Traditionally, corporations that do business with countries that are considered international pariahs have drawn a bright line between matters of trade and matters of state. Many CEOs see it more or less as Mark Weil of global business service provider TMF group does: “If I start saying, I don’t much like that government—and there are plenty of governments whose actions one might choose not to like very much—we wouldn’t do business anywhere,” he says.
Besides, trade between nations is supposed to be good for peace and prosperity, so those who help it along consider themselves the good guys. “We’re part of the cog of capitalism that spreads investment employment wealth,” says Weil of his company’s work providing compliance and administrative services around the world, including in Russia and Ukraine. “And generally there is some correlation between inward investment and prosperity and various freedoms.”
But these calculations have changed since Russia invaded Ukraine on Feb. 24. The NATO countries and their western cousins quickly slammed an unprecedented suite of financial and economic penalties on Russia. While cutting off an aggressor from outside resources is almost as old a battle tool as battering rams, these economic restrictions were of a breadth and depth that had never been leveled against a country with such a large GDP before. And they were enhanced by the number of corporations and private enterprises that unilaterally announced they would suspend or completely terminate business dealings there. Having jumped in with both feet, the business world has become enmeshed in an international geopolitical conflict with a whole new force, which could have a significant impact on how wars are fought—and peace is negotiated—in the future.
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In the space of a few days the statements rolled in from energy companies, credit card companies, media companies, management firms, tech giants, and on Thursday, even banks. It wasn’t just that they announced their departures in their usual neutral corporate-speak; many of them shook the dust off their feet before leaving. “We are compelled to act following Russia’s unprovoked invasion of Ukraine, and the unacceptable events that we have witnessed,” said Al Kelly, chairman and CEO of Visa Inc. Accenture, calling for an end to “unlawful and horrific attack on the people of Ukraine and their freedom,” said it was discontinuing its business in Russia. In an email to franchisees and employees about temporarily closing all its restaurants in Russia, McDonalds CEO Chris Kempczinski said the company “cannot ignore the needless human suffering unfolding in Ukraine.”
On Mar. 4, TMF Group joined the boycott, sort of. Weil announced that TMF group be wrapping up any work with Russian clients, but would continue to serve clients who were doing business in Russia. “I found it a very difficult decision. Not because I was scared of the immediate consequences or thought it was a difficult moral judgment but it’s that sense of crossing a line,” he says. If he changes his company’s blanket “no politics” stance in this situation, then other situations are negotiable too. But the arguments on the counter side were too strong. He has an office in Ukraine, and was shocked at what was happening there. He wanted to communicate to his employees that he meant it when he said integrity was one of the company’s core values, and he wanted to get ahead of any trouble. “It was partly me thinking, why are we wasting our time waiting for sanctions?”
How corporations became corporals
What has surprised sanctions experts is how many of these corporations are, like TMF, imposing these restrictions on themselves, and how quickly they moved. In many cases they decided to exit Russia before being ordered to by any government. “I’m surprised at the scope and scale of what the private sector has done,” says Juan Zarate, a senior adviser at the Center for Strategic and International Studies, who was a deputy national security adviser in the George W. Bush administration. “Even before sanctions really took full hold or before the full suite of sanctions were unrolled, you had the private sector making decisions to divest, to withdraw investments, to minimize exposure to Russia.”
While businesses have increasingly become accustomed to what is known as de-risking or over-complying with international sanctions, the conflict in Ukraine has generated a different level of corporate behavior. “I’ve spent pretty much my entire career working around sanctions,” says Daniel Tannebaum, the Global Head of Sanctions at Oliver Wyman, “and we’ve not seen something quite like this in terms of the self-sanctioning.”
Perhaps the most remarkable exits were those by the energy companies, who had sunk a lot of money into partnerships with Russia and were among the first to announce their exits. Many companies’ bottom lines would not be much affected by closing their Moscow offices. But Shell’s liquified natural gas joint venture with Gazprom, Sakhalin 2, was considered a jewel in its crown. “IKEA pulling out is not surprising to me. IKEA’s had problems with corruption and other issues in its dealings in Russia for a long time. It was the straw that broke the camel’s back,” says Zarate. “But BP and Shell and Exxon? Russia is a major partner, a major player in the energy market, that’s a big deal.”
The business sector’s swift buy-in to the economic isolation of Russia has made the sanctions more effective, says Bryan Early, an associate dean for research at Rockefeller College of Public Affairs and Policy at SUNY Albany, because “economic sanctions tend to work better when they are imposed in packages that are large and highly disruptive and impose an immediate strong impact, as opposed to economic sanctions that are imposed through gradual escalation.” That way, the offending countries do not have time to figure out a workaround and find new trading partners or financiers before they start to feel the impact.
The more businesses pull out, the less economic sense it makes for others to remain. The cost of doing business in Russia rises. It’s harder to find the goods and services needed to keep the business running. The number of people who can afford a given company’s products or require its services grows ever smaller.
