It's really hard for foreign companies to break up with Russia — and there are 3 main reasons why
One year after Russia invaded Ukraine, just 520 firms have fully exited Russia, per a Yale study.
Foreign firms can't quit Russia that quickly due to operational, ethical, and policy challenges.
They are also trying to exit the market in an orderly fashion.
It's hard to break up with Russia.
More than a year after Russia invaded Ukraine, just 520 companies have made a clean break with the country, according to an ongoing study from Yale University. That's despite 1,000 companies announcing they were voluntarily cutting back on operations just two months after the Ukraine war started.
And it's not for lack of trying: More than 2,000 companies are seeking approval to exit the Russian market, the Financial Times reported on Tuesday, citing a person involved in an exit negotiation. But the Russian authority handling the applications meets only three times a month and considers up to seven applications each time, thus prolonging the exit process, per the FT.
Others who have varying degrees of active operations in Russia cannot simply pack up and go for a variety of business and non-business-related reasons.
Quite simply, it's just not that straightforward for a company to get out of Russia right now — and there are three main reasons why.
1. Companies have been trying to exit Russia in an orderly fashion
Many companies were quick to announce their intent to leave the Russian market after it invaded Ukraine.
While some big brands such as McDonald's, Starbucks have fully exited the country, others may be taking a slow and orderly approach to their exit strategy or various reasons.
As Hassan Malik, a senior sovereign analyst at the Boston-based investment management consultancy Loomis Sayles, told Insider in June last year, "Translating boardroom decisions into on-the-ground action takes time."
Some companies also cited obligations to their local employees while deciding to leave or stay.
"Our colleagues in Russia have, through no fault of their own, endured months of stress and uncertainty," Arvind Krishna, the CEO of IBM — one of the earliest companies to exit the market — said in a statement in June.
"We do not think it is right to abandon our people in Russia," UK consumer giant Unilever said on February 13. The conglomerate, which currently employs 3,000 people in Russia, stopped all imports and exports of its products and capital flows into and out of the country last year but continues to supply made-in-Russia products domestically.
There are also concerns about what would happen to businesses if they simply shut their operations in Russia. "It is clear that were we to abandon our business and brands in the country, they would be appropriated – and then operated – by the Russian state," Unilever said.
Selling the business isn't a good option, either. "To date we have not been able to find a solution which avoids the Russian state potentially gaining further benefit," the company added.
2. The Kremlin has devised programs to keep the economy going
The Russian government made it challenging for companies to leave right after countries started imposing sanctions on the Kremlin over its war in Ukraine.
Investors who want to sell their businesses and are from "unfriendly countries" — those that have imposed sanctions against Russia over its invasion of Ukraine — must donate at least 10% of the sale proceeds to the Russian budget, according to a document posted on Monday by the country's finance ministry.
This donation is on top of a previously announced 50% cut on the sale of their assets, which has to be borne by these investors.
These hurdles are in addition to obtaining state approvals before they can leave Russia and an implicit pressure on employers to preserve jobs — a tactic Putin's regime has been using through the years, Loomis Sayles' Malik told Insider in June.
Thus, companies that want to exit Russia are pressed to find buyers for their Russian operations who would continue running the business under a different brand. The pool of buyers is also limited due to international sanctions against Russia.
McDonald's, for example, sold its business in the country to a local licensee in May. Under the deal, the buyer was required to continue employing and paying all of the fast-food giant's staff in Russia for two years after the takeover, according to a McDonald's statement in May.
These moves — alongside a labor crunch due to Putin's widescale mobilization of men — have kept the unemployment rate low and Russia's economy is appearing resilient over one year into the war. But its time may be up soon.
As aluminum oligarch Oleg Deripaska told the Krasnoyarsk Economic Forum in Siberia on March 2, Russia "will need foreign investors" as its funds are running low, Bloomberg reported on March 2. "There will be no money already next year," Deripaska said, per the media outlet.
3. Multinational companies face operation challenges in their exits
Because many foreign companies operating in Russia are multinationals, shutting operations in the country can have a domino effect on their businesses elsewhere.
Because such companies are integrated globally, their worldwide operations could be impacted if a subsidiary in one place is closed, Saul Estrin, a professor at the London School of Economics, and Klaus E. Meyer, a professor at Ivey Business School, explained in a blog post on Wednesday.
"This interdependence may be small when the subsidiary solely has a sales and service role," they wrote, citing food and US beverage giants McDonald's and Starbucks as examples. "However, the interdependence is high and disruptive for the parent organization when the subsidiary is procuring critical raw materials or intermediate products for the parent that cannot easily be obtained elsewhere."
Complex global supply chains mean that companies such as those in the automotive and machine tool industries would have to change their procurement processes if they close an operation, they added.
Read the original article on Business Insider