As the brutal and terrifying sounds of modern warfare echo around Ukraine, thousands of companies are rushing to pull their capital out of the country responsible for raining down terror on Eastern Europe. Firms who’ve invested billions in Russian projects are learning the hard way – again – that ignoring the geopolitical realities of the countries in which they invest often comes with a steep and sudden price. But will the lesson be forgotten shortly after the last round of the conflict is fired?
Dash for barred exits
As of March 20, 2022, here’s a full list of the companies that have promised to divest from Russia entirely with no intention of returning even if that country ceases its attack on the Ukrainian people. In this list, the global companies that have withdrawn completely, suspended operations, reduced, or refuse to end their operations in Russia.
Many of the late joiners of this group find themselves in a serious bind, however. Those firms with physical or intellectual assets in Russia who wish to divest from the country face the reality of sanctions that prohibit selling those assets to individuals and companies based in Russia. They also face the reality that virtually no non-Russian firms are investing in Russia-based assets. Russia has also been cut off from the SWIFT banking system and the Putin regime is limiting the ability of foreign investors to move their assets out of the country. This leaves foreign investors in Russia with assets they cannot sell or use.
And while service businesses – like the Big 4 accounting firms, McKinsey, and other professional firms – leave a light footprint as they exit a market, capital-intensive companies – especially oil and gas giants – face massive losses as they flee. Which makes one wonder: Did these companies properly weigh the risk of investing in a country with serious political problems? And did they wait too long before pulling the plug?
Foreign direct investment in Russia has fallen dramatically since 2003:
While there were a few periods of growth, the recent history of FDI in the country is characterized by a relatively uninterrupted slide. Of course, it’s not a coincidence that Vladimir Putin first became President of Russia in 2000 and began implementing increasingly illiberal policies and directives that threatened the ongoing stability and security of economic actors in that country.
While causation is impossible to establish, it’s difficult to imagine that many firms contemplating investments in Russia weren’t scared off by the regime’s increasingly arbitrary and draconian actions. From media suppression to military invasions and widespread corruption, Russia’s hostility to free and fair elections, markets, and courts has been painfully obvious for decades.
It is to the credit of thousands of international companies that they either refrained from doing business in Russia in the first place, or exited well before the crisis in Ukraine unfolded.
Germany’s addiction to Russian fuel
Of the major western powers, there is one clear frontrunner in the race to do business in Russia: Germany.
Much of that activity is driven by Germany’s insatiable appetite for Russian energy resources. According to Politico:
Germany is by far the biggest EU spender on Russian oil, gas and coal, paying more than €40 billion in 2021; it gets 55 percent of its natural gas, 52 percent of its hard coal and 34 percent of its oil from Russia. In January alone, Germany sent €2.6 billion for oil and gas imports to Russia.
Unsurprisingly, Germany’s dependence on Russian energy is now creating massive problems for German political leaders who are stuck trying to balance Germany’s economic needs with moral and reputational imperatives.
Would the last one to leave turn off the lights?
The relative unity and solidarity of the liberal democracies in the face of Russian aggression are commendable. The sanctions imposed by those countries, combined with Ukraine’s remarkable military resistance and Russia’s surprising weakness, have devastated Russia’s ability to wage war against her neighbors.
The willingness of for-profit firms to exit a lucrative market is also laudable. But we shouldn’t forget that, even as Russia annexed Crimea and massed her troops on the Ukranian border, these same firms continued to do business as usual. It was only after the first shots were fired that most of these companies actually took action. And, by then, it was largely too late to mitigate their losses. There is no doubt that shareholders of internationally active companies around the world should and will be posing hard questions to the directors of these companies.