SAP delays Russia exit as deal talks fail and workers at risk

SAP (SAPG.DE) will miss its deadline to exit Russia before the end of the year as the German software group has failed to find a buyer for the unit, five sources said, underscoring the difficulties some companies are facing to leave the country.

The Walldorf, Germany-based enterprise software company in April joined Oracle Corp (ORCL.N), Salesforce Inc (CRM.N) and others in announcing plans to exit Russia after President Vladimir Putin sent troops into Ukraine, prompting a slew of Western sanctions on Russian companies and business people.

In July, CFO Luka Mucic said SAP would complete the exit by the end of the year and take a charge of 350 million euros.

While it has shut its data centers and cloud business in the country, SAP still has annual contracts for its maintenance business in Russia that it must service or face legal risks, said the sources, who asked not to be identified because they are not authorized to speak publicly about the situation.

Under Russian legislation, employees who run SAP’s local unit – SAP CIS – could be personally liable for any contract violations, according to four of the sources.

“SAP is fully committed to winding down our business in Russia as quickly as possible,” a SAP spokesperson said. “Recent legal developments in Russia have, however, limited our options with regard to the final steps of our exit.”

Russia’s parliament has been discussing draft legislation that would allow Moscow to seize Western companies’ assets and possibly prosecute executives involved in implementing sanctions against Russia. No consensus has been reached.

The SAP spokesperson said the company had “significantly reduced” its workforce in Russia from 1,250 people and would have less than 100 staff there by year-end.

The company will report its third-quarter earnings on Tuesday.

SAP’s software helps businesses manage a broad range of functions from marketing and human resources to logistics and procurement.

Its Russian clients have included behemoths in the energy, banking and mining sectors, such as state energy firm Gazprom (GAZP.MM), dominant lender Sberbank (SBER.MM) and mining giant Nornickel (GMKN.MM).

SAP has stopped providing support services to companies targeted by Western sanctions, according to the sources. While Gazprom and Sberbank were hit by Western sanctions, Nornickel was not.

The withdrawal of some of SAP’s services in Russia has already disrupted industries generating billions in revenue that are vital to the Russian economy, according to executives and analysts.

During SAP’s more than 30 years operating in Russia, corporations have invested heavily in its business planning and management systems, making rapid replacement of them challenging, said Leonid Konik, editor-in-chief of ComNews, an IT-focused publication.

The SAP case sheds light on the complications Western companies face leaving Russia. These include grappling with their contractual obligations, avoiding work for sanctioned individuals or institutions, offering staff relocations, and facing Russian state pressure on departing foreign companies.

Russia has been critical of Western firms leaving. Former President Dmitry Medvedev called them “enemies who are now trying to limit our development and ruin our lives.”

ARDUOUS PROCESS
While hundreds of Western businesses have suspended operations and announced plans to leave Russia, many are still going through the arduous process of making a formal exit.

In the scramble to leave, some Western companies have sold their businesses to investors Russia deems friendly, or transferred them to local managers along with the liabilities – often booking costly losses.

Some have inserted buyback clauses in sale contracts, such as carmakers Renault (RENA.PA) and Nissan (7201.T), who sold to a Russian state-owned entity for a symbolic sum in May and October respectively.

Others simply abandoned the market. Companies who had only a nominal presence in Russia or were able to quickly dispose of physical assets were the first ones out.

But for SAP, whose software systems are widely used by businesses, an exit is not so simple.

To discontinue operations in Russia – unless facing sanctions – could be considered as a breach of contract and might lead to court cases in the country, said Anton Imennov, senior partner of the Moscow offices of attorneys Pen & Paper.

Under contract rules, SAP must give three-months notice before severing relationships, which it has not done because of concerns over legal repercussions, the sources said.

SAP’s maintenance contracts in Russia automatically renew annually and were extended in September for another year, three of the sources said.

Rival Oracle (ORCL.N) says in a statement on its website it has withdrawn all products, services and support for Russian and Belarusian companies, subsidiaries and partners. An Oracle spokesperson declined further comment.

MANAGEMENT BUYOUT
An attempt to find a buyer for SAP’s Russian operations and talks for a local management-led buyout have yet to bear fruit, according to the five sources.

If SAP exits, local staff could be left to deal with potential legal repercussions which is why a management buyout is the preferred solution from the company’s perspective, two sources said.

A skeleton staff is required to keep the maintenance business running.

While some departing companies have fired local staff, SAP gave them the option to relocate from Russia. More than 150 employees have already relocated and some are still engaged in discussions, according to sources.