The Ukraine crisis, the imposition of US and EU sanctions on certain Russian individuals and companies – and Russian measures in response – have started to have a significant impact on business in Russia, and on cross-border transactions with Russia and Russian companies.

Economic slowdown

Russian economic growth has slowed considerably, investments have been reduced and companies have been forced to seek different ways to raise capital instead of the standard international share and bond issues. Most companies have postponed plans to raise equity and debt capital. All these factors have caused a sell-off of the rouble and a fall in equity markets.

Some companies have already been forced to reduce production and start cutting their staffing costs. For example, German sportswear firm Adidas announced in July it was shutting some stores in Russia and cutting back its Russian expansion plans. In August, Finland’s biggest milk processor Valio halted some of its production lines and announced plans to place 800 of its employees in Finland who work in export operations with Russia on forced leave.

However, the immediate impact of the sanctions on business in Russia is still manageable. So most companies, including Russian subsidiaries and affiliates of foreign companies, have put off taking any radical steps and do not plan to make staff redundant or to liquidate their business in Russia – at least in the near future. Companies’ next steps will depend on this year’s financial results and on events in Ukraine.

New sanctions likely

Most economists and business analysts are pessimistic about Russian economic development next year. They believe the sanctions will take some time to filter through the economy but may have a significant impact on the country in the future. It is very likely that new sanctions will be imposed (both by the US and the EU, and by Russia).

Russian parliamentarians, for example, have drafted a bill that authorises the federal government to designate certain countries as ‘aggressor nations’ and ban all nationals of these countries (including companies registered there and their affiliates) from carrying out certain business activities in Russia (including audit, legal and consultancy services). The bill has not yet been introduced to the Russian parliament and it is hard to predict whether it will be adopted in its current wording. 

As we know, the EU (based on the UK’s proposal) is considering disconnecting Russia from SWIFT. This could significantly complicate bank transfer services, stock market operations and real estate business, for example, for companies in Russia and their partners abroad.

Options to cut personnel and labour costs

If the economic situation deteriorates, companies may be forced to cut their costs. Cost-saving measures will most likely include reallocation and reducing personnel. Under Russian labour law, companies could use the options below to cut their personnel and labour costs.

  • Lower employees’ salaries: as a general rule, an employee’s salary may be changed subject to the agreement between the employer and the employee. If there are organisational or technological changes in working conditions in the company, the employer may unilaterally change the amount of employees’ salaries. In this case, the employer must notify employees in writing at least two months in advance of the changes it plans to make to their salaries, as well as the reason for the changes.
  • Announce temporary suspension of work (‘downtime’) due to economic, technological, technical or organisational causes. During a downtime period, employees must be paid no less than two-thirds of their average salaries.
  • Agree unpaid leave with employees: if employees request it, they may be granted unpaid leave for a period agreed by the employer and the employee. The employee has the right to return from leave before the agreed date. 
  • Reduce staff: the employer must notify employees at least two months in advance of ending employment by redundancy. During this notification period, employees remain employed and continue to be paid their regular salary. The employer is also obliged to offer those employees who are being made redundant other available positions in the company. Employees may only be dismissed if there are no vacant positions to offer them or if they  refuse to take vacant positions they are offered. An employee who is made redundant is entitled to statutory severance payments of up to three months’ salary. Some employees may be protected from redundancy due to their family situation (for example, pregnant women, women who have children under three years old and single mothers who have children under 14).
  • Liquidation: if a company decides to liquidate its business in Russia, the employees can be dismissed due to the employer’s liquidation. As with the redundancy process, employees will need to be notified at least two months in advance of the liquidation and will be entitled to severance payments of up to three months’ salary. 
  • Repatriation of foreign employees: if a company decides to discontinue a foreign national employee’s work in Russia and to repatriate the employee to their home country, the employee’s Russian employment contract would need to be terminated under one of the grounds envisaged by the Russian Labour Code. Depending on the circumstances of repatriation and whether the company plans to employ the employee in other countries, the Russian employment contract could be terminated by the employee’s voluntary resignation or by the parties’ mutual consent.