The cost to shareholders of Western companies’ exodus from Russia will become clearer in coming weeks, as companies make their first earnings announcements since the invasion of Ukraine.
More than 6oo Western companies have said they would exit or cut back operations in Russia, according to researchers at Yale University.
Losses stemming from the pullout include the expected write-down, or complete write-off, of assets ranging from oil wells to car factories and consumer loans, according to statements by the companies.
The impact will be felt well beyond the big announcements that have already come mostly from energy companies. A fifth of the companies in the S&P 500 listed Russia subsidiaries for 2021, according to data provider Calcbench.
The biggest hit so far is expected to come from British oil giant BP PLC, which faces a potential loss of as much as $25 billion from exiting its nearly 20% stake in Russian government-controlled oil producer Rosneft.
At the other end of the scale, Swedish telecom company Ericsson AB this week made a provision of 900 million Swedish kronor, equivalent to around $95 million, for asset-impairment and other costs stemming from the indefinite suspension of its Russian operations. An Ericsson spokeswoman declined to comment beyond the disclosure.
Russia-related impairments are likely to have the biggest impact on earnings of European companies, according to Carla Nunes, a managing director at risk-consulting firm Kroll LLC. “In the U.S., inflation and global supply-chain disruption are together likely to have a bigger impact,” she said.
The question of whether a company has to take a Russia-related earnings hit depends partly on whether it is disposing of assets, mothballing them, or just stopping sales in Russia, according to John McInnis, an accounting professor at the University of Texas at Austin.
Under international and U.S. accounting rules, decisions about whether to impair an asset are based on its expected value over its lifetime. For assets that are being idled temporarily, that may mean companies “could ride out for quite some time” without taking impairments, Mr. McInnis said.
McDonald’s hasn’t said whether it will take an accounting charge related to the closure of its 847 restaurants in Russia. Russia and Ukraine together contributed around 9% of the company’s $23 billion global revenue last year. The burger chain has said the closures are temporary and it is keeping its 62,000 employees in Russia on the payroll. McDonald’s didn’t respond to requests for comment.
“Companies are always reluctant to take a hit to the bottom line,” said D. Larry Crumbley, an accounting professor at Texas A&M University
Some companies are disposing of their Russian assets, rather than waiting. Heineken NV and Carlsberg A/S, the world’s second- and third-largest global brewers respectively, said last month intend to exit Russia entirely. Carlsberg, among the Western companies with the biggest exposure to Russia, said its Russian business will be treated as an asset awaiting sale and reassessed at its fair value. That will result in a substantial noncash impairment charge, the Danish brewer said. Its Dutch rival Heineken said its exit would result in a one-time €400 million ($435.3 million) charge.
Asset values are depressed in Russia, and companies might struggle to find a buyer for their business or joint-venture investment, or be forced to sell for a knockdown price, according to analysts.
French bank Société Générale SA this week said its income would decline by more than $3 billion after it sells its stake in lender Rosbank and its Russian insurance units to one of the country’s richest people. Société Générale didn’t disclose how much it is selling Rosbank for. But the French bank said the disposals would lead to a roughly €2 billion ($2.18 billion) write-off of the net book value of the sold assets, and a one-off noncash charge of about €1.1 billion. A company spokeswoman declined to comment beyond the previous disclosure.
Oil-and-gas companies that have pledged to exit Russia typically are preparing to write off the entire value of their assets. Exxon Mobil intends to exit its 30% stake in a massive oil-and-gas project it runs on Sakhalin Island in Russia’s Far East. Depending on the terms of the exit, Exxon may have to write off the full $4 billion book value of the stake, the Texas company said in a securities filing this month.
Energy giant Shell PLC is going further. The London-listed company expects to book $4 billion to $5 billion of accounting charges related to its exit from its Russia operations, including joint ventures with energy giant Gazprom PJSC. That is more than the roughly $3 billion noncurrent book value of those assets. The earnings hit could include potential knock-on costs from the exit, such as expected credit losses, in subsequent quarters, Shell said.
Companies that have to take a financial hit on Russian disposals may try to include as many potential losses as they can in the write-down, accounting professor Mr. Crumbley said. This “kitchen sink” approach opens the door to a potential future bump in earnings, should the losses in practice prove less severe than the company has made provisions for.