US sanctions authority delayed KFC’s Russia exit

A US sanctions authority delayed for months KFC’s exit from Russia this year after commenting on an “exit tax” for departing foreign firms when the deal was on the cusp of completion, according to the owner of the master franchise in Russia.

New demands from Moscow originally delayed the departure of KFC restaurants and led the US Office of Foreign Assets Control, or OFAC, to get involved, creating further delays, according to Sergei Levin.

Levin heads the legal department at Unirest, which manages the former assets in Russia of Yum! Brands (YUM.N), KFC’s US parent company. Yum! Brands did not immediately respond to an emailed request for comment.

The delay provides another illustration of how corporate exits have become more complicated as Russia has tightened restrictions. Executives say that navigating the rules is becoming harder.

Yum! Brands is one of many companies to exit Russia over Moscow’s actions in Ukraine, but its departure differed from that of rival McDonald’s (MCD.N) in that some KFC franchisees were permitted to remain open and the menu was barely changed.

The US Treasury declined to comment. Its OFAC office issued compliance guidance to the industry regarding the exit tax in the form of FAQs, or frequently asked questions, on Feb. 24, 2023, while negotiations on KFC’s exit deal were still ongoing.

Yum! Brands in April finalised its exit from Russia, transferring master franchise rights to Smart Service, a local franchisee led by businessmen Konstantin Kotov and Andrey Oskolkov. The deal included all its Russian KFC restaurants, its operating system and the trademark for the Rostic’s brand. The price was not disclosed.

“The process of finding a buyer and agreeing the basic conditions took some time,” Levin said. “When the basic conditions were agreed, a rule appeared that the sale of shares should be agreed with the relevant (government) department.”

Once the buyers were approved, taking this new requirement into account, another one appeared – the budget contribution termed an “exit tax” by Washington – Levin said. Russia added that demand in December 2022.

“The closure was delayed again, the correct procedure on paying the exit tax was agreed,” Levin said. “It seemed that all was agreed, everything was moving towards completion and then a foreign regulator appeared on the scene – OFAC.”

“As a result, it took quite a long time to settle…we closed everything successfully in mid-April.”

Former KFC restaurants began opening in April as Rostic’s, reviving a brand born soon after the collapse of the Soviet Union.

Levin added that Unirest hopes to complete the brand transition from KFC to Rostic’s in 2024, with plans for 60 per cent of the 1,200 restaurants in Russia to be Rostic’s by end-2023.