A High-Level Overview
MARCH 2022 – In response to Russia’s invasion of Ukraine, many multinational companies quickly announced their intent to divest themselves of business in Russia, including their joint ventures. For example, Shell announced it would exit multiple JVs with Gazprom, including a 26.5% stake in Russian LNG JV Sakhalin-2. Norwegian state-owned energy company Equinor says it will divest its joint ventures in Russia, including an oil and gas field in Western Siberia. BP announced an intent to sell its 20% direct equity interest in Russian oil giant Rosneft and to exit three JVs with them. Outside of oil and gas, Uber announced an acceleration of its already-planned exit from many joint ventures with Russian technology giant Yandex, while Ford halted operations at its 51:49 JV with Russian company Sollers, pending a review of its ownership stake.
Announcing an exit is easy, but even highly-motivated companies trying to exit Russian JVs or suspend local operations are likely to find that disentangling themselves from complex commercial arrangements is anything but simple. Our experience and data consistently show that exiting a JV is time-consuming and complex under the best of circumstances, with JV exits typically taking a year or more to execute. It took ExxonMobil until 2017 to exit from several JVs affected by sanctions put in place in 2014 after Russia annexed Crimea.
Here are a few reasons why companies will find withdrawing from Russian JVs immensely challenging:
- No Right to Halt Operations: JV partners may not have any contractual right to unilaterally halt operations in their Russian JVs, as decisions to suspend operations or initiate liquidation proceedings almost always require approval from at least a majority of partners – and therefore, contractually, cannot be taken unilaterally. If the party seeking to exit physically operates the joint venture, it may be able to shutter operations simply by stopping work, but this action likely violates any operating agreement between the company and the JV and risks litigation with an uncertain outcome. Worse, if the JV is operated on a day-to-day basis by the company’s Russian partner or by an independent operating company that the partner seeking to shut down operations does not control, even a legal right to suspend operations may not translate into local action.
- No Right to Exit: Partners seeking to exit a joint venture generally need a contractual right to do so. While most JV agreements include language giving partners some rights to exit, this is often constrained by a requisite triggering event, like the imposition of sanctions or partner misbehavior, and dependent on legal interpretation. Our recent analysis of the exit provisions in 81 JV agreements found that only 60% give one or more partners the right to exit without a triggering event, so simply exiting “at-will” may not be a possibility for companies seeking to leave their Russian JVs. Meanwhile, a sanctions-based exit right may not be in play for certain JV partners, as sanctions are not being levied against all Russian companies and industries. And companies with a force majeure-based exit trigger – an issue often fiercely contested even under normal circumstances – may find Russian courts unwilling to agree that the war in Ukraine is a force majeure event that inhibits the business enough to trigger exit, especially as the distance grows between the location of the JV itself and the conflict.
Of course, nothing stops companies from simply negotiating an exit with their partner, but such negotiations range from expensive to impossible, especially if occurring against the backdrop of litigation. Companies having the legal right to easily exit Russian joint ventures is not a foregone conclusion.
- Challenges of Selling at Pre-Conflict Value: Even if a company with an interest in a Russian JV has a usable right to exit, it’s unlikely to receive anything close to the pre-crisis value for its interests in a Russian company, which will be negatively impacted by sanctions, supply chain disruptions, evaporating global demand, and the loss of leverage in a fire sale (which some buyers will surely try to exploit). Exits will hit company balance sheets hard, with BP estimating that its exit from Rosneft will cause a $25 billion write down. This is not the first time exits from Russia have caused write downs. When Russia was sanctioned following its annexation of Crimea, ExxonMobil’s withdrawal from several joint ventures came with a write down of some of those assets.
These valuation hits have the potential to be larger in JVs than in wholly-owned subsidiaries, as the pool of potential buyers may be limited to other existing partners, or even to just the Russian partner(s) – none of whom may be interested unless offered a heavily-discounted price. Even with a legal right to exit, companies may need to just walk away from a venture if they wish to divest, obtaining no value for their stake, which is a worst-case scenario, but possibly the fastest means of exiting.
- Operational Interdependencies: Almost all joint ventures rely on their owners for support, which can range from some IT or back-office shared services to one partner fully operating the venture on behalf of all owners. Exiting companies need to figure out how, or even if, they can extricate themselves from these relationships with JVs, which are provided under commercial agreements that, like JV agreements, may not have a near-term exit right. Terminating such arrangements without a right to do so is likely to spark litigation. Adding to the challenge is the fact that pulling back on parent support for the JV inherently undermines the value of the venture, and thus the potential sale price. Despite this risk, however, companies are pulling back on their services to Russian ventures. For example, ExxonMobil, which operates the Sakhalin-1 project on behalf of an international consortium of Japanese, Indian and Russian companies and owns a 30% interest in the project, announced it will immediately discontinue operations on the project and will seek to exit the venture. Regardless, operational interdependencies between JVs and their owners complicate exits from joint ventures.
- Interim Governance: Pending a sale of a Western company’s interests, JVs will need to continue to operate and be governed. Several companies have announced that their board members are resigning from Russian JV boards. For instance, BP CEO Bernard Looney and BP executive Bob Dudley resigned from Rosneft’s Board, and Uber said it would remove its company’s three executives who sit on the board of its joint venture with Yandex. While well-intentioned, lauded by public relations departments, and potentially helpful to avoid running afoul of sanctions or accounting issues, these actions can put exiting companies at risk by leaving their JVs in the hands of their remaining partners, whose incentives may deviate from those of the exiting partner. In times of crisis, JV governance is particularly crucial. Leaving a venture in the hands of partners whose interests are not aligned with those of exiting partners can further dilute value and prevent exiting partners from being able to shape the JV’s business.
These challenges are playing out in real time as companies grapple with the legal realities of their Russian JV agreements. Burger King announced plans to divest its 15% stake in a Russian venture operating 800 of its stores, but the local partner running the JV has so far refused to halt operations. As Restaurant Brands International, Burger King’s parent company, said in a statement – “There are no legal clauses that allow us to unilaterally change the contract or allow any one of the partners to simply walk away or overturn the entire agreement.”
Burger King is not alone in this challenge. While there was a flood of announcements about the intent to exit Russian JVs within the first quarter of 2022, the actual execution of these exits will be spread across months or even years. That said, immense political and economic pressure sometimes causes impossible deals to happen quickly, like the 2008 sale of failing bank Bear Stearns to Goldman Sachs, which occurred in record time. Perhaps a few JV partners will find a way to navigate thorny joint venture legal agreements and escape more quickly than anticipated.