In Light of Russia Sanctions, Consider Your Conditions for Doing Business in Other Countries

In Light of Russia Sanctions, Consider Your Conditions for Doing Business in Other Countries

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The Russian invasion of Ukraine changed the role of business in their response to sanctions. Investors and businesses will need to reassess what strategies and models they should adopt in response to a ‘brave new world’ in which entry into a country is perceived of as implicit acceptance of that country’s political actions. The challenge for managers is to be ready not just for the Russia fallout, but to develop a sound, responsible strategy for the next country that breaks international order and launches into conflict. Recognizing where that may be, and perhaps even acting before it has reached the point of no return, can mean the difference between being lauded as a socially responsible firm and risking a total write-off.

Within one week of the Russian invasion of Ukraine, governments around the world passed some of the toughest and most coordinated sanctions in modern history. At breakneck speed, dealings with the Russian Central Bank and Russian travel to and through 33 countries’ airspace were banned, billion dollar projects were stopped, many Russian banks were blocked from using SWIFT, and powerful members of Vladimir Putin’s inner circle were individually sanctioned.

The immediate consequences for companies working and investing in Russia have permanently changed Russia’s future business environment, regardless of the outcome of the invasion. Already, companies are making major strategic decisions with unprecedented pace. Not satisfied with pausing operations in Russia, many firms opted to permanently cut ties with Russia and the Russian government — multi-decade long partners — within days.

The situation in Russia may be the first time that we’ve seen sanctions trigger a rapid self-sanctioning from business, but they are highly unlikely to be the last. While the situation is fast moving — as of this writing we are just three weeks removed from when the invasion started — we have already witnessed a series of initial trends that will carry forward into future conflicts and crises. And even for companies not touched by this conflict, these sanctions will have global, long-term impacts on not just the responsibilities of companies in crisis settings, but also in their ability to make a positive impact.

Backchannel diplomacy

Talking informally with governments has always been a part of doing business in almost every country. In war zones, that simple fact often means that businesses often talk with all sides of a conflict. After the Russian invasion of Ukraine — and Western sanctions in response — backchannel corporate diplomacy should now become more central to international business strategy. But establishing dialogue is only the first step in how companies should prepare; how they integrate this information into their forward political risk strategy can mean the difference between successful exit and entrenched failure at the moment of crisis.

Companies working in Russia have seen their businesses upended, and many have taken surprisingly strong stands. In the run up to this moment, many forward-thinking companies re-examined their political risk and valuation assessments in breadth and depth, preparing for crises that require immediate decisions about whether to divorce or separate from a specific country as well as building in more sophisticated knowledge of the political world and its consequences. Others went the “business as usual” route.

Let’s look at two examples of companies that took different approaches before the crisis hit: BP and Renault.

After spending 30 years building up its business, it took BP’s board just three days to accept a potential $25 billion loss by selling its stake in Rosneft, Russia’s state-owned gas company. BP battled with Putin’s corrupt oligarchy for years until it came to a working arms-length relationship. But the speed of withdrawal meant that even with that relationship, BP had a rapid exit strategy in place.

In contrast, car-maker Renault relies on the Russian market for 12% of its revenue through its majority stake in AvtoVAZ, which is both the largest car manufacturer in Russia and a partnership with the Russian state manufacturer of missiles, planes, and AK-47s, itself the subject of Western sanctions since 2014. The business partnership makes it expensive to pull out of the Russian economy and the loss of 37% of its value since the Russian invasion makes it expensive to stay. Renault is deeply enmeshed with actors in Putin’s war machine, and although it has paused some of its operations because of logistics problems caused by the sanctions, Renault appears to have had no real exit strategy or to have planned for such tough sanctions.

Both BP and Renault have powerful Russian connections, but while Renault considered these connections to be the most important component of doing business in Russia, BP was more adept at recognizing that the government was capable of actions that could significantly harm their business and prepared accordingly. For BP, backchannel diplomacy was fed into the overall business structure as a means of providing information about risk; for Renault, it was about deepening a relationship.

