Divestment Dilemmas in Russia: Business Teaching Case

Featured Sponsor

Store	Link	Sample Product
UK Artful Impressions	Premiere Etsy Store

After Russia invaded Ukraine in February 2022, some companies quickly scaled back their operations in Moscow. Big groups like Siemens, McDonald’s and Starbucks pulled out. A wave of corporate pledges to divest from Russia followed. Not all companies have kept those promises.

The Chief Executive Leadership Institute (CELI) in Yale School of Management has been tracking how more than 1,600 Russia-linked companies have reacted to the armed conflict.

By April of this year, a third had stopped engaging or dated altogether; a third party temporarily reduced operations but retained return options; and 15 percent continued as usual.

These mixed responses show that many companies are still struggling to decide if, when and how to exit the Russian market.

For some, the decision is easy, because their exposure is limited. Others, such as Austria’s Raiffeisen Bank International, which has operated in Russia since 1989, are highly dependent on their Russian operations and still operate in the country, although in April it was reportedly in talks with potential suitors about the sale. from its Russian branch. .

Many western companies struggle to sell assets due to the creation of new rules dispossession more difficult and expensive. In December 2022, the Kremlin required companies that wanted to leave to have assets valued by the government and to sell at a 50 percent discount. In many sectors, there are only a few buyers, if any, as many are under Western government sanctions.

Tobacco group Philip Morris has admitted it “would rather keep” its Russian business than sell on the Kremlin’s terms. Chief Executive Jacek Olczak pointed out his duty to shareholders to protect $2.5 billion in assets. Other companies face similar problems: Carlsberg, which joined Heineken in leaving Russia, also struggled to find a buyer.

Background

The discussion about whether to divest is heated. Those in favor say that companies that remain in Russia pay taxes to a repressive regime and fill Putin’s war chest. In doing so, they create a paradox: while many Western governments support Ukraine with bilateral aid, the remaining companies indirectly support Russia’s war. A global coalition of civil society organizations, B4Ukraine, estimates that companies that choose to stay could pay some $18 billion in taxes.

Others have argued that companies’ social license to operate anywhere is diminished if they stay in Russia. If the companies do not withdraw, they give legitimacy to the regime and indirectly condone a one-sided war.

On February 23, 2023, 141 countries voted in favor of a UN General Assembly resolution to end the war, 32 abstained and only seven voted against. The broad condemnation of the invasion puts moral pressure on the companies to leave. Doing business in Russia carries reputational risks, as it can give the impression that a company ignores human suffering.

Some companies were directly affected by government sanctions. Siemens, for example, cited “comprehensive international sanctions” and their effects on rail services and maintenance as one of the reasons for withdrawing from Russia.

While many companies in the “exit” camp highlighted moral obligations or political necessities, others made economic calculations. With a quick resolution unlikely, these companies face exponential risks in a country subject to significant sanctions. In many cases, supply chains are disrupted and resources are not available.

An analysis by Yale scholars of the joint effects of government sanctions and corporate divestment decisions concluded (and is titled) “Trade withdrawals and sanctions are crippling the Russian economy,” for example, because Russia cannot find substitutes for some products you can’t now. matter.

The economic risk argument has been supported by an analysis, “Divestment Under Pressure,” by Tetyana Balyuk and Anastassia Fedyk, which showed that companies with the worst stock price reactions to war were more likely to leave Russia. subsequently. Those who experienced only mild effects were more likely to stick around.

Some companies argue that they should stay in Russia, at least if the conflict does not escalate. They stress a social responsibility towards local employees, particularly with the hard-hit Russian economy. One assumption behind this argument is that the Russian people are not responsible for the war and the actions of the government.

Firms in the “stay” camp also point out that selling assets at deeply discounted prices is a gift to the Putin regime, especially if bought by oligarchs close to the Kremlin. French bank Société Générale has sold its Russian business to Vladimir Potanin, who served as deputy prime minister under Boris Yeltsin and maintains ties to Putin.

Other businesses emphasize that they provide essential goods such as medicines or basic food. Food company Cargill stated: “Food is a basic human right and should never be used as a weapon.” Some critics argue that Russia is violating this human right by stealing Ukrainian grain and destroying storage facilities. Others point out that Russia is a big food producer and can secure basic items without Western help. Pharmaceutical and agricultural companies are among the slowest to go, with more than four-fifths continuing to do business in Russia.

For the companies that remain, then there remains the question of where to draw the line. Should they stay in Russia regardless of how the conflict unfolds? The chief executive of Danish insulation producer Rockwool said his “red lines” included a full-blown escalation of war with direct NATO involvement or a nuclear attack.

Andreas Rasche is Professor of Business in Partnership at the Center for the Sustainability of Copenhagen Business School (CBS) and associate dean of the CBS full-time MBA program