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Provisions for write-downs have only just begun in many cases
Thursday 21 Apr 2022 Author: Ian Conway

Just when it seemed as if Russia’s standing in the international community couldn’t sink any lower, evidence of war crimes in Ukraine has seen the US and its allies take an even tougher line.

As well as imposing harsher sanctions on Russian banks and state-owned enterprises, the US has proposed a blanket ban on all new investment in the country. The UK has done the same.

‘The goal is to force them to make a choice,’ said the White House press secretary. ‘The biggest part of our objective is to deplete the resources that Putin has to continue his war against Ukraine.’

For companies who moved to disassociate themselves from Russia, the issue now isn’t just the revenues they have lost from no longer doing business in that country. They need to face the fact they may never do business there again and therefore have to write off their assets.

One of the first companies to announce its withdrawal from Russia was oil major Shell (SHEL). The company stopped all spot purchases of Russian crude oil and shut its local service stations, aviation fuels and lubricants operations.

It also pledged to cease all involvement in Russian hydrocarbons including crude oil, petroleum products, gas and liquefied natural gas.

That means pulling out of the Nord Stream 2 pipeline project, exiting its equity partnerships with Gazprom and its 27.5% stake in the Sakhalin LNG facility together with 50% stakes in two further energy projects.

In its first quarter update, the company said the post-tax impact from the impairment of non-current assets and charges for write-downs of receivables, credit losses and onerous contracts from its Russian activities would be between $4 billion and $5 billion, which even for a firm like Shell is still a material hit to its balance sheet.

Rival BP (BP.) said it would sell its 19.75% shareholding in Russian energy firm Rosneft, which was valued at $14 billion at the end of last year, as its involvement with the firm ‘simply cannot continue’.

As well as presenting the firm with a major strategic challenge given Rosneft accounts for half of BP’s oil and gas reserves and a third of its production, exiting Russia is going to be extremely costly.

BP will no longer recognise its share of Rosneft’s revenues or earnings and will no longer receive dividends from this investment, plus it will have to take a ‘material’ non-cash charge to write down the value of its equity stake and account for the $11 billion of currency losses accrued on it since 2013.

Working out the value of Rosneft isn’t going to be easy either, especially with other sellers of Russian assets including Norway’s $1.3 trillion sovereign wealth fund also rushing to offload Russian investments.

If a ban on new investments is widely adopted the list of potential buyers of Russian assets is going to be pretty short and prices are likely to be rock-bottom, so BP may end up writing off the majority of the value of its Rosneft stake.

Similarly, cigarette and vape-maker firm British American Tobacco (BATS) concluded owning a business in Russia was ‘no longer sustainable in the current environment’. Therefore, the firm is transferring its operations to a local firm and walking away. Russia and Ukraine accounted for 3% of group revenues and slightly less in terms of operating profit.

Rival Imperial Brands (IMB) also said it would transfer its Russian assets and operations to a local third party as a going concern.

Russia and Ukraine made up around 2% of sales and 0.5% of operating profits last year, so the impact isn’t major for either firm, but both are essentially writing off their investments in Russia.

Shareholders will want to know if there is a chance of recouping anything from Russia, and where insurance companies stand if companies start claiming for lost assets and revenue.

As Shares understands it, most war-risk policies include a seven-day notice of exclusion or cancellation as standard, so most insurers would have notified firms they were cancelling cover as soon as Russia invaded Ukraine in late February.

In the high-profile case of the more than 100 foreign-owned aircraft leased to Russian airlines, the Russian government only drafted a law allowing the airlines to register the planes locally on 14 March by which time most seven-day notices would have come into effect.

As a result the cost to the insurance industry is likely to be minimal, say in the region of 10% to 15% of the value of the assets, with the aircraft owners – typically leasing companies – left to shoulder the bulk of the losses.

Shares of UK business insurers such as Beazley (BEZ) and Lancashire (LRE) are down between 10% and 15% since the invasion of Ukraine, although to date neither firm has commented on potential claims.


Mothercare (MTC:AIM) had 116 stores and an online presence in Russia via a franchise partner. These operations have now been suspended.

It says £88 million of annual retail sales came from Russia and the territory contributed £5.5 million to adjusted earnings.

Mothercare says it has excluded Russia from its forecasts given uncertainty around when stores may reopen. Many other companies are pulling out of Russia permanently.

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