“Companies likely would not be able to earn any money in the Russian market going forward and even if they did earn that money they’d have no ability to actually bring that money back into the U.S. financial system,” says Leo Feler, senior economist at UCLA Anderson School of Management. The net effect of so many companies exiting or pausing operations in Russia means the government sanctions might almost become a moot point. “It’s a chicken and egg story. If enough businesses abandon the Russian market on their own, the Russian market is also going to shrink,” says Feler. “You don’t need sanctions to do it if everyone’s self-sanctions.”
The future of global warfare
The longer term consequences of private enterprises essentially opting to add their power to the engines of war are unknown. “I think we’re an unchartered waters now, as to the effects of this,” says Zarate. Compliance experts are not sure how best to advise clients. “We’ve just not seen a situation where sanctions were literally brought to a gunfight in a very long time,” says Tannebaum. “So that is a bit of the challenge.” As an advisor to major financial services firms, which are mostly still doing business in Russia, Tannebaum says he’s in a lot of discussions about what move to make next and what the result would be without any clear answers. “This playbook is being written as we’re speaking,” he says.
One sure outcome is that Russia will be more cut off to influence from the West than ever. “We’ve accelerated the isolation of a major global economy in a way that we haven’t in modern history,” says Zarate. This isolation may make the war and subsequent occupation in Ukraine logistically, financially, and politically punishing for Putin to complete. But it also may force Russian enterprises to seek trading partners elsewhere, notably China. The two main Russian banks, Sberbank and Tinkoff Bank are already said to be considering using cards powered by China’s UnionPay system after Mastercard and Visa removed access to their services.
A warmer Chinese-Russian alliance could represent a significant shift in the global balance of power and trade. But analysts are dubious. “Thus far, China has neither condemned nor endorsed the actions in Ukraine. If you look at some of the underlying Chinese financial institutions, I don’t see the appetite of really welcoming with open arms kind of a mass volume of activity,” says Tannebaum. “This was more than the Chinese government had anticipated. I think that’s become extremely clear. So I’m not sure how much support China will provide.”
The West’s other trading partners may be scrutinizing the dramatic, co-ordinated moves that America and European governments and private enterprises are prepared to make in concert and the devastation such acts can cause and consider their own vulnerability. Putin knew sanctions were coming, and tried to create some sanction-proof networks and firewalls, but they proved insufficient. “One of the lessons that you can glean from this is that it’s very, very difficult to disconnect yourself from the global economy or protect yourself in the case of an overwhelming desire to impose economic punishment for bad behavior,” says Early. “If there are countries that are considering doing something that would lead to global stigmatization and a global punishment, they might have learned some lessons from this that it’s a lot harder to protect yourself from from the exposure.”
A shift in diplomatic leverage
As the business world begins to flex its diplomatic muscles, actual diplomats and statesmen may find that they have less impact and control than they’re used to. Some of the levers of power have been transferred to a different operator, with different priorities. “The private sector has a voice in this now and is a prime agent in the isolation of the Russian economy. It will have a say in how Russia is reintegrated if ever,” says Zarate. “But it also makes diplomacy a bit more unwieldy.” Several experts pointed to the Iran nuclear deal, for which then Secretary of State John Kerry went on a global tour trying to persuade banks that the sanctions on Iran had been lifted and they should start doing business there. They all declined, which made it almost impossible for other businesses to set up shop, leading Iran to accuse the West of not holding up its end of the deal.
Even if some negotiated settlement could be reached in Ukraine, in return for the lifting of sanctions, many companies may not choose to reinvest in Russia. “Diplomats don’t control the decision-making of McDonalds’ board or of BP’s CEO,” says Zarate, who wrote about the growing role of private enterprise in his book, Treasury’s War. Typically, removal of sanctions is accompanied by promises of foreign investment as inducements to persuade warring nations to lay down their arms. “The private sector has its own risk calculus and its own reputational calculus that may not coincide with the diplomatic off-ramps that are often discussed, in terms of turning off the pressure from sanctions or converting the pressure of sanctions into carrots.”
It’s not just a matter of whether corporations will re-invest in Russia. The unusual and undiplomatic manner in which the corporations announced their exits—with terms of disgust and dismay rather than the usual oblique references to operational difficulties and the uncertainty of the situation—may make Russian authorities less than eager to welcome them back. If the negotiated settlement is imperfect, which all deals usually are, investors and employees may protest that the conditions that led to the exit have not improved significantly. It’s possible a desire among businesses to emphasize their ESG bona fides has scorched their bridges back to Moscow, and Moscow’s bridge out of the conflict.
For CEOs and boards, the downstream question is whether corporate leaders have opened a door that will make future moral considerations about where to do business more complicated. If companies are prepared to make a stand on behalf of the Ukrainians, why are they not prepared to make a stand on behalf of the Uighurs, the Rohingya, or other oppressed peoples?
Weil expects some blowback from his employees. “It feels like we made a tough, but correct choice,” he says. “But I know I’m going to get emails saying, ‘I can’t believe you haven’t done anything to look after [this oppressed group] and I’m going to stress to them, ‘Look, don’t expect me to be your ethical instrument. We can’t have what’s now nearly 10,000 employees having their individual preferences satisfied by the policies we adopt. You have to accept that this was exceptional.'”
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