Lush CEO expects its Russian business to sell out and wind down

The cosmetics manufacturer Lush Ltd. has stopped sending supplies to Russia and expects his business in the country to fizzle out. However, it will not force its local stores to close, illustrating the many complications multinationals face when attempting to sever business ties with Russia.

Lush, a private company based in Poole, England, has 500 employees in Russia and operates 48 branded stores, which will continue to operate although management has no plans to withdraw funds, Chief Executive Mark Constantine said.

What will happen to Lush’s involvement in the Russia deal is unclear. The bulk of the company, or 65%, is owned by Dmitry Azarov, a naturalized Russian citizen who was born in Ukraine, while 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’s not in the [license agreement]’ Mr Constantine said, referring to Mr Azarov and the license agreement which governs the relationship under UK law. According to Mr Constantine, Lush will discuss his next steps with Mr Azarov on Wednesday. Mr. Azarov did not immediately respond to a request for comment.

Whether or not such a license agreement can be terminated depends heavily on the particular agreement, said John Hammond, partner at law firm CMS.

“You can only terminate a license agreement in accordance with its terms or if those terms are violated,” he said.

Since Ukraine’s invasion last month, more than 400 companies have announced their withdrawal from Russia, according to a tally by the Yale School of Management. Every business faces unique challenges when it comes to figuring out how to detach their brand, products and services from Russia. Some, like S&P Global inc,

cease commercial operations and lay off local employees while others, including Kimberly-Clark, leave corp

continue to sell certain items in Russia.

Budweiser Brewer Anheuser-Busch InBev SA,

which has a joint venture in Russia with controlling partner Anadolu Efes,

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

And restaurant brands internationally inc

Last week it announced it had begun selling its ownership interest in a Burger King joint venture in Russia after trying and failing to halt operations there.

“Right now there isn’t a full business ban in Russia,” said Amanda Raad, a partner at the law firm Ropes & Gray LLP. “However, it is becoming increasingly complicated to comply with the rapidly changing sanctions worldwide.”

Lush announced earlier this month that it would stop supplying its Russian business. Mr. Azarov has enough supplies for about three months, according to Mr. Constantine. The revenue generated in Russia would remain in the country to pay employees, he said.

Lush, which made about 2% of its annual sales in Russia and Ukraine before the war, has set aside £150,000 ($198,912 equivalent) to make payments to its Ukrainian employees and is sending those funds in multiple tranches from its UK bank. The company intends to acquire the remainder of its Ukrainian business from Mr. Azarov.

Even after its Ukrainian stores have closed in recent weeks – except for one that has reopened in Lviv – Lush continues to pay its 120 workers in the country, Mr Constantine said. The company has also offered to relocate Ukrainian employees to other countries, although only 12 have left so far. Lush does not make this offer to Russian employees, he said.

In Russia, the local operator is trying to reduce the number of Lush stores to expand dwindling stocks, Mr Constantine said. If Mr. Azarov sources new products from another manufacturer and sells them in the Lush store, the cosmetics manufacturer could face legal action, Mr. Constantine said. Again, how that would play out would depend on the structure of the company and the licensing agreement, Hammond said.

Lush has been working with Mr. Azarov for about 20 years, Mr. Constantine said. Mr. Azarov is not on the US Office of Foreign Assets Control sanctions list, the European Union, the UK Office of Financial Sanctions Implementation or any other list covered by Dow Jones Risk & Compliance, a data provider.

Still, Lush sees no future for his business in Russia. Mr. Azarov “is looking for alternatives to us,” said Mr. Constantine, adding: “Nobody will buy it. The stake will just fall away and [Mr. Azarov] will change name and sell something else.” Companies with interests in a local company would have to transfer their ownership to someone and cannot give it up unilaterally, said Mr Hammond of CMS.

Some Western companies have been able to transfer funds out of the country, but these transactions are becoming more complicated by the day as the Russian government tries to curb capital outflows, according to two people familiar with the matter. Lush still has funds in Russia from a royalty payment from Mr. Azarov. Mr Constantine said he would like them to be spent on local salaries.

Mr Constantine declined to comment on whether Russian law enforcement officials have put pressure on the company’s local employees out of fears for their safety. Several Western companies including Coca-Cola co

has had visits from Russian prosecutors in recent weeks who have threatened them with possible arrests and confiscation of assets.

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

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