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March 18, 2022

What companies fleeing Russia are failing to consider

The response of foreign corporates and governments to Russia’s invasion of Ukraine has been unprecedented in speed and scope, so much so that companies may not be making sufficient contingency plans.

By Elizabeth Meager

No-go area: most foreign firms are exiting Russia. (Photo by Valery Bocman via iStock)
  • Amid the war in Ukraine, even companies not directly affected by sanctions against Russia are rushing to exit Russian operations and partnerships. 
  • The unconditional withdrawal of many businesses sets this apart from previous corporate boycotts and makes the future even less certain, say experts. 
  • Some argue that companies may not be thinking ahead sufficiently about the potential impact on their businesses. 

What do vodka and Russian-bred cats have in common? They are victims of the West’s response to Vladimir Putin’s invasion of Ukraine. 

Western governments’ economic sanctions on Russia are already widespread and unprecedented, but they are having an impact well beyond their legal requirements. Whether directly affected by the restrictions or not, foreign firms are suspending business or withdrawing from the country in droves – nearly 400 at last count, according to a database compiled by the Yale Chief Executive Leadership Institute. 

A big question hanging over these largely voluntary decisions is whether they represent a short-term pause or a more lasting shift in the world order that sees one of the world’s biggest economies shut out of global markets.  

The outcome either way has practical implications – implications that some experts believe foreign companies may not be fully taking into account, particularly if they expect to be able to return to doing business in or with Russia. 

Corporate boards and management teams with any involvement in Russia whatsoever have a lot to consider, whether they are are staying or going. Being associated with an aggressive dictator accused of committing war crimes invites moral judgement and harms reputations, at the very least. 

There is also considerable uncertainty surrounding current sanctions and the fear of future restrictions, not to mention pressure from governments, customers and employees.  

But exiting and later re-entering is not easy either. While McDonald’s may be able to go back to selling burgers in Moscow relatively quickly, energy majors ditching billion-dollar partnerships are unlikely to find them easy to rebuild. 

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Still, the sheer speed and scale of the Western business community’s response to the war – like those of the sanctions themselves – is telling. 

“Increasingly, any association is being interpreted as support of the regime,” says Oana Branzei, strategy and sustainability professor at the Ivey Business School in Ontario. “Capitalism and globalisation are basically being used as weapons and levied against a humanitarian crisis in a way we have never seen before.” 

'Huge change in philosophy'

The practical implications appear to be similarly unprecedented. 

“There’s been a huge change in philosophy. We’ve been inundated by calls from companies that are unaffected by the official sanctions but are waking up and realising they’ve got to make a major political decision,” says Tobias Caspary, a London-based international trade partner at US law firm Fried Frank.  

Oana Branzei, strategy and sustainability professor at the Ivey Business School in Ontario, says some companies are making significant sacrifices and taking extraordinary losses, which in most cases will not be recoverable. (Photo courtesy of the Ivery Business School)

“Very quickly it has become way too costly and complicated for businesses to figure out if they can maintain the relationship, so the preferred option has been to just get out.” 

No action would appear to be too small. British supermarkets have removed products with Russian origins from their shelves. The Eurovision Song Contest has banned Russian competitors. So has the International Cat Federation

Ultimately, sanctions are a blunt policy instrument that in their simplest form restrict capital flows; in this case with the goal of starving the Kremlin of military funding. Yet despite their questionable effectiveness in achieving that particular aim in the short term, they clearly demonstrate the huge influence governments can have over the flow of money, whether directly or indirectly.  

Identifying sanctions breaches

It is not surprising, then, that blanket decisions are being made to cut ties, though identifying potential sanction breaches can be tricky. 

Once businesses have established their exposure to Russian customers, suppliers or other counterparties, they need to run this relationship through a sanctions screening tool: software connected to various databases of government sanctions. If that party is sanctioned, a company should immediately alert its lawyers, who can then establish how to extricate it from the relationship. 

These initial steps have been difficult this time around because Russian companies have in many ways anticipated further sanctions since Putin’s annexation of Crimea in 2014, if not earlier, says Zach Brez, litigation partner at law firm Kirkland & Ellis in New York.  

“A big part of that preparation has been to obfuscate some of the public’s ability to identify ownership change,” he adds. “Figuring out which entities are owned by who on the SDN [specially designated nationals and blocked persons list] was already incredibly complicated and has been made more so as a result of these efforts.” 

Given the swift introduction of sanctions on Russia, enforcement officials will likely be sympathetic to foreign companies over potential breaches – but not forever, says Kirkland & Ellis partner Marcus Thompson.  

Risk versus cost trade-off

“Any company that has historically done business in Russia and is not doing any sanctions screening is asking for trouble with regulators and prosecutors,” he adds. “In the past, it might have been enough to rely on general due diligence, but the risk is so much greater now.” 

And, for many businesses, it is simply not worth the risk of getting on the wrong side of sanctions regulators – or of social media

But cutting ties comes with a cost. Austrian fossil fuel giant OMV will reportedly lose $2bn on Nord Stream 2, the new Russia-to-Europe gas pipeline that had been due to open. BP could face losses of up to $25bn on the planned sale of its stake in Russian energy giant Rosneft.  

Indeed, many of those with big businesses in Russia – for instance, oil field services providers such as Baker Hughes and Schlumberger – have been quieter than the public-facing social media giants and consumer goods brands. 

On the other hand, says Branzei, some companies are “making significant sacrifices and taking extraordinary losses”, which in most cases will not be recoverable.  

After sanctions, then what?

Yet many businesses do not seem to be thinking about the future, she adds. Many parallels have been drawn with the 30-year boycott of South African products in protest against the apartheid system. A key difference today appears to be the lack of contingency plans. 

“Past corporate activism has been very different – with South Africa it was about creating incentives for the government to change its ways,” Branzei adds. “We are not seeing this here at all – these are clear, unconditional disassociations that the Russian people will not forget quickly.  

“Most people don’t seem to realise that re-entry won’t be possible – they are breaking these bonds with Russian stakeholders for good, and that could go beyond a regime change.” 

Harry Broadman, Washington, DC-based chair of the emerging markets practice at consultancy Berkeley Research Group, makes a similar point. “Unless companies have another untapped market to enter, they’re net losing sales – they’ve got to make a major calculation,” he says. “Shareholders are going to want to know when those profits will be restored. Boards need to be thinking about at what stage they’ll go back in.” 

That is if there are any assets left for companies to reclaim, of course. On 10 March, former Russian president Dmitry Medvedev said the government was working on plans to seize the assets of Western companies that have left the country, either via bankruptcy or nationalisation proceedings.  

The most realistic approach for foreign businesses may be to write Russia off as a lost cause. After all, there is no way of knowing how long sanctions will remain in place.

If Russia were to become an acceptable place for Western companies to do business again, all well and good; that would likely indicate that sanctions and business responses have had a positive impact. But few will be betting on that happening any time soon. 

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