The Big Four face a tough exit from Russia

Western companies have massively cut ties with Russia since Vladimir Putin sent his troops to Ukraine. But even when banks such as Goldman Sachs and energy companies like BP have said they are exiting the market, they have given little clarity on what that means in practice.

The big four accountants have joined the corporate exodus but are still struggling with the practicalities, according to several people who spoke to the FT. “It’s rabbit in the headlights,” said one.

Deloitte, EY, KPMG and PwC employ around 15,000 people in offices across Russia and are deeply intertwined with the country’s economy. Its largest companies are clients, including state-owned ones: KPMG has worked for Gazprombank and Lukoil while EY audits Rosneft, VTB Bank and Evraz. PwC signed accounts for Sberbank and PhosAgro and even worked for Russia’s central bank. Deloitte audits Polyus, Russia’s largest gold producer.

All of this makes withdrawal a torturous process. Here is a detailed overview of the state of affairs.

Did the Big Four really leave Russia?

No. Deloitte said its “transition will take a few weeks.” PwC is aiming for an exit “as soon as possible, which should take no more than six months.” KPMG hasn’t said anything about when it will be released.

EY’s global leaders told thousands of partners in a call on Tuesday that its exit would take eight to 12 months, insiders told the Financial Times.

EY’s departure could be canceled if the situation in Russia changes, they were told. The message from company executives “sounded like hope it might explode,” one of the people said. However, a person close to EY said the remark about a rollover was unscripted and it would be a misinterpretation to suggest the company was dragging its feet on leaving Russia.

The problem is that the Big Four are networks of separately owned national companies that pay a fee each year for sharing brand, systems and technology. The structure makes it difficult for domestic companies to exit and exit normally takes more than a year.

Speeding up the process means overcoming legal and practical hurdles, such as whether Russian members can continue to use licensed Big Four global auditing platforms.

Deloitte debated whether its Russian business would need to go “pen and paper” due to limitations in sharing technology with off-grid companies, a person familiar with its deliberations said.

Microsoft has suspended new sales in Russia, meaning local businesses could find themselves without even basic technology unless they can keep their existing software licenses.

The accountants said they were also trying to manage the split in a way that minimized the risk of newly independent Russian companies being punished by the Kremlin for exiting.

EY’s customers include Evraz, which mines iron ore and coal and manufactures steel beams and railway tracks © Andrey Rudakov/Bloomberg

Will people lose their jobs and the Big Four lose money?

Jobs will probably be lost, but indirectly. Russian member companies are expected to remain independent entities, but the exodus of Western companies from Russia and the country’s growing economic isolation means much of their work will dry up.

About half of PwC Russia’s revenue comes from referrals from its global network, a person familiar with the business said.

“If you’re not working for half the clients anymore, do the numbers,” said one person from another company. “People will leave”

Profits in Russia are not disclosed but are mostly kept locally, so there should be little effect on Big Four finances globally.

Sales by Russian companies are only a small fraction of the Big Four’s $167 billion annual global revenue. The main reason for developing a presence was to act as a ‘one stop shop’ for multinational groups.

KPMG Russia reported 2020 revenue of more than 15 billion rubles, or about $127 million following the collapse in the value of the Russian currency.

An oil refinery in Novgorod operated by Lukoil
An oil refinery in Novgorod operated by Lukoil, a KPMG client. The company’s Russian unit reported 2020 revenue of more than 15 billion rubles following the collapse in the value of the currency © Andrey Rudakov/Bloomberg

PwC earned 5.8 billion rubles ($43 million) in revenue from audit clients last year, while EY reported equivalent sales of 6.2 billion rubles ($46.2 million). dollars) in 2019, a figure that has reportedly increased significantly since then. Neither company disclosed its revenues for tax and advisory clients. Deloitte does not publish its numbers.

The Big Four in Russia also entrust the work to foreign colleagues. The resulting costs are undisclosed, but an executive from one of the Big Four said that they amount to a few tens of millions of dollars a year in his company and that this figure is less than the cost of divorce from its Russian operations.

Will the Big Four still work for Russian customers?

Russian companies are not bound by Western sanctions and will continue to work for domestic customers. “The principles and rules of working with clients in Russia will remain unchanged,” PwC Russia said.

Outside of Russia, the Big Four are required to stop work in certain countries for sanctioned customers, and have said they are in compliance.

PwC said it went further by refusing to work in any jurisdiction for sanctioned Russian clients, even though those sanctions only apply in a small number of countries.

EY and PwC said they would not work for Russian government entities or public companies. Deloitte said it was not working for Russia’s central government. KPMG declined to confirm its approach.

In reality, much of the work will shrink, with many Russian companies having to close their foreign subsidiaries and the remaining Russian customers being subject to tighter corporate controls.

What happens to international guests staying in Russia?

Russian Big Four affiliates should step up their efforts, but there are problems. The auditing standards stipulate that a group auditor must supervise the work of a local partner. That would normally mean putting “boots on the ground” to check evidence in countries where a company has significant operations, senior accountants have said, something travel restrictions now make nearly impossible.

If Moscow’s isolation persists, the situation could resemble that of China. Beijing is locked in a longstanding standoff with regulators of overseas-listed Chinese companies, who are barred from reviewing local audit documents.

There is also a question of principle as to whether the Big Four should help customers such as Danone, Toyota and Mars to continue doing business in Russia.

PwC said enabling “confidence in the reporting to investors of companies incorporated around the world” may “require working in Russia.”

Deloitte said it would “honour. . . commitments and obligations to global financial markets and multiple regulatory bodies”.

The Big Four have also said little about the types of work they will continue to do for international groups based in Russia. A person from an accountancy firm said there would be “cleaning up” to do, such as helping clients settle their tax debts.

An executive from another company said large clients would probably need someone to take care of the practicalities of getting out of the country.

“If we don’t do it, who is going to do it to allow these international companies to leave effectively in the proper way?”

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