Paper and packaging group Mondi is caught between a rock and a hard place, saying on Friday it cannot withdraw from Russia because of legal obligations it has there.
The group said in a statement to the JSE's news service that because of legal obligations to supply the power needs of about 60,000 people in one region, it cannot halt operations.
But the group, which is listed in London and Johannesburg, is exploring options that could entail legally separating the business from the rest of the group.
“Recognising its corporate values and broader stakeholder responsibilities, the board is assessing all options for the group’s interests in Russia, including any form of legal separation,” Mondi said.
It emphasised that this does not “mean or imply” it is “planning or initiating any liquidation or bankruptcy proceedings in relation to any of its Russian subsidiaries or assets”.
The Russian business generates 12% of group revenue and contributed about 20% of its earnings before interest, tax, depreciation and amortisation over the past three years.
Mondi said its most significant facility in Russia is a “wholly owned integrated pulp, packaging paper and uncoated fine paper mill located in Syktyvkar (Komi Republic)”.
The Syktyvkar mill, which “does not receive any direct funding from Mondi”, operates an “integrated power plant providing a portion of the Komi Republic’s energy demand, and is the primary source of heat and warm water for the Ezhva district of Syktyvkar, which has a population of 60,000 people”.
“It also provides other local community services such as waste water treatment. The mill is legally required by the Russian authorities to provide the energy supply,” it said.
Mondi said the mill continues to operate but is starting to “see a number of operational constraints” relating to the “importing of process chemicals, spare parts and other critical supplies”.
All Weather Capital senior equity analyst Cobus Cilliers said Mondi is in a difficult situation: “I would say they obviously are constrained on one side by sanctions imposed by the US, UK and all the European countries. The thing about Russia is first of all there is a legal duty on their part to supply power.”
Cilliers said closing the operation would “put a lot of Russian citizens in a very difficult situation”.
“But to be fair that is what sanctions are also trying to do, which is to sway the decision making of [Russian president] Vladimir Putin.”
If Mondi were to shut up shop in Russia completely and write off its assets, the “value destruction for Mondi shareholders would be significant”, said Cilliers. “Russia is a very profitable region for them because they have an integrated mill [in Syktyvkar]. It is well situated and the entire value chain is in the same place. It makes it very cost advantageous.
“Mondi is in a tricky situation because that mill is a very good asset on the face of it. It makes amazing margins. If you take the Russian operations out of the Mondi business, it will be a worse business.”
He said it was easier for companies such as McDonald's to exit Russia because the start-up costs were not as vast as those for the milling operations Mondi runs.
“You don’t want to give away the keys of a prized asset for next to nothing.”
By assessing an option to legally separate the Russian operations from the rest of the group, Cilliers said Mondi is perhaps looking at options that would enable it to bring it back into the fold if the situation between Russia and Ukraine improves. This could entail placing the Russian operations in a special-purpose vehicle run completely separately from Mondi.
We fully understand that no-one wants to leave a profitable operation in any country, but with sanctions imposed, you may be left with no alternative
— FNB portfolio manager Wayne McCurrie
FNB portfolio manager Wayne McCurrie said while it was a “difficult situation for any company that makes money in Russia” to have to consider leaving, whether the court of public opinion or its shareholders would accept Mondi remaining there is another matter.
“We fully understand that no-one wants to leave a profitable operation in any country, but with sanctions imposed you may be left with no alternative but to do that until circumstances change. You don’t want to leave, it’s a big part of your business, but the pressure is just on,” said McCurrie.
Mondi also has three converting plants in Russia, and said in its SENS statement that “all these facilities primarily serve the domestic market and have continued to operate through this time of heightened geopolitical tension”.
Mondi said it employs about 5,300 people in its Russian operations. It also has a paper-bag plant in Ukraine that employs about 100 people and whose production is now suspended.
Mondi said it “is profoundly concerned about the crisis unfolding in Ukraine and is shocked by the humanitarian impact”.
“We express our deepest sympathy to all those impacted by the ongoing hostilities, adding our voice to those calling for an urgent cessation.”
Mondi said apart from direct assistance it is providing to “colleagues in Ukraine”, it has also pledged €1m (R16m) to the UN’s World Food Programme to provide food for those affected by the conflict.
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