Kremlin-aligned entrepreneurs thrive as Western firms exit Russia

As an example, the newspaper cites Alexei Sagal, an entrepreneur from the Stavropol region in the south of Russia, who has become a key buyer of Western companies' assets. Last week, his group Arnest, previously a subcontractor for some of the world's largest consumer goods producers, agreed to purchase Unilever's Russian business for $550 million CAD.

Previously, it acquired the Russian assets of Dutch brewery Heineken, American aluminum packaging producer Ball Corporation, and Swedish cosmetics group Oriflame. As a result, according to the company's information, its sales revenue doubled from 7.4 billion rubles (about $100 million CAD) in 2021 to 13.9 billion rubles (approximately $190 million CAD) last year, and profit grew approximately 24 times, from 40.6 million rubles (about $550,000 CAD) to 972.8 million rubles (about $13 million CAD).

The rapid rise of Sagal demonstrates how the Russian invasion of Ukraine has triggered the biggest redistribution of assets in the country since the fall of the Soviet Union, giving rise to a new generation of state-affiliated capitalists, as noted by "FT".

"Arnest was relatively unknown until companies needed to sell their assets. At that time, it became a regular and effective bidder. The mass exodus of Western companies from the country created a new class of entrepreneurs," said a lawyer assisting Western companies exiting Russia to the newspaper.

Only those favoured by the authorities can get approval to acquire these assets. No one acquires them by accident, said Ilya Shumanov, head of the Russian branch of Transparency International.

Another businessman acquiring Western assets is Ivan Tavrin, who in 2022 purchased the Avito classifieds site from the media conglomerate Naspers for approximately $3.3 billion CAD, and a year later acquired the Russian assets of the German consumer goods giant Henkel.

"FT" points out that finding buyers acceptable to both Western regulators and the Kremlin is becoming an increasingly significant challenge for companies that want to exit Russia. International corporations must conduct thorough due diligence on prospective buyers and sometimes seek approval from their own regulatory bodies to ensure they do not violate Western sanctions. "The list of potential Russian buyers who meet these criteria is steadily narrowing," said a person who advised on several exit transactions.

The company Arnest, established in 1971 in Sagal's hometown, Nevinnomyssk, as a state chemical plant, has a key advantage: its owner is not subject to Western sanctions. According to sources cited by the newspaper, he is closely connected with Denis Manturov, Russia's deputy prime minister overseeing the defense sector, who in turn is a protégé of Sergei Chemezov, who served in the KGB alongside Vladimir Putin in the 1980s and now heads the state defense conglomerate Rostec. Both Manturov and Chemezov, unlike Sagal, are subject to sanctions.

Foreign companies must also comply with increasingly strict Russian regulations, including agreeing to substantial discounts. The larger the transaction, the more likely the involvement of the Kremlin and ministers.

"FT" adds that exiting Russia may become even more costly for Western firms as the Russian authorities aim to retain some portion of Western assets in the country as a safeguard in case the West intends to confiscate Russian assets abroad.

According to two individuals familiar with these plans cited by the newspaper, the measures under consideration include raising the mandatory discount Western companies must agree to from 50% to 60%, and increasing the sales tax from 15% to 35%. Additionally, for transactions valued over 50 billion rubles, in all sectors, Putin's approval would be required.