Firms' desire to pull out of Russian market complicated by many factors

A Stark Logistics truck on the road in Estonia, reportedly en route to the Russian border.
A Stark Logistics truck on the road in Estonia, reportedly en route to the Russian border. Source: Reader submission

A reluctance on the part of some Estonian firms to pull out of Russian markets altogether should not solely be put down to greed or short-sightedness.

Fines and court actions, possibly even in European courts, by Russian partners over canceled orders, the difficulty of finding new markets at a time of general downturn, and obstacles to disengagement put in place by the Russian Federation itself are all significant factors.

The issue particularly is faced by companies, for instance involved in logistics, who had long before the current invasion had a significant proportion of their business tied up in or with Russia; some firms say that in fact stricter sanctions would help, provided these are applied uniformly both across business sectors and across EU member states.

Many of the issues facing Estonian firms would likely translate to those in other EU and Western countries as well.

What proportion of companies are, as it were, trapped in Russia, and how many remain simply for profitability reasons is nigh impossible to delineate; some Western firms are actively seeking to exploit loopholes in sanctions, Külli Kurvits, head of the customs formalities department at the Tax and Customs Board (MTA) said.

Kurvits provided as an example luxury car exporters attempting to satisfy the not inconsiderable thirst for shiny vehicles in Russia.

Sanctions ban bringing in vehicles worth over €50,000 into Russia, but this, Kurvits said, has been followed by smaller operators bringing in cars worth €49,000, two or three at a time.

However, and Kurvits pointed to this as an example of success for the agency, a new sanctions package adopted a few months ago come into effect from the end of this month – and this will ban the export of all passenger cars into Russia, luxury or otherwise.

Of more quotidian items, Kurvits referred to electrical plugs – subject to sanction unless they have a cable attached in which case they are allowed, as things stand.

"Bearing in mind Russia has been experiencing shortages across quite a few product groups, loopholes like this will be probed for in respect of Europe, or of the rest of the world," she said.

In a sense the devil is in the detail with sanctions, and this provides plenty of options for circumvention, Kurvits said.

The MTA itself recommends barring all types of electronics, white goods, machinery and other equipment for transport into Russia.

Russia itself makes disengagement difficult

The Russian authorities themselves have made pulling out of the country more complicated, for another thing. A committee formed last autumn must approve the sale of any stake, before it can go ahead, for instance.

Marie Allikmaa, head of the business and consumer environment department at the Ministry of Economic Affairs and Communications, said: "We have heard of long waiting lines for applications [to the committee] numbering several thousand at present. At the same time, the committee works somewhat haphazardly and arbitrarily. Some applications get resolved within a month, but Estonians are not exactly in the good books there."

Those who do get the go ahead to sell often have to settle for half the fair price, Allikmaa added.

"Companies that are exiting, or have already exited, the Russian market today say that it has proven very unprofitable, and they will definitely not be able to obtain their market's worth there. This will certainly lead to losses," she went on.

Some business-people, ERR reports, say that a greater uniformity in sanctions (see above) would help.

Allikmaa confirmed that sanctions help protect entrepreneurs from claims, as written into the International Sanctions Act.

"However, this is not just a matter of sanctioned goods It is true that for Russian entrepreneurs – should an Estonian entrepreneur opt to terminate a contract immediately – then of course there will be a high risk and probability that the liquidated damages will be due [in Russia]."

In this case, it is not out of the question that, since damages can be sought in a court in the country of origin, an Estonian court may have to grant this right to claim damages to a Russian company.

Compensation for companies pulling out of Russia, for instance on ethical grounds following the February 2022 invasion, has not been discussed at ministry level, Marie Allikmaa says, pointing out that since the insurgency war in Eastern Ukraine began back in 2014, the knowledge of the risks of doing business in Russia is hardly a new thing.

Nonetheless, the state can offer help and advice to those businesses who want to find new markets or reshape production to their needs, including an international expert engagement service which makes available experts on other markets, and special loan guarantees to those firms whose turnover to a significant proportion derives from Russia, or for that matter, from Ukraine.

The reasons for entrepreneurs not forgoing all their business ties in and with Russia are complex, in Estonia, Allikmaa added

One factor can be if the Estonian business concerns just one branch of a foreign-owned group or listed company, which makes loss-making decisions difficult to make independently, in Estonia.

Cancelling pre-invasion orders could lead to bankruptcies

Hekotek, a company which produces equipment for the timber industry, had received orders worth a hundred million euros from Russian customers on the eve of the full-scale invasion.

Contracts had been signed and advance in some cases already paid.

These funds, Hekotek CEO Heiki Einpaul told ERR's radio news, are then used to produce the ordered equipment, which must be delivered – otherwise bankruptcy would follow if the Russian customers demanded a refund, Einpaul said.

No new contracts are being concluded with Russian customers, Einpaul added – though the backlog of existing contracts are taking time to process since Russian customers themselves have gotten into difficulties with paying for the goods ordered, in many cases.

In short, walking away from agreements and awaiting arbitration STOCK in three-to-five years is not realistic, he added.

Moreover, placing the company in jeopardy can itself end up with legal difficulty at home, Einpaul said, if, for instance, a company board member is charged with not carrying out his or her duty of care, for example.

Only those companies who did not have a significant proportion of business in Russia could afford to pull out quickly, he said – while the Estonian state and the EU can also provide help in doing this, not least by putting in place a full boycott and range of sanctions, backed by the force of law.

Meanwhile Ermo Perolainen, head of the Rahvusvahelise Autovedajate Assotsiatsioon, a lobby group for the haulage sector, said that for many firms, the Russian-facing market is all that they know, while re-focusing on, for instance, a more westerly direction will run into competition brought about by the glut of carriers now available in Europe as a result of contracting business there.

Regulations and expectations should be equal for all businesses and types of business in this region, Perolainen added; were stricter sanctions imposed in concert with all the other EU countries bordering Russia and Belarus, including the other two Baltic States, then hauliers in Estonia would have no objections to the policy, he added.

This should be twinned with EU-level support measures for EU-based companies, he went on.


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Editor: Andrew Whyte, Mait Ots

Source: ERR Radio News, reporter Madis Hindre.

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