The message of Volodymyr Zelensky was sharp. Western business must immediately leave Russia “because it is drenched in our blood,” the Ukrainian president told the US Congress last week. Those who remain will finance Russian President Vladimir Putin’s war, he said.
Transnational corporations have retreated from Russia at an unprecedented rate and on an unprecedented scale. Some, such as Danone, have stopped new investments but insisted they would stay, citing responsibility to “the people we feed”. [and] farmers who provide us with milk.”
Many are exploring more radical options. Jeffrey Sonnenfeld, a professor at the Yale School of Management who tracks the “business blockade,” believes more than 400 people have already pledged to cut back, suspend operations, or opt out entirely.
Behind the volley of announcements, “execution is very difficult,” he noted.
Interviews with executives, advisers and academics show that even companies that have announced plans to leave Russia face a dilemma regarding their employees, their assets and liabilities, and their short and long-term options in the country.
People problem
“It would be pretty easy for me to say that we are leaving Russia – that’s what we all want,” said Andrea Orsel, chief executive of UniCredit. However, according to him, the bank employs about 4,000 people.
Some companies like Spotify have pulled people out. Some have closed their businesses in Russia despite being large local employers, such as Accenture, whose exit affects nearly 2,300 jobs. After shutting down a plant in St. Petersburg, Toyota is gradually allowing its expatriates and their families, 48 in all, to return to Japan.
Most employers struggle to find a balance between distancing themselves from a suddenly toxic market and protecting the people on the payroll.
“You have places like McDonald’s and IBM with [large local] workforce and they don’t want to be seen as punishers to people who were part of their family,” Sonnenfeld said.
Even though McDonald’s has suspended its 850 Russian restaurants, it has promised to keep paying its 62,000 employees there.
But Sonnenfeld noted: “The question is how long McDonald’s and IBM can pay people to do nothing: how long will they tolerate it and how long will the general public appreciate that they are pumping money into a fraudulent economy.”
Privately, executives express concerns about possible retaliation. Russian prosecutors have warned that business leaders who criticize the government face fines and jail time, and businesses that go out of business could be found guilty of “fraudulent or willful bankruptcy.”
Another car company executive said: “We deliberately cited supply chain issues as the reason for the shutdown. [production]. We deliberately do not get into this politics, no matter what we think, because the situation is very, very delicate. If you stop [the plant] for some reason you are on their radar.”
Several companies cited staff concerns as a reason to stay. Dave Robertson, COO of Koch Industries, noted that the two glass factories in Russia employ about 600 people. “We will not leave our employees and transfer these production facilities to the Russian government so that it can operate and benefit from them,” he said.
Threat of expropriation
As Robertson hinted, some Western companies are concerned that suspended operations could be confiscated by the state. Putin warned that the Kremlin would find “legitimate solutions” to transfer the assets of multinational corporations avoiding Russia to “those who really want to work.”
Another automaker’s executive said: “If we are perceived as a stoppage of production without a good reason, we could face nationalization, bankruptcy or administration, and then asset forfeiture if you do not resume work.”
Alberto Alemanno, law professor at HEC Paris, said companies are now “paying a lot of lawyers to assess what they can do with it in terms of protecting their investment.”
Their concerns reached the White House, where press secretary Jen Psaki tweeted that “illegal” confiscations are subject to legal action. The Russian Embassy in Washington dismissed such concerns as “Russophobic hysteria.”
Sonnenfeld said the risk was limited because most non-industrial companies had few hard assets in Russia.
When Disney said it would “suspend” all of its activities in Russia, it added that “contractual complications” meant it would take time to separate from others, such as its TV channels.
McDonald’s also has ongoing commitments, such as restaurant leases. Overall, CFO Kevin Ozan said this month that the company’s spending in Russia will remain at about $50 million a month.
Some businesses may decide that the reputational risks of continuing to pay counterparties in Russia are too high, said Derek Leatherdale, managing director of geopolitical risk consultancy GRI Strategies.
“Theoretically, those firms that exit will retain their legal and financial obligations in Russia,” he said. “Probably, some people think that even if the Russian authorities try to use them, nothing can be done. This falls into the category of theoretical risk outweighed by the PR benefits of exiting.”
Western companies seeking professional advice face new challenges as international law and accounting firms shut down their local branches, or at least temporarily cut them off from their global networks. The legislation, designed to avoid any “circumvention” of the sanctions, limits what advice they can give to companies with Russian counterparties and liabilities or seeking to sell assets or receive payments.
One lawyer warned that while companies can legally stop doing business with sanctioned entities, those companies that voluntarily suspend their contractual obligations are at serious risk. “Going beyond sanctions is extremely risky,” he said. “There will be many claims from suppliers, joint venture partners and investors that will be heard in the English courts.”
Can sellers find buyers?
Companies, including BP and Shell, have announced plans to sell Russian assets. For some, existing partners or franchisees become logical buyers. But they face difficulty finding buyers not on Western sanctions lists and questions about how to repatriate any proceeds from the sale.
Cigarette manufacturers Imperial Tobacco and British American Tobacco are outsourcing their operations to Russian companies. BAT marketing director Kingsley Wheaton told the Financial Times that the company was aware of the “real possibility” that “sham bankruptcy” provisions being debated in Parliament could lead to criminal prosecution.
But he said the talks could take months, as transferring control of BAT’s 2,500 employees in Russia, its manufacturing facility in St. Petersburg and supply chains was a “challenging task.”
“This is not the classic M&A book on the coffee table,” he said. “Mergers and acquisitions of this kind would themselves take a long time. Add to that the peculiarities of the current environment, it will only make the situation even more complex and complicated.”
Keep options open
Those companies that have retained some or all of their original operations in Russia, more than 80, according to Sonnenfeld, are dealing with a weakening economy, disrupted supply chains and currency devaluations. Some struggle to access cash to support their operations.
As James Peters, Whirlpool’s chief financial officer, said: “You have demand that is falling, you have sanctions that are in place now that will make it difficult to supply components. We don’t know what the long and medium term looks like. Like for this.”
Ingka Group, whose 17 Ikea stores, nine planning studios and a distribution center in Russia employ 12,000 people, said it was operating on the assumption that the suspension of operations would last for many months.
“We want to ensure long-term job security for all of our employees and recognize that the situation in both countries is dynamic and changing rapidly. We work according to a six-month plan, but at the time of the announcement of a temporary pause, we guaranteed a three-month salary in Russia, ”the company said.
Return risk
Even as companies grapple with the challenges of meeting their retreat obligations, those who hope to one day return to Russia should consider how they will do so, says Michael Yuzem, a Wharton professor who specializes in risk management.
“If I’m at McDonald’s headquarters, I think, ‘One day we’ll be back at . . . What would be the context, the circumstances, the moment, the political climate that would mean that we can legally return?” he said.
Boards of directors should oversee a strategy for how their companies can return to Russia in a way that is acceptable to their stakeholders, Usim said. “It should be [informed by] specialized analytics.
A number of companies are exploring ways to switch off but stay, such as using call options to buy back assets temporarily sold to trusted local partners. But, as one lawyer said: “Selling is never easy, and finding a buyer is very difficult. If you are selling to a trusted third party, it is not easy to enforce a call option. If you let go of an asset, you may never see it again.”
Andrew Edgecliff-Johnson & Andrew Jack, Peter Campbell, Philip Georgiadis, Ian Johnston, Richard Milne, Michael O’Dwyer, Anthony Slodkowski & Eri Sugiura