorise financial transfers to blacklisted Russians "after having determined that such funds or economic resources are necessary for the completion of transactions, including sales, which are strictly necessary for the wind-down, by 31 August 2023, of a joint venture or similar legal arrangement established in Russia with this natural person or an entity owned by this natural person before 28 February 2022".

The EU had also banned European law firms from providing commercial services to Russian clients.

But the 11th round proposal aims to relax that as well in order to help disentangle related EU-Russian joint interests inside Europe.

"Competent authorities of the member states may authorise until 31 December 2023 the provision of legal services which are mandatory ... for such divestments to be completed, such as notary services," the proposal said.

More than 1,000 foreign firms have already fled Russia over the past year, according to a running tally kept by Yale University in the US and last updated on 16 May.

But dozens of major EU-based companies are still present in the Russian market.

These include some of Europe's biggest banks (Deutsche Bank, ING Bank, Raiffeisen Bank International, UniCredit) and energy firms (Engie, OMV, and Total).

It includes well-known fashion brands, such as Armani, Benetton, Diesel, and Lacoste.

It also includes: Austrian energy-drink maker Red Bull, Danish medical equipment manufacturer Coloplast, Dutch consumer goods firm Phillips and drinks maker Heineken, Estonian taxi company Bolt, French hotel chain Accor and cosmetics maker Clarins, as well as German engineering firm Bosch.

For the past 12 months, staying in Russia has been a calculated gamble of reputational risk versus financial reward.

The share value of Austria's Raiffeisen Bank International has fallen by 40 per cent since the war due to the opprobrium of staying in place, for instance.

But at the same time, profits from its Russian operations climbed to a record €2.2bn in 2022, accounting for more than 60 per cent of total profits, according to independent Russian newspaper Novaya Gazeta.

Meanwhile, Russia is not making it easy for its old friends to leave.

Strategic firms, such as banks and energy companies, now have to get permission to sell Russian assets from the foreign investment commission of the Russian finance ministry.

But this issues no more than 10 or so permits a month, amid a waiting list of more than 700 applicants, Novaya Gazeta said.

Russia made things harder still in March by saying foreign firms had to pay a 10 per cent tax on the assets they sold if they left.

"We are creating conditions so that ... exit is not beneficial to foreign business," Russian finance minister Anton Siluanov told the Russia 24 TV channel at the time.

But for all that, incoming new legislation could make staying an even greater financial and moral hazard than before.

Up until now, most European firms paid next to no tax inside Russia on their profits there due to favourable double-taxation treaties.

But, also in March, the finance ministry proposed freezing such tax treaties with some 40 "unfriendly" countries that imposed sanctions on Russia, such as the EU 27.

Putin has yet to implement the proposal, but this is a matter of a presidential decree that could happen any day.

And, given his penchant for symbolism, his trap could be sprung after the EU imposes its 11th round of sanctions, which are expected in the next few weeks.

Putin also publicly asked his government, on 2 May, to "clarify" by 20 May how to handle dividend payments to shareholders from the "unfriendly" nations in future.

And, according to one Russian source who asked not to be named due to the sensitivity of the information, the new rules could see a tax of up to 25 per cent imposed on the Russian profits of EU firms such as Armani, Clarins, Raiffeisen and the rest who stayed.

Russian trap

Siluanov's 10 per cent exit-fee meant "Western companies, unaware of the future dividend tax, might be lured into maintaining some presence in Russia," the source said.

"But once the [double-tax] agreements have been terminated Moscow will impose a new tax on those Western companies still present in Russia — they would have to pay a dividend tax even up to 25 per cent," the source added.

And "that would in reality turn those companies into sponsors of the Russian war effort," they told EUobserver.

The EU foreign service never comments on details of upcoming sanctions, such as its motives for now suddenly lubricating European divestments.

It also told this website that advice to private entities was primarily a matter of national competence.

But it added: "This is not the time to do business in Russia nor with Russia due to its war against Ukraine and due to the unpredictability of the local economic, investment, and rule of law environment".

And that was just one among many warnings to foreign investors that Putin was preparing to shake them down for money.

Putin has "demonstratively built an illegitimate and lawless state", exiled Russian tycoon Mikhail Khodorkovsky, whose oil firm Yukos was seized by the Kremlin some 15 years ago, warned on 2 May.

"The withdrawal of assets should have started a very long time ago, even before the war. And on 24 February 2022 [the date of the Ukraine invasion], the decision should certainly have been made," Khodorkovsky said.