Shifts in Business Landscape: Western Exodus, Eastern Influx in Russia

After Moscow's invasion of Ukraine almost two years ago, a significant outflow of Western companies from Russia began, according to a Business insider.However, an intriguing development is underway as businesses from alternative markets, notably former Soviet republics and China, step in to fill the void.

Official data from the SPARK-Interfax professional information service, as reported by Vedomosti business daily, reveals that 9,600 companies with foreign affiliation departed Russia in 2022 and the first 10 months of 2023. This mass departure, driven by Western companies, is a direct consequence of Moscow's actions in Ukraine.

Yet, a fresh wave of companies, predominantly from former Soviet republics and China, has entered the Russian market. Vedomosti's analysis indicates that businesses with co-founders from countries like Belarus, Kyrgyzstan, and Kazakhstan constituted 59% of all new companies established in Russia last year. Additionally, companies with co-founders from Turkey, India, and particularly China accounted for 3%, 2%, and 25% of new firm registrations, respectively, during the first 10 months of 2023.

Despite this influx, the numbers still fall short of compensating for the Western departures. By late 2023, there were 116,400 legal entities with foreign involvement registered in Russia, marking a decline of over one-third from the peak of 185,000 foreign-affiliated entities recorded in 2017.

Mikhail Nikolayev, the head of Russian ratings agency ACRA, suggests that while Western sanctions have impacted the number of foreign-affiliated companies, the reorientation of Russia's trade and supply chains toward the east has spurred registrations from alternative markets.

Interestingly, Russian businesses overseas have also been repatriating their assets amid Western sanctions. About 3% of companies registered in Russia last year were from countries deemed "unfriendly" by the Kremlin, marking a decrease from 14% in 2021.

The challenges faced by foreign companies attempting to exit Russia have been notable. Moscow has imposed steep hurdles, including financial obligations to the state and the sale of assets at a significant discount. Companies in strategic sectors require approval from President Vladimir Putin for asset sales.

Despite early pledges by numerous international companies to exit the Russian market in the wake of the Ukraine conflict, only about 350 have completed their exits, according to the Kyiv School of Economics. Another 1,606 firms continue operations as usual, while 1,741 are in various stages of pausing their investments or operations in Russia, highlighting the complexities and obstacles they face.