This finding by two highly regarded academics, Simon
Evenett from University of St Gallen and Niccolo Pisani from IMD Business
School, contradicts earlier reports of a mass exodus by Western businesses and
points to a lack of alignment between the geopolitical strategies of Western
governments and the commercial realities of Western businesses.
The
study identified 1,404 companies headquartered in EU and G7 countries with a
total of 2,405 subsidiaries in Russia before its February 2022 invasion of
Ukraine. Only 120 of these companies, or 8.5% of the total, had exited at least
one of their subsidiaries by the end of November.
Moreover, some of the companies that have trumpeted their
withdrawal from Russia, such as McDonald’s and Nissan, have buy-back options.
Russia’s anti-monopoly agency says McDonald’s can repossess its Russian
operations within 15 years, while Nissan, which sold its business to a Russian
state-owned enterprise for €1, can buy back within six years.
The
study is at odds with earlier work by Yale University’s Jeffrey Sonnenfeld,
which said more than 1,000 companies had pulled out, threatening Russia with
economic oblivion, but it is broadly consistent with research by the Kyiv
School of Economics. The latest research double-checked the prior-data bases to
see whether companies that said they were withdrawing had in fact done so.
The researchers acknowledge that there are many sound
reasons why companies might fail to withdraw. A Western firm operating in a
sector excluded from official sanctions may decide that it is inappropriate to
abandon its Russian customers, who may have played no part in the decision to
invade Ukraine or in the prosecution of the armed conflict, they wrote.
In other cases, Western firms may not want to abandon
long-term relationships with employees or suppliers or decide to cease
operations because of the societal relevance of their products and services
(for instance, the supply of lifesaving medicines).
Even
when a Western firm has decided to exit and committed to do so publicly, it may
still ultimately fail to do so. For instance, it may not be able to find a
buyer for its subsidiary that is prepared to pay a high enough price. And even
when a buyer is found and the price agreed, the Russian government may have put
in place obstacles that impede or anyway delay the sale, or ultimately prevent
transfer of proceeds abroad.
It can take time to conclude such sales in adverse
circumstances so it is likely that the percentage quitting will rise, however
the evidence shows the overwhelming majority of Western companies with
operations in Russia are staying put.
US Treasury Secretary Janet Yellen has repeatedly called on
the US business sector to strengthen the resilience of its supply chains by friend-shoring,
or redirecting investment to allies. In the context of the risk of conflict in
the Taiwan Strait, she urged US businesses to pay greater heed to geopolitical
realities. We are seeing a range of geopolitical risks rise to prominence, and
it’s appropriate for American businesses to be thinking about what those risks
are.
However, the latest study suggests that those pressures may
not translate into meaningful changes in the international footprint of
companies. It is reasonable to conclude that the high cost of exiting an
operation that may have taken years and billions of dollars to establish has
restrained companies from following their country’s wishes, even if that means
they are effectively ‘trading with the enemy.
The
authors note that, if the immense geopolitical pressure on companies to decouple
from Russia has been resisted, it’s unlikely that the similar pressure for
companies to pull out of China will gain traction. For every US$1 invested in
Russia, Western multinationals have US$8 invested in China.
They argue that the Russian economy is large enough to be a
good test of the willingness of companies to respond to geopolitical pressure,
while not being so large (as China’s economy is) that Russia’s future economic
prospects are decisive for the global strategies of most companies.
The study found wide variation in both national and sectoral
responses to the geopolitical pressure to withdraw from Russia. About 16% of US
firms have closed subsidiaries, compared with 15% of British firms, 7% of
Japanese firms and 5% of German firms.
Companies were more likely to close loss-making subsidiaries
than those with healthy profits. The 120 companies that have shut subsidiaries
in Russia represent 15.3% of the pre-invasion workforce of Western
multinationals in the country but only 6.5% of the profits. The inclusion of
large service firms like McDonald’s and Starbucks among the exiting firms would
help to explain this difference.
In the manufacturing sector, the 50 subsidiaries that were
sold or closed were responsible for 18.6% of the workforce of Western
operations in the sector but only 2.2% of the profits.
The study said its finding that 8.5% of Western
multinationals had exited their Russian operations was almost certainly an
overestimate. Companies were counted if they had withdrawn one or more subsidiaries
but not necessarily all their operations in Russia. The presence of buy-back
options casts doubt on the finality of exits.
The study says greater attention should be given to the
costs of decoupling and friend-shoring.
If the write-offs announced by publicly traded Western
companies are anything to go by, divestment, decoupling, and supply chain
reconfiguration are likely to be costly to firms, their employees, and their
shareholders.
If those costs must be borne on geopolitical grounds, who should
bear them? Answering this question is of the essence since to date Western
corporate retreat from Russia has been limited.
