Irish engineering firm owner flees Russia as companies fear hike in exit price

Irish engineering firm owner flees Russia as companies fear hike in exit price
John Mark, founder and chief executive of the international design and engineering company Clancy Engineering. / Clancy Engineering
By Jason Corcoran in Dublin November 23, 2023

The Irish owner of Clancy Engineering in Russia has sold his shares to local management in Moscow, becoming the latest foreign company to flee before the Kremlin hikes the exit price further, bne IntelliNews can reveal.

Industry sources in Moscow said John-Mark Clancy, founder and chief executive of the international design and engineering company, had recently sold his shares in his company to local managers for an undisclosed amount.  Neither Clancy nor senior management responded to requests for comment.

Clancy set up his own firm in 2008 after working in Russia. The company, which had over 50 employees, designs industrial properties, hotels, commercial property and residential buildings from the concept stage to the construction stage of the facility, including the Bvlgari 6-star Hotel in Moscow, Russia's biggest theme park 'Dream Island,' residential developments in Siberia and Kronospan’s largest wood processing facility in Egoreivsk east of Moscow.

A Moscow business source said Clancy and his family had left Russia a few months ago after selling up at a knockdown price. “I think he got out even though he had to take a severe haircut but that’s the price these days for foreigners wanting out,” said a source.

The transaction was overseen by the Kremlin’s Government Commission on Monitoring Foreign Investment, which sets the conditions for issuing permits to foreign nationals from unfriendly states to conduct transactions involving the sale of shares and stakes in Russian companies.

Moscow corporate sources say the commission runs the ruler over deals worth hundreds of millions of dollars, as well as small deals involving commercial property owned by foreigners.

Any deal can be scrapped if it is discovered that the buyers and the foreign seller have not applied for the requisite permissions from the commission. A transaction by a subsidiary of Germany’s Bauer Technology to sell land and real estate to a local entrepreneur Ruslan Prudnikov was invalidated due to the lack of clearance.  

The commission, which is formally headed by former President Dmitry Medvedev, demands an independent assessment of the market value of the assets being sold, prepared by an appraiser recommended by the same commission.

Members of the commission are made up of representatives from the central bank and officials from several of the government’s key ministries.

Any banks or energy companies being sold also have to be personally vetted by Russia’s President Vladmir Putin before they can be offloaded.

The Kremlin has gradually tightened the exit requirements since Western companies began leaving soon after Russia’s invasion of Ukraine in February 2022.

Sources say navigating the rules has become more difficult although more deals are now being completed after a lull following the scandalous seizure in July of the Russian assets belonging to Danish brewer Carlsberg and French yoghurt maker Danone.

Carlsberg had announced in June that a buyer had been found for its Russian asset Baltika, but a decree the following month signed by Putin said the state was seizing the business.

Carlsberg's boss Jacob Aarup-Andersen last month said Russia had "stolen" its business, and the company had refused to make Moscow's seizure of its assets look legitimate. The company had eight breweries and about 8,400 employees in Russia, and took a DKr9.9bln ($1.41bln) write-down on Baltika last year.

The government commission was previously seeking a 50% discount on all foreign deals plus a “contribution” to the Russian budget of at least 10% of the prices. However, Moscow business sources indicated that many deals were subject to additional discounts before being rubber-stamped by the commission.

Between March 2022 and March 2023, approximately 200 Russian asset sales were completed by foreign companies, according to Russia’s central bank. Notably, around 20% of these transactions were valued at over $100mn.

In its biannual financial stability review, the central bank openly admitted that the foreign entities under pressure to leave Russia were doing so on "unfavourable" terms.

The commission grants approval to approximately 90% of deals and convenes at least twice a week on average to assess the latest proposals.

Western investors still present in Russian companies are preparing themselves for the possibility of a new presidential decree which may require them to sell their shares at even higher discounts.

If enacted, the potential decree could establish a "super pre-emptive right" for Russia to purchase shares in strategic companies from foreign shareholders.

Ivan Chebeskov, head of the finance ministry's financial policy department, told Reuters that amendments to a presidential decree were underway and that possible changes could give the Kremlin  a "super pre-emptive right" to buy shares in strategic companies from exiting foreigners.

"This super pre-emptive right will work only in specific cases, with specific companies," said Chebeskov. "The exact list has still not been approved."

The unclear timeline and lack of clarity underscore the unpredictability of regulatory changes for investors adjusting their exposure to Russia. If such a decree is enacted, investors from nations deemed hostile to Russia may face an even greater challenge recovering any value in their Russian holdings.

Italian lender Intesa Sanpaolo is desperately trying to finalise the sale of its local unit, while HSBC is awaiting approval to sell its Russian subsidiary to local lender Expobank, which is owned by veteran banker Igor Kim.

In September, it was revealed that US commodities giant Cargill is selling a 25% stake in a grain terminal on Russia’s Black Sea to local company Delo Group. The commission is expected to greenlight a deal any day.

In July, the commission approved the application of the French sports goods retailer Decathlon to sell several of its stores in five of Russia’s regions.

The European Bank of Reconstruction and Development, a long-term cornerstone lender to the Russian economy, has been trying to exit its portfolio companies with mixed success.

Frank Media this month reported that the commission is about to approve the sale of the EBRD’s 5% stake in the Bank of St Petersburg and 17.8% stake in Center-Invest Bank.

The EBRD, which has owned these stakes since the mid-2000s, curtailed new investments in Russia in 2014 after the annexation of Crimea.

The London-headquartered lender retained a large portfolio of companies and did not begin trying to wind up until the full-scale invasion of Ukraine last year.

However, the EBRD is being frustrated in its attempts to sell its 5.3% stake in the Moscow Exchange (MOEX), the leading Russian bourse for trading securities.

The commission has blocked a deal for the EBRD to sell up to local IT group Softline, according to a report this week by Frank Media, which suggested the government intends to charge the EBRD an increased contribution to the budget to compensate for funds it invested in the international financial institution.

At the close of trading last week, the EBRD’s stake in MOEX was worth about RUB23bn  but Russian Forbes magazine reported that the commission was now demanding “a discount to the exchange value” of 60%, as well as an exit tax of 20%.

Western investors still active in Russian are closely monitoring such deals and are now bracing themselves for the prospect of a for a formal mandate compelling them sell at even steeper discounts.

“At this rate, the commission will be taking the shirt of our back and asking us to pay for the drycleaning,” a Moscow business owner, who requested anonymity, told bne IntelliNews.

The foreign business owner, who has lived in the capital for almost 20 years, has mulled selling his retail business but has decided to stay in the hope that the conflict will end.

“We have built a great business from scratch in a competitive b2b sector so it would be sickening to sell it for a fraction of its worth,” he explained. “Also, I am too old to give it all up and try to start again back home.”