Key Russian M&A market and industry trends' 2024

January is the traditional time to take stock of the past year. 2024 proved challenging in terms of both the foreign policy landscape and domestic events within Russia. Sanctions pressure from 'unfriendly' foreign states continued to mount, leading to the disappearance of entire product categories, the freezing of investment projects, and rising import costs. Domestically, Russia is experiencing a wage race, an expanding money supply, and rising inflation, compelling the Bank of Russia to maintain a high key interest rate to cool demand. All these factors directly impact the business climate and development prospects.

1. The ongoing "exodus" of foreign business from Russia

Following the events of February 2022, many foreign companies rushed to exit the Russian market. Some approached the matter formally, signing agreements to sell their businesses with buyback options or transferring control to local management. In our experience, such agreements were often cobbled together hastily—literally "on the fly"—within a matter of days and signed by foreign partners without detailed discussion of the terms. Other foreign companies decided to truly part with their assets at any cost, accepting significant losses.

Throughout 2022 and 2023, companies that had invested billions of dollars and decades of effort into their operations struck deals to sell them to domestic entrepreneurs or entities from 'friendly' jurisdictions. It is worth noting that such transactions required, and continue to require, approval from the Government Commission on Monitoring Foreign Investment, and in specific cases, the issuance of a special Presidential Decree. Obtaining permission to sell a business controlled by entities from countries deemed 'unfriendly' to Russia involves numerous conditions, ranging from mandatory sale discounts and budget contributions to the development and defense of key performance indicators (KPIs) and the preservation of jobs.

In 2024, we observed a decline in deals involving the exit of foreign companies from the Russian market; this is because, over the preceding year and a half, most companies had already decided whether to stay or leave. Nevertheless, throughout 2024, news emerged almost weekly regarding major deals to acquire the businesses or assets of such foreign companies. Many foreign investors had not yet secured the necessary regulatory approval for a sale; some faced rejection because their applications failed to meet evolving rules, while others were still seeking suitable buyers or negotiating prices. Given that experts estimate 70% of foreign companies have remained in Russia in some capacity, the potential for further exits clearly persists. This depends directly on sanctions pressure and the willingness of countries to penalize their businesses for circumventing sanctions or refusing to terminate commercial relationships with Russian clients.

2. Selling a business prior to the hike in personal income tax (PIT) on transactions involving shares and equity interests in business entities

Alongside the ongoing "exodus" of foreign business, many Russian entrepreneurs—some of whom have been operating for 10, 20, or even 30 years—have begun considering a complete exit through a cash sale of their business. There are at least a few reasons for this.

In 2024, tax legislation underwent a hasty overhaul, introducing VAT for organizations on the simplified tax system and raising corporate profit tax and personal income tax rates. These new rules took effect on January 1, 2025. Notably, the changes restricted the tax relief available to individuals who hold shares or equity interests in business entities for more than five consecutive years. Previously, the sale by an individual of shares or equity interests in business entities held for more than five years was exempt from personal income tax, regardless of the sale price.

This year, a 50-million-ruble threshold for tax-exempt income came into effect; if shares or equity interests are sold for a price exceeding 50 million rubles, the seller is liable for tax on the difference between the sale price and the 50-million-ruble threshold, regardless of the holding period. Consequently, for a transaction valued at 1 billion rubles, the income tax would exceed 140 million rubles.

Furthermore, while the tax rate was previously a flat 13% regardless of income amount, it is now 15% for income exceeding 2.4 million rubles. The only positive aspect here is that the tax rate does not rise above 15%, regardless of the size of the income derived from the sale of shares or equity interests.

Another common reason for selling a business is the challenging economic situation in Russia and uncertain growth prospects. Intensifying sanctions pressure, labor shortages, high key interest rates, and inflation make it impossible to engage in even medium-term planning—let alone a five-year outlook. Many businesses have struggled to establish new supply chains, source affordable alternatives from China, and service debts to financial institutions. In this context, selling the business appears to be a sensible way to preserve capital and avoid stress. This is especially true given that "black swan" events—such as a global recession or a drop in energy prices—could deal a severe blow to the domestic economy and drive business valuations even lower.

3. Seeking Promising Businesses and Assets Within Russia

Applying the dialectical principle of the unity and struggle of opposites, it is worth noting that some entrepreneurs are, conversely, actively seeking high-quality investment projects. This trend is driven primarily by a liquidity surplus within Russia. In reality, as professional investors explain, the market holds far more ruble liquidity than there are quality projects available. This surplus of ruble liquidity stems from two main factors: first, the de-offshorization process, which saw large fortunes repatriated to Russia from Western jurisdictions due to the risk of asset freezing; and second, the authorities' monetary policy, which aims to stimulate economic growth by prioritizing funding for the manufacturing sector.

Nor should we overlook exporters; the ruble’s depreciation against major currencies has enabled them to accumulate significant gains from exchange rate differentials in their accounts. As a result, three groups of players with significant cash reserves have emerged in the market: (1) companies directly or indirectly owned by the state (banks, state corporations, and development corporations); (2) private investors who have accumulated substantial funds through past profits or the sale of businesses at market peaks; and (3) subsidiaries of giants in the commodities, financial, and manufacturing sectors—such as Severgroup (Severstal), SFI, AFK Sistema, and others. These players are actively seeking investment projects capable of delivering exponential growth in the near term.

In reality, with the key interest rate hovering around 20%, only a few businesses—those possessing truly unique expertise and products—will be able to achieve growth that outpaces the rate. Moreover, the search for promising projects is not limited to the IT sector (which has already become a standard target) but extends to any area capable of producing high-quality goods to replace products from companies that have exited the market—ranging from pet food to apparel.

How the situation unfolds in 2025 will depend largely on global economic and political developments. Should inflation subside and the key interest rate decrease, the volume of M&A deals is expected to rise, as high-quality businesses and assets will remain in demand. We also anticipate that a number of assets and businesses currently owned by entities from "unfriendly" nations will change hands in 2025. At the same time, investors from "friendly" countries could also become active players in the domestic M&A market, provided that geopolitical factors stabilize.

Source: Lemchik, Krupsky & Partners LLC, Moscow

Link to original publication: https://companies.rbc.ru/news/yGMZQXIE8n/kakie-glavnyie-tendentsii-ryinka-m-and-a-v-2024-godu/