Companies that trade with nations that are internationally pariahs tend to draw a clear line between state and commerce. 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 Many governments have implemented these policies. One might not like everything. much—we wouldn’t do business anywhere,” he says.
Trade between countries is also supposed to promote peace and prosperity. Those who support it consider themselves good men. “We’re part of the cog of capitalism This 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 there are usually some correlation between inward investment and many other aspects of prosperity FreiheitYou can find it here.”
These calculations are now different since Russia invaded Ukraine in February 24. NATO nations and their western relatives quickly applied unprecedented financial and economic sanctions to Russia. These economic restrictions, which were of an unprecedented breadth and depth against a country boasting such large GDPs, are almost as common as the use of battering rams to stop aggressors from being able to access outside resources. These were made worse by the fact that a number of private and corporate enterprises unilaterally declared they would cease or terminate all business relations with them. 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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Within a matter of days, statements were rolled in by credit card and media companies, as well as management companies, banks, technology giants, and even tech companies. 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. IAn email was sent to employees and franchisees regarding the temporary closing of all Russian restaurants. McDonalds CEO Chris Kempczinski said the company “cannot ignore the needless human suffering unfolding in Ukraine.”
March. TMF Group, sorta joined the boycott. Weil said that TMF group would cease working with Russian clients but would still continue to provide services for clients in Russia. “It was very hard for me. decision. But not because I was afraidOf the immediate There are consequences It was difficult to believe. 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. The arguments against the other side were just too strong. He had an office in Ukraine. It was shocking to see what was taking place 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?”
What corporations did to become corporals
The surprising thing for sanctions specialists is the speed with which these corporations, such as TMF, have imposed these restrictions and how fast they did it. Many of these corporations decided to leave Russia without being required by the 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.”
Although businesses are becoming more comfortable complying with international sanction, they have a new level of behavior after the conflict in Ukraine. “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.”
One of the most impressive exits was that made by energy companies. These firms had invested significant money in Russia partnerships and were one of the first ones to announce their departures. 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.”
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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.
It is less economically sensible for businesses to leave, and more companies will move on.Russia’s business costs are rising. 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. With so many Russian businesses closing down or suspending operations, it could be that the government sanctions are almost irrelevant. “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.”
Future of global war
Long-term effects of private enterprise’s essentially choosing to boost their power at the engines of war remain unknown. “I think we’re an Uncharted waters now, as to the effects of this,” says Zarate. Experts in compliance are unsure how to best 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.
Russia is likely to be less open than ever to the West’s influence. This is a certain outcome. “We’ve accelerated the isolation of a major global economy in a way that we haven’t in modern history,” says Zarate. The isolation could make it logistically and financially difficult for Putin to end the occupation and war in Ukraine. It may also force Russian companies to look for trading partners, especially 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.
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Warmer relations between China and Russia could lead to significant changes in global trade and power balance. However, analysts remain skeptical. “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 was aware of the impending sanctions and attempted to build some firewalls and sanction-proof networks, but these failed. “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 levers of power were transferred to an operator who has different priorities. “TThis is where the private sector can have a say and it has been a major agent in the Russian economic isolation. It will have a say in how Russia is reintegrated if ever,” says Zarate. “But it also makes diplomacy a bit more unwieldy.” Experts pointed out the Iran nuclear agreement, which was signed by Secretary John Kerry. He went on a worldwide tour to convince banks that Iran’s sanctions had been lifted. They should now do business in Iran. The refusals made it difficult for businesses from other countries to establish shops, making the Iran accuse the West not honoring its part of the deal.
Many companies might not choose to invest in Russia, even if a settlement is reached in Ukraine. “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. In order to induce warring nations into laying down their arms, it is common for sanctions to be lifted with promises of foreign investment. “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. Investors and employees might protest the fact that exit conditions haven’t improved significantly if the deal isn’t perfect, as all agreements are. 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.
The downstream question for CEOs and boards is whether they have created a situation that makes future moral considerations regarding where to do business more difficult. Why aren’t companies willing to take a stand for the Ukrainians?
Weil is expecting some backlash 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. It was not normal.’”