Over 10 Billion Won in Fines and Factory Sold at Low Price... Companies Struggling with Russia

Korean Air Fined 180 Billion Won
Hyundai Motor Sells Factory for 140,000 Won
Some Companies' Shares Also Seized

Korean Air's imposition of a fine worth approximately 180 billion KRW after a two-year lawsuit with Russian authorities is seen as a clear example of the risks faced by domestic companies operating in Russia. The damage cases suffered by companies that have entered the Russian market have been snowballing since the outbreak of the war with Ukraine in 2022.

In the aviation industry, the heavy fine imposed on Korean Air is viewed as the result of Russian authorities’ “nitpicking.” Previously, Korean Air cargo flight KE259 departed from Incheon International Airport in 2021 en route to Frankfurt, Germany, via Moscow, but took off without receiving the official stamp from the airport customs, resulting in a fine from the local customs office. Korean Air explained, "We submitted all documents and data according to Russian regulations, properly cleared the cargo, and received prior approval electronically from customs," adding, "Considering that all procedures, including the customs stamp, were followed, there was no illegal intent, and we explained this multiple times to the airport customs authorities," but these explanations were not accepted.

The date the fine was imposed was February 24, 2022, the day Russia invaded Ukraine. This has led to reactions suggesting that, anticipating financial sanctions from the U.S. and others, Russia squeezed foreign companies.

Among companies, the ‘Russia risk’ is seen as becoming more serious. Hyundai Motor Company sold its Saint Petersburg plant in Russia at a bargain price of 10,000 rubles (about 140,000 KRW) to a local company at the end of last year, 13 years after its completion. The plant’s annual production capacity was 234,000 units as of 2021. After Russia’s invasion of Ukraine and the international community’s sanctions, local auto parts supply deteriorated significantly, prompting this decision. Although a ‘buyback’ clause was included allowing the plant to be revived within two years after the sale, there are concerns that considerable damage has already been done. Hyundai also plans to transfer the General Motors (GM) Saint Petersburg plant it acquired in 2020.

The Russian government also seized shares of local subsidiaries of French dairy company Danone and Danish beer manufacturer Carlsberg. In July last year, a presidential decree placed the shares of Danone Russia and Baltika, a Russian brewery owned by Carlsberg, under the temporary management of the Federal Agency for State Property Management. Both Danone and Carlsberg subsidiaries had declared suspension of local operations following Russia’s invasion of Ukraine. Additionally, shares of state-owned power companies from Germany and Finland were also placed under temporary management by the Russian government. This series of moves aims to sanction the Russian subsidiaries of companies from unfriendly countries that have not yet withdrawn from Russia.

Companies sanctioned by Russia fear ‘aftereffects.’ Before the Ukraine war, Korean Air operated routes between Incheon and Moscow, Incheon and Vladivostok, and flew to Saint Petersburg during the summer season. However, due to the fine and difficulties in payment, resuming these routes in the future is uncertain. Like Hyundai’s buyback clause, some business options remain, but there are concerns that if preparations are not made in advance when the time comes, additional disadvantages may arise.

It is difficult for Korean companies to respond alone to sanctions imposed by the Russian government. There are calls for proactive monitoring of local conditions and support to prepare for risks. It is known that Korean Air did not make any special appeals to the Ministry of Foreign Affairs regarding the final loss in the fine imposition case. An industry official said, "Since Korea is also included among the unfriendly countries designated by Russia, we must continuously monitor Russian government actions and be prepared to respond."

Putin Holding a Press Conference in Kazakhstan
Russian President Vladimir Putin is holding a press conference after attending the Shanghai Cooperation Organization (SCO) summit in Astana, Kazakhstan, on July 4 (local time). The SCO is a political, economic, and security consultative organization led by China and Russia.
[Image source=Yonhap News]