This shows that companies may have to keep problematic governments at arms-length even while engaging with them, a delicate balancing act that many firms will need to build capacities for.

Politics, Positions, and Ethics

While the division between business and politics was always less stark than most wanted to believe, managers now need to justify not just their own firm’s ethical positions, but also the politics of their partners (or partner countries). And late movers will pay the price. For example, McDonald’s restaurants are operated by franchisees, but not in Russia and Ukraine where the majority of restaurants are company-owned. McDonald’s stayed almost completely silent on the invasion for the first two weeks. Then it was forced to act in response to widespread calls for its boycott by ceasing sales in Russia.

As more and more firms withdraw, public and political pressure that was once spread over dozens of companies magnifies onto the few that remain, exacerbating their reputational risk. Just as there were first mover advantages to leaving, there are last mover drawbacks to withdrawal.

When political events or crises occur, firms often gravitate to very short-term thinking. But unprepared firms can suffer for years or decades if they make the wrong strategic calculus about whether they should stay or go. If the actions of Russia against Ukraine are sufficient to justify a disengagement, what does this mean for firms working in countries with regimes with even greater human rights abuses and support for atrocities?

Managers must ask themselves two key questions when considering their operations abroad.

First, what are your conditions for exiting the country, especially if that country’s politics are at odds with yours? Moreover, how far beyond sanctions or legal obligations are you willing to go? This answer can vary dramatically across sectors. For example, financial services firms’ conduct of due diligence is already a multibillion-dollar expense and for which the transition from doing business to not doing business is much simpler than a company with factories and retail stores.

Second, what are your conditions and expectations for re-entry? There is an assumption that the Ukraine-Russia conflict will be relatively quick, but studies of authoritarian regimes invading neighbors show that the opposite is true: Putin is much more likely to hold on to power than be deposed and to continue this war — although at a lower level of intensity — despite domestic consequences. If the goal of companies is just to do business, then they will have to accept the harsh reputational and financial consequences of doing so. If the goal of companies is to do business ethically, then the company must prioritize peace over all else. Very practically, this means it will be increasingly hard for ESG raters to justify high social scores for companies operating in countries with socially unacceptable politics, particularly when those politics could lead directly to war crimes tribunals.

The Sanctions to Come: Are You Ready?

For most firms with Russian investments and operations, the invasion of Ukraine is tragic but not totally unexpected — especially for firms that were working in Russia when it invaded Ukraine in 2014. Business leaders understood the risks associated with doing business in Russia and had witnessed past incursions and horrific human rights abuses. Still, even firms with contingency plans in case Russia attacked again were caught by surprise by the speed at which everything changes. This is partially because sanctions have been typically adopted and implemented over a period of time, without real teeth or with many loopholes, but these sanctions were swift and severe, forcing firms to make more rapid decisions. This sets a precedent that firms must learn from.

The Russian invasion of Ukraine changed the role of business in their response to sanctions. Most notably, many firms have self-imposed sanctions, restrictions and withdrawals far beyond what government sanctions required. But even more important, these responses illustrate a new operational approach for companies doing business in other countries with reprehensible human rights violations. Companies withdrawing from Russia and Russian markets are listening to their stakeholders and looking to align their business practices with the views and values of their customers.

Whatever the resolution of the Russian invasion, business leaders need to understand that their world has changed. Investors and businesses will need to reassess what strategies and models they should adopt in response to a ‘brave new world’ in which entry into a country is perceived of as implicit acceptance of that country’s political actions. The challenge for managers is to be ready not just for the Russia fallout, but to develop a sound, responsible strategy for the next country that breaks international order and launches into conflict. Recognizing where that may be, and perhaps even acting before it has reached the point of no return, can mean the difference between being lauded as a socially responsible firm and risking a total write-off.

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