The geopolitical instability and conflict resulting from the military operation of Russia in Ukraine have had significant impacts on corporate boardrooms around the world. The assumption of continuing peace and stability in international business strategies is being challenged, and Western governments are now demanding domestic firms to decouple from autocratic regimes.
A research was conducted aimed to answer several empirical questions related to the divestment of Western businesses from their Russian subsidiaries in the nine months after the invasion. The research identified the foreign companies operating in Russia at the time of the invasion using the ORBIS database and focused on completed exits rather than temporary suspensions of activity or announcements of intention to leave.
The findings of the research revealed that only 8.5% of EU- and G7-registered firms had completed a divestment from at least one Russian subsidiary by the end of November 2022. Estimates within the range of 5-13% were also defensible depending on the interpretation of companies’ public evidence. Exiting firms tended to have lower profitability and larger workforces compared to those that remained, and exit rates varied across countries.
These findings raise important questions for business executives, policymakers, and analysts. The first question concerns Western businesses’ willingness to sever ties with Russia’s $1.7 trillion economy. Although Russia is an international pariah now, it may not remain so in the future, and the allure of doing business in the world’s eleventh largest economy is not going away.
The slow pace of Western firms’ withdrawal from Russia raises the question of why it is taking so long. It is worth noting that divestments are complex and challenging even in the best of times, and the Russian government has taken active steps to discourage or prevent divestment by foreign companies. Several presidential decrees issued between August and October 2022 made it technically impossible for some foreign companies to complete their divestments.
However, the fact that more firms have not divested suggests that, in addition to the moral argument for doing so, their boards are weighing other salient considerations that bear on their fiduciary responsibilities. The extent to which the moral argument could override these considerations remains to be seen.
The parallels to the debate over divesting from South Africa in the 1970s and 1980s are evident, with concerns that too few firms will quit voluntarily. Although there was no military operation in another country in the case of South Africa, there was an active clampdown by Western countries.
The biggest question raised by this research is the extent to which senior corporate executives are aligned with Western policymakers who aim to decouple. If they are as aligned as they claim to be, there seems to be a mismatch between what policymakers want and what businesses can do when it comes to divesting rapidly without incurring significant losses.
As the military operation enters its second year, the human and economic toll continues to climb, and the commercial and moral ramifications of the war, along with the entrenched geopolitical rivalry it portends, will be felt much more widely. The implications for the business world are clear.