The Russian invasion of Ukraine is expected to hit the coatings industry with supply disruptions and lowering demand. The long-term outlook remains vague since there is no clarity on the scale of sanctions and whether companies suspending operation plan to return.

The Ukraine war has already proved to be the biggest shock for the Russian economy since the collapse of the Soviet Union. As many as 400 Western companies have pulled out from the county at the time of writing, citing reputational risks and logistics issues. Some coatings producers joined the trend, as the demand in some segments looks troublesome.

For instance, in the first week of the war Volkswagen, BMW, Renault, Mercedes, Hyundai, Toyota and Ford Sollers suspended finished vehicle production at Russian factories. The Russian consultancy Avtostat forecasted that the entire automotive industry in Russia would have to halt operation soon due to Western sanctions, logistic issues and a lack of components. Over the past few years, several companies localized the production of automotive coatings in the country. There are future remains uncertain.

Things are similar with marine and aircraft coatings. The lack of foreign components and technologies is set to wreak havoc on these industries. The impact of sanctions on the construction industry is also going to be tough, though the government’s bailout package is called to soften the blow.

Massive exodus
In this background, some international coatings suppliers already rolled out plans to sever their ties with the Russian market for the time being.

Because of the ongoing conflict between Russia and Ukraine, as well as the sanctions imposed, Jotun has also decided to suspend its operations in Russia until further notice, the company said in a statement on its website in March.

“We have been operating in Russia for a long time. We have a good team and a modern production site there. However, based on an overall assessment, we now find it both right and necessary to shut down,” Jotun’s President and CEO Morten Fon commented.

“Jotun is deeply concerned about the humanitarian consequences of the ongoing crisis,”he said.

Jotun has been present in Russia since 1989 and has had its own local production since 2017. With more than 300 employees in the country, Russia accounts for between 2% and 3% of Jotun’s operating revenues, the company estimated.

On March 1, Hempel also said it had taken the decision to suspend its operations in Russia until further notice.

“Earlier this week, we proactively suspended all deliveries in and out of Russia and stopped taking new business in Russia. We now take the next step of halting our operations completely,” the company said. “As always, safety is of paramount concern and we are working with our Russian colleagues to complete the safe closure of our production facility in Ulyanovsk”.

Hempel said it had a total of 124 employees in Russia in the main office in Russia, in Moscow five sales offices across Russia. Hempel operated in Russia since 1996.

“The safety of our employees in Ukraine and Russia is our major concern,” the company said.

“We are keeping a watchful eye on developments. We always adhere to international rules and sanctions, and we are closely following the new sanctions against Russia as they are communicated, with which we act in accordance,” the company said.

Some Western chemical companies also declared plans to suspend Russian business. For example, DuPont said that due to recent developments, the company decided to suspend its business operations in Russia and Belarus. Solvay also suspended operations and new investments in Russia, the company said in a statement.

Chemours, one of the major suppliers of titanium dioxide to the Russian market, also cut its ties with the local market, just like LyondellBasell Industries and several other major components suppliers.

It is not clear how the exodus of coatings producers and raw materials suppliers will impact the market. Russia imports around 40% of raw materials for coatings production. Not all raw materials suppliers decided to suspend operation, but there are reports that those that are left now demand full pre-payment of all orders from Russian customers. On the other hand, the industry is believed to be hit with logistics issues, as most international shipping companies, Maersk, MSC and others suspend delivery in and out of Russia.

AkzoNobel and PPG?
AkzoNobel said “as a result of the latest EU sanctions, the majority of their Coatings business in Russia is being suspended.”

“Even non-sanctioned activities in Russia are affected as the whole chain from suppliers to customers is being disrupted,” AkzoNobel said in a statement on March 9.

In Russia, AkzoNobel runs four coating factories mainly supplying daily consumer products such as decorative paints and packaging coatings, including antibacterial coatings for hospitals and pipe coatings used for supplying drinking water.

Thierry Vanlancker, CEO of Akzo Nobel elaborated on this further in an interview to Financial Times published on March 14, saying that a combination of interruption to key supply chains and the financial strains facing its Russian customers made the failure of the Russian business inevitable.

“We’re pretty realistic that over a one month, two month period this will come to a gradual, if not normal, phasing out of the business. It’s either because the raw materials aren’t available any more, or it is because somewhere the main customer may not be able to pay anymore,” Vanlancker said.

PPG Industries Inc. said it is closely monitoring the situation in Russia and Ukraine, not sharing details about its future plans in the country.

“We have a presence in Russia, which equates to about 1% of our sales, and a very small presence in Ukraine with no manufacturing or distribution facilities,” the company said.

AkzoNobel has issued a statement that they support and follow all sanctions and measures put in place against Russia. In addition, they said that all activities that were not sanctioned at the time will also come to a halt as the supply chain was disrupted.

“We hope that such a large transnational corporation, one of the first to break off the production of coatings in the Russian Federation, will make the right decision, retaining customers and jobs for its employees, just like its main global competitor, the American company PPG, with its subsidiary PPG-Tikurilla, which, without making any official statements, continue to work and accept orders from consumers,” Centlack said.

Most recently, AkzoNobel  gave further information on its business being scaled down.

AkzoNobel CEO Thierry Vanlancker spoke to the international media about this:
“Our business in Russia represented about 2% of our revenue prior to the start of the conflict and we have 640 colleagues in the country.

Our Aerospace Coatings activities and new investments and marketing activities have already been suspended in Russia. The Q1 financial impact of the Ukraine/Russia conflict was approximately €5 million on our operating income.

Going forward, as a result of the latest EU sanctions, the majority of our Coatings business in Russia is being suspended and the residual Russian business will be locally operated which we expect to decrease by approximately 70% compared to 2021.

We’re evaluating the situation daily and it might be that more of the remaining business in Russia could come to a halt in the next months, mainly due to the increasing practical difficulties around the supply of raw materials into Russia.”

Western companies are now being extremely cautious with their public statements on the future plans on the Russian market, as the Russian government threatened the businesses leaving the country for political reasons with forced bankruptcy and nationalization. Besides, the authorities said that criminal charges could be pressed against top managers of these companies. Some members of the Russian Parliament called to prohibit the companies that left the Russian market over political reason to return to the country in the next ten years.

Russian companies can offer a replacement
Commenting on the decision of Jotun, Hempel and Teknos to suspend operation in Russia, Gennady Averyanov, president of Centlack, expressed confidence that Russian coatings manufacturers can provide a replacement to the products withdrawn from the market.

“The industry community regrets this decision of our colleagues. We understand that under the onslaught of sanctions pressure and the current situation, it is difficult for heads of European headquarters to make a different decision,” Averyanov said, adding that picture of raw materials supplies to the coating industry was challenging, but he hoped that joined efforts of industry community and the government would secure stabilization.

“Basically, these companies operated in the anti-corrosive, shipbuilding, and construction niches. Their total share in the overall output was close to 2%. Russian manufacturers have enough capacities and experience to replace these volumes in the market,” Averyanov said.