Russia's Strengthened Foreign Asset Control Moves... "Need to Prepare for Korean Risk"

Over the past decade, South Korean companies' investments in Russia have exceeded $1 billion, raising concerns that domestic companies could also be affected if Russia intensifies control over foreign companies from unfriendly countries operating within its borders.

On the 19th, law firm Yulchon analyzed that Russian President Putin signed a presidential decree transferring the shares of the Russian subsidiaries of French dairy company 'Danone' and Danish beer manufacturer 'Carlsberg' to the temporary management of the Russian Federal Agency for State Property Management, signaling moves to control foreign companies' Russian subsidiaries. Since the main targets of control are subsidiaries of foreign companies from unfriendly countries that have not yet withdrawn from Russia, South Korea cannot be complacent. South Korea is also classified as one of Russia's unfriendly countries. As pressure from the Russian government on foreign companies from unfriendly countries owning Russian subsidiaries intensifies and the list of temporary management expands, close monitoring of Korean companies operating in Russia is necessary.

According to data compiled by the Export-Import Bank of Korea, South Korea's investment in Russia over the past decade has exceeded $1 billion. From 2012 to 2022, the total investment amounted to $1.031 billion. No investments were made last year due to the impact of the Russia-Ukraine war. Over the past ten years, 220 new companies with Korean capital have been established in Russia. While Korean companies used to establish double-digit numbers of new companies annually in Russia, the number dropped to six last year after the war began, and as of the end of March this year, only one new company was established.

Currently, 167 Korean companies operate corporations and branches locally in Russia. Although this represents only 1.6% of the total 10,396 overseas ventures, many large Korean companies such as Samsung Electronics, LG Electronics, and Hyundai Motor Company are included. These companies have halted operations at local factories and are closely monitoring the situation. Due to international sanctions making it increasingly difficult to continuously procure parts within Russia, most have stopped factory operations after exhausting inventory.

Although losses have occurred due to factory shutdowns, withdrawing from the Russian market is not easy because of a newly introduced clause requiring a donation of 5-10% of the market value upon asset sales within Russia.

In March, the Russian Ministry of Finance revised and announced provisions related to foreign companies' asset sales, requiring investors from unfriendly countries to pay up to 10% of the market value as tax when selling their businesses. This means that in addition to the existing law requiring unfriendly country companies to sell local assets at a discount of at least 50% of the market price, they must also pay additional taxes. If a foreign company sells Russian shares at a discount of 90% or more, it must pay 10% of the market value as tax to the Russian government; if the discount is less than 90%, the tax is 5%. The closed nature of the Russian market also makes it difficult for companies that have withdrawn once to re-enter and regain market share, which further discourages Korean companies from exiting Russia.

However, most companies' decisions to withdraw from Russia are driven not by economic reasons but by political decisions of their home countries, meaning some companies must withdraw even if they do not want to. As of May, 1,938 global companies have left Russia. Among them, 233 have completely withdrawn, 1,197 have downsized operations, and 508 have halted future investments and expansions.

There are calls for government support for companies wishing to withdraw from the Russian market but burdened by the costs of asset sales. The Korea International Trade Association recently stated in a report that if the Russia-Ukraine war prolongs, Russia is likely to impose additional retaliatory measures, potentially disadvantaging foreign companies operating there. Researcher Won Bin Do from the Trade Association advised, "The government should prepare appropriate support measures for some Korean companies suffering damages in Russia. For companies wishing to withdraw but burdened by asset sale costs, financial support such as withdrawal cost assistance and low-interest loans should be provided."

This content was produced with the assistance of AI translation services.