Lush’s CEO expects to run out of stock in Russia for Russian business

By | February 18, 2021
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Lush Cosmetics Ltd. has stopped sending supplies to Russia and expects its business in the country to vanish. However, it will not force the closure of its domestic stores, illustrating the many complexities multinational companies face as they try to sever business ties with Russia.

CEO Mark Constantine said Lush, a private company based in Poole, England, has 500 employees in Russia and operates 48 branded stores, which continue to operate, although management does not plan to recover any money.

What will happen to Lush’s stake in the Russian business is not clear. The majority of the business, or 65%, is owned by Dmitry Azarov, a naturalized Russian citizen born in Ukraine, and Lush owns the rest. Mr. Azarov, who also owns 65% of Lush Ukraine, has operational control of the business in Russia.

“We couldn’t just insist that he close the stores because that wasn’t written in [license agreement]Mr. Konstantin said, referring to Mr. Azarov and the license agreement that governs the relationship under British law. Loach is scheduled to discuss his next steps with Mr. Azarov on Wednesday, according to Mr. Konstantin. Mr. Azarov did not immediately respond to a request for comment.

Mark Constantine, CEO of Lush.


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Whether or not this license agreement can be terminated depends largely on the agreement in question, John Hammond, partner at law firm CMS, said..

“One can only cancel the license agreement according to its terms or if those terms are breached,” he said.

Since the invasion of Ukraine last month, more than 400 companies have announced their withdrawal from Russia, according to a tally by the Yale School of Management. Each company faces its own set of challenges in figuring out how to separate its brand, products and services from Russia. Some, such as S&P Global company ,

Ending business operations and letting local employees go, while others, including Kimberly Clark corp.

-Continue to sell some items in Russia.

Anheuser-Busch InBev . brewing machine to,

Which has a joint venture in Russia with controlling partner Anadolu EfesAnd the

It said it had asked Efes to suspend the license to produce and sell its Bud brand in Russia. The companies declined to say whether Ives had approved the request.

And restaurants of international brands company

It said last week that it had begun the process of getting rid of its stake in the Burger King joint venture in Russia after it tried and failed to suspend operations there.

“Currently, there is no complete block for doing business in Russia,” said Amanda Raad, partner at the law firm Ropes & Gray LLP. “However, compliance with rapidly changing sanctions around the world is becoming increasingly complex.”

Lush announced earlier this month that it would stop supplying its Russian business. Mr. Azarov has enough stocks for about three months, according to Mr. Konstantin. He said that the revenue generated in Russia will remain in the country to pay the salaries of employees.

Lush, which generated about 2% of its annual revenue in pre-war Russia and Ukraine, has set aside 150,000 pounds, the equivalent of $198,912, in payments to its Ukrainian employees, and sends the money over several tranches of its UK bank. The company is looking to acquire the rest of its business in Ukraine from Mr. Azarov.

Mr. Konstantin said that even after closing its Ukrainian stores in recent weeks – with the exception of the one that reopened in Lviv – Luch continues to pay the salaries of its 120 workers in the country. The company has also offered to transfer Ukrainian employees to other countries, although only 12 employees remain so far. Lash said do not make this offer to Russian employees.

In Russia, the local operator is looking to reduce the number of Lush stores to expand dwindling supplies, said Mr. Constantine. Konstantin said if Mr. Azarov gets new products from a different manufacturer and sells them at Lush, the cosmetics maker can take legal action. Mr. Hammond said again, how that will depend on the business structure and licensing agreement.

Lash store in Kharkiv, Ukraine.


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abundance

Mr. Konstantin said Loach had worked with Mr. Azarov for nearly 20 years. Mr. Azarov is not on the US Office of Foreign Assets Control, or OFAC’s sanctions list, and other lists covered by Dow Jones Risk and Compliance, a data provider.

However, Lush does not see a future for its business in Russia. Mr. Konstantin said Mr. Azarov was “looking for alternatives for us,” adding, “No one will buy it. The stake will only fall and [Mr. Azarov] He’ll change the name and sell something different.” CMS’s Hammond said that companies with stakes in a local company must transfer ownership to someone and cannot unilaterally transfer them.

Some Western companies have been able to transfer funds out of the country, but these transactions are getting more complicated by the day as the Russian government looks to reduce capital outflows, according to two people familiar with the matter. Lush still has money in Russia from the royalty payments made by Mr. Azarov. Mr. Constantine said he wanted it to be spent on local salaries.

Mr. Konstantin declined to comment on whether Russian law enforcement authorities had put pressure on the company’s local employees out of fear for their safety. Several Western companies, including Coca-Cola company

In recent weeks, visits by Russian prosecutors have been threatening them with possible arrests and confiscation of assets.

The effects of harsh economic sanctions against Russia are already beginning to be felt around the world. Greg Ebb of the Wall Street Journal joins other experts to explain the significance of what has happened so far and how the conflict can transform the global economy. Photo illustration: Alexander Hotz

write to Nina Trentmann at Nina.Trentmann@wsj.com

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