Companies are increasingly expected to take a stance on major political and social events. Research by The Conference Board found that 72 percent of more than 800 global business leaders believe unequivocally that organizations should respond to social change issues, and 27 percent believe organizations should respond at least some of the time. Russia’s war in Ukraine tested this belief and evidenced the challenges and the complexity of such decisions which can deeply affect the reputation of a company.

Our ongoing dialogue with European-based senior business leaders and Council members from leading companies shows a balance needs to be found between two issues: not helping the Russian government to sustain the war in Ukraine, but at the same time, not abandoning team members, customers, and partners in Russia. The war has a political side, but also a human side. This brings the tension inside the company to another level compared to recent cases where companies were expected to take a stance.

Five options for companies in Russia 

The US-based Yale School of Management tracks in real time the decision of large companies with regards to stay or leaving Russia. As of April 22, the list documented more than 750 companies that have announced they are voluntarily curtailing operations in Russia to some degree beyond what is required by international sanctions. Companies are divided in five categories:

1. Digging In, companies that are just continuing business-as-usual in Russia.
2. Buying Time: Companies postponing future planned investment/development/marketing while continuing substantive business.
3. Scaling Back: Companies that are scaling back some significant business operations but continuing some others.
4. Suspension: Companies temporarily curtailing most or nearly all operations while keeping return options open.
5. Withdrawal: Companies totally halting Russian engagements or completely exiting Russia.

 What are European companies doing? Overall, 162 of 279 (58 percent) large companies in the six largest European economies are withdrawing from Russia or suspending operations. In other words, they are cutting off Russia from their major international networks for production, retail, tech development, supply chain, finance, adding to the burden imposed by Western sanctions.

In Germany, 34 percent of companies tracked suspended operations in Russia, and another 24 percent decided to withdraw. In the UK, the decision to withdraw dominates (51 percent), followed by suspension (36 percent). In France, 33 percent of companies tracked are digging in, followed by 28 percent who suspended operations. 27 percent of Italian companies tracked are digging in, followed by 23 percent who are buying time. In Spain, 58 percent of companies opted for a suspension, followed by 26 percent who are digging in. In the Netherlands, 31 percent of companies suspended operations, followed by 27 percent who are scaling back.

Why withdrawing from Russia is hard

Each of the five decisions outlined in the Yale School of Management list entails risks. Conversations with members of The Conference Board highlight some of the complexities of withdrawing from Russia that are often overlooked in public debates:

• Contracts with other companies, either in Russia or outside of the country, may require continued operations in Russia. Also joint ventures often require partner approval of changes, and in the case of franchise contracts, operations are locally owned.
• Withdrawing from the financial sector is particularly difficult due to insurance obligations and the number of financial and capital flows, such as portfolio investments and trade accounts that need to be revised.
• A law approved by Russia in March can hit consumers brands particularly hard by allowing local retailers to import products from abroad without the trademark owner's permission. It states that Russian companies are not obliged to compensate the owner of patents from “unfriendly” countries—in essence legalizing piracy and trademark infringement. Media company The Fashion Law reports that since the law came into effect the Russian patent office, Rospatent, has received many applications to locally register logos and names of well-know and established Western brands.
• In many cases, companies withdrawing, suspending, or scaling back continue to pay their local staff in Russia, but the question is - how long will this be possible?

Buying time, suspending, scaling back, or digging in, all carry risks and challenges

For those that have decided to suspend or scale back operations, the two common fears are the risks of criminal prosecution of local managers in the event of bankruptcy, and the possibility of confiscation of physical assets by the Russian authorities. In the past Russian courts have pursued criminal penalties for some bankruptcy-related offenses, such as hiding assets that can lead prosecution of local management. For many multinational companies, the risk of bankruptcy is often imminent as local branches are close to exhausting their available cash. Moreover, under Russian law, bankruptcy can be followed by confiscation of the business with the government or a local creditor taking it over.

Those that “dig in”, for one reason or another, need to adopt a “Russia for Russia” organizational model. In other words, they need to be prepared to run a business that will likely be removed from global networks. Challenges to implementing this model include setting up independent IT systems without violating sanctions that forbid transfer of technology and sensitive technological equipment and have limited access to outside capital and investment.

All of these risks are aggravated by concerns about the quality of the justice system in Russia. World Bank Governance Indicators show that in the last two decades there has been no improvement in the ranking of Russia on the rule of law and on the control of corruption. The country sits at the bottom quarter of the rankings for these two indicators, while its position on the quality of regulation worsened.

Looking ahead

A recurrent unanswered question is - how long the war will last and what will the new business environment in Russia actually look like? The longer the war in Ukraine lasts, the higher the chances of permanently closing operations in Russia since it will be harder and harder to reconstruct relationships with suppliers, landlords, franchisors or to reopen stores as time goes on. Moreover, even when the war ends, many challenges will remain since sanctions will probably be maintained.

Down the road, the capacity of Russia to attract business will remain severely compromised. The war is further deteriorating the independence of the justice system and the enforcement of intellectual property rights, making the business climate increasingly toxic for foreign companies. Russia is currently locking itself out of the global economy for many years to come.

Another recurrent concern is: what happens if the war spills over into EU/NATO territory? Companies are re-examining their continuity plans for Poland, Romania, Baltic countries, and Moldova, based on how they performed in Ukraine. The chances of the war spilling into EU/NATO territory are still low, but cannot be considered zero. Large companies need to map how a Russian invasion of Poland or Romania could affect them, detail how to evacuate plants and stores, have a conversation with clients, and revise plans on how to protect employees and their families.

It is important for companies to have a disciplined process for deciding whether and how to withdraw from Russia. Just as important is to think about the longer term consequences of such commitments, as well as to prepare from unexpected future developments.