Ruble's Decline Deepens Concerns for European Companies

By Justin Scheck, Jason Chow and Ruth Bender

The ruble's sharp fall Tuesday--and the possibility of drastic Russian government action to address it--deepened concerns for European companies that depend on Russia for sales, raw materials or manufacturing.

Auto makers, oil companies, banks and luxury goods firms each stand to lose if Russia's financial and economic instability continues, after years of making the nation's oil-fueled economy an integral part of their businesses. While they've suffered months of slower sales amid Western sanctions and Russia's faltering economy, the recent market slide--if it isn't stemmed--threatens to exacerbate the pain sharply.

French yogurt conglomerate Danone SA, for example, counts Russia as its largest single market, accounting for 11% of its revenue. The company has 24 plants and 13,000 workers in Russia.

Italian luxury firm Salvatore Ferragamo's Chief Financial Officer Ernesto Greco said in November that Russia's woes had already "limited growth" for the company. Mr. Greco said "the fragrance business is quite important" in Russia as well as Ukraine.

And Italian food makers were counting on the Russian market as a growth engine for coming years, with sales in the country growing by double digits annually, said Nomisma consultancy's analyst Denis Pantini.

The Russian ruble fell more than 12% early Tuesday following a late-night-rate hike by the central bank aimed at stemming the currency's fall. That dragged down the shares of some European firms from a range of industries exposed to the Russian market. The ruble and many stocks recovered after Economy Minister Alexei Ulyukayev later in the day ruled out the sort of capital controls that foreign multinationals most fear in such financial crises.

One of the most exposed western firms is BP PLC, which also owns close to 20% of Russia's state-controlled oil company OAO Rosneft. The British oil giant collects an annual dividend from Rosneft. In July BP collected a Rosneft dividend totaling $693 million for the first year of the deal.

Such payouts could end up stranded in Russia under some forms of capital controls. Such a hit would be a blow to BP, which is already coping with falling oil prices and the uncertainty of a U.S. court decision that could force it to pay billions of dollars in additional environmental damages for its 2010 Gulf of Mexico disaster.

Amid the rapidly falling ruble, BP might be forced to lower the value of its Rosneft stake, which could require it to book an accounting loss, said Iain Pyle, an analyst at Bernstein Research.

BP rival Royal Dutch Shell PLC doesn't have the same kind of exposure to Russia, but it does have stakes in two projects there that could be affected by constraints on capital. Shell owns a 27.5% stake in a massive natural gas project on Sakhalin Island, as well as 50% of a development called Salym, which produced the equivalent of 145,000 barrels of oil a day in 2013.

Spokesmen for Shell and BP declined to comment on how specific changes in Russia could affect the companies' income.

In October, Danone finance chief Pierre-André Térisse said sales trends were "solid" in Russia in the third quarter despite the tough environment. Still, consumption trends have changed since the ruble began to decline a year ago. Danone said higher-end brands such as yogurt drink Actimel or Aktual continued to grow well including in the most recent quarter, but lower-end products such as milk and fermented dairy products have come under pressure of late.

Danone said it was working on adapting its production and brand portfolio to this trend. A Danone spokeswoman wasn't immediately available to comment on the latest drop in the ruble and its possible impacts on the company.

Car makers also have a lot at stake. Renault SA's alliance with Nissan Motor Co., for example, owns Avtovaz, Russia's largest domestic car maker. But while others are reconsidering their plans in Russia, the Renault-Nissan Alliance is sticking with its big bet in the country. The alliance announced earlier this week it would be launching a joint purchasing organization that will buy parts and supplies for all related brands in Russia.

Car sales in November declined just 1% over the same month in 2013 as Russian buyers raced to foreign brands to purchase before the currency fell any further, according to data released on Wednesday by the European Automobile Manufacturers' Association. Luxury cars did especially well: Porsche sales jumped 55% last month.

The luxury business is one that has also bet heavily on Russia. LVMH Moët Hennessy Louis Vuitton SA and Kering SA have spent lavishly in erecting museum-like stores in Moscow and other cities that cater to Russian appetites for luxury goods such as Louis Vuitton handbags and Gucci loafers.

Luxury firms were also counting on sales growth in Russia to make up for softer results at home as more Russian tourists--some of the world's biggest luxury spenders-- are staying home amid geopolitical tensions with Ukraine. Kering finance chief Jean-Marc Duplaix told analysts in October that Russian tourism numbers in Europe had remained weak in the third quarter.

Kering declined to comment. LVMH didn't immediately respond to requests for comment.

Manuela Mesco contributed to this article.

Write to Justin Scheck at justin.scheck@wsj.com, Jason Chow at jason.chow@wsj.com and Ruth Bender at Ruth.Bender@wsj.com

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