International Business and Russia: A New Cold War or a Temporary Pause?
March 16, 2022
Since the Russian invasion of Ukraine in February 2022, the West has coalesced around a cohesive sanctions strategy aimed at crippling Russia. Several tranches of sanctions have ensued. G7 leaders recently announced a series of sanctions that includes revoking Russia’s most favored nation (MFN) status, and the United States has banned the import of Russian oil and gas. (CSIS’s Gerard DiPippo and Matthew Reynolds have a more comprehensive overview of the sanctions here.) In a matter of weeks, Russia has surpassed North Korea and Iran to become the most sanctioned country.
Russian president Vladimir Putin, meanwhile, has responded by banning exports of over 200 commodities and threatening to expropriate funds and properties of foreign businesses in Russia. For a country with a population of over 144 million people and a GDP of over $1.4 trillion, sanctions and export controls are already having a profound effect on international business and have encouraged firms not subject to sanctions to rethink their operations in Russia.
Q1: How has the private sector responded to the Russian invasion of Ukraine?
A1: Following the Russian invasion of Ukraine, several companies have pursued self-sanctioning, which entails pursuing a set of voluntary measures to sever ties with Russia. Even before the U.S. ban on Russian energy imports, oil and gas giants such as Exxon halted joint ventures in Russia. Financial services companies such as Visa and American Express are also discontinuing global services there. In a move intended to target Russian oligarchs, luxury goods companies have shuttered operations and emptied storefronts. Western food companies are also pulling out. McDonald’s and Coca-Cola, among others, have ceased operations in Russia, amid what many commentators are likening to the economic relationship between the West and Russia before the fall of the Soviet Union. Meanwhile, Russia has responded by threatening to nationalize and seize the assets of foreign firms in Russia that have abandoned the country in support of Ukraine.
Q2: How is the Russian government planning to nationalize private companies?
A2: Putin has made the threat, probably as a deterrent against further departures, but he also has a history of carrying out his threats, so it is likely at a minimum that he will make an example of a few selected companies. Nationalization, however, will be easier said than done. As a legal matter, with a compliant parliament and judiciary, it would be fairly easy. The difficulty will be in implementation.
First, someone has to take over management, and it may not be easy to find people willing to engage in a questionably legal activity that could subject them to further personal sanctions by allied governments. Second, the new management will have to find workers. Many of the current workers may be willing to continue, but some may not, particularly at senior technical levels, where significant numbers appear to be leaving for the West. Third and most important is the supply chain issue. Unless the company was making a product or providing a service that is wholly indigenous to Russia, restarting production (or reopening services, as in the fast-food sector) will be dependent on obtaining parts and components from the former owner. That could lead to a Faustian bargain between Russia and foreign companies, in which the former promises to eventually restore the company to its rightful owners, and the companies in return promise to supply the components necessary to keep operating. That bargain would likely be proposed by the Russians, and companies would agree to it at their peril, as both their governments and their consumers outside Russia would likely object.
Q3: How long will this conflict last?
A3: Any answer to this question is speculative. At this point, the war has already lasted longer than most informed observers expected, apparently due to a combination of stiffer-than-expected Ukrainian resistance and Russian incompetence. In this situation, where the aggressor has substantial military superiority but meets determined resistance from a highly motivated population, the most likely outcome is sustained violence and destruction over a long period of time. The Russians may well capture Kyiv and eventually install a compliant government, but Ukrainian resistance will continue, and the war will turn into a long, grinding insurgency featuring Ukrainian attacks on Russian people and facilities and a brutal Russian response. The longer that lasts, the greater the likelihood is of Ukrainian guerilla activities inside Russia that will further aggravate the situation. This scenario is likely to continue for years.
Q4: What are possible scenarios for resuming business in Russia?
A4: How companies resume business in Russia depends on when and how they reenter Russia. There are three general categories. First, if the war concludes in a way that is satisfactory to the United States and its allies, then companies will likely be left to decide for themselves how to proceed. If the war ends with a change of government in Russia and the departure of Putin from the scene, then allied governments might actively encourage companies to return to help rebuild the economy.
Second, as long as the war continues, companies should expect significant pressure to comply with sanctions, with appropriate action from their government if they do not. Also in the continuing war scenario, companies that left or stopped their activities in Russia voluntarily (i.e., without being required to do so by their government) will be pressed by public opinion not to go back. That is particularly true of consumer-facing goods and services industries that are vulnerable to reputational damage and consumer boycotts. Governments will also advise their companies not to return while the war is ongoing, and companies should be prepared for the possibility of additional sanctions that could impact them, even if those so far have not.
Third, there is the scenario where the war “ends” with Russian occupation of Ukraine and the installation of a puppet government. (That will not be the end of the war, as noted above, but it will turn the corner into a new stage.) In this case, companies should expect Russia to be a pariah state for a considerable period of time, with sanctions remaining in effect and pressure on companies not to return. Companies should expect similar pressure from consumers in allied countries.
Q5: What happens when global companies reenter or resume business in Russia?
A5: There are also different ways to return, which are in part dependent on the Russian reaction to departure. If the Russian government nationalizes a company and seizes its physical assets, return may be impossible or, at a minimum, dependent on Russia’s terms, which are likely to be unfavorable to companies. That may not, however, be true in the case of companies engaged in activities that the government badly needs. In contrast, if the government simply acts as a steward of a company’s assets, holding them until companies decide what to do, return might be fairly simple.
Even if a firm’s assets are taken over by the Russian government and handed to someone else, return might be possible if the company is prepared to make a new investment and, in effect, start over. In theory, litigation to obtain return of confiscated assets would also be possible, but the Russian judicial system is not independent, and an outcome the government does not want is extremely unlikely.
William A. Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Emily Benson is a fellow with the CSIS Scholl Chair in International Business.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2022 by the Center for Strategic and International Studies. All rights reserved.