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Russia exit failures put businesses on the back foot

Author: ICAEW Insights

Published: 03 Apr 2023

Following the invasion of Ukraine, many companies pledged to withdraw their business operations from Russia. A year on, many are still there, risking stakeholder revolts.

Heineken has been in the firing line after it emerged that the beer maker’s Russian business is continuing to launch new products despite promises made at the outset of the war in Ukraine to withdraw from the country – with potentially devastating reputational consequences.

As the conflict rages on, the spotlight is on organisations that continue to operate on Russian soil despite pledges to cease those business operations. While countless companies have publicly announced they are voluntarily curtailing operations in Russia beyond the bare minimum legally required by international sanctions, some have continued to operate in Russia undeterred. 

Critics have been quick to highlight discrepancies between the promises to exit Russia and the reality on the ground, but for some businesses the process of an orderly extraction is proving more difficult than they might have anticipated.

In a statement, Heineken said the challenges for companies with physical production and manufacturing assets were complex and different to those that provide services or own retail shops with limited or no local production. “All business transfers need multiple approvals by the local authorities. It’s often presented as a simple thing to leave, but it’s much more complex. 

“For some companies, international sanctions make continuing to operate in Russia illegal and require them to stop. The food and beverage sector is not subject to sanctions, which means the Russian authorities view a decision to suspend or close as ‘intentional bankruptcy’, triggering risks of prosecution and nationalisation,” the statement continued. While frustrated that the process was taking so long, Heineken added that it remained fully committed to leaving Russia.

True, the ambition for some to cease activities in Russia is being thwarted by increasing Russian bureaucracy, financial penalties and increased risks of arrest and asset seizures. Employers are also juggling competing forces such as the need to exit the country and having a responsibility to their Russian staff. However, a lack of transparency regarding their ongoing presence in Russia is also leaving many on the back foot and facing stakeholder revolts. 

Heineken is by no means the only business struggling to leave the country; analysis by Yale School of Management’s Chief Executive Leadership Institute since the invasion of Ukraine finds that of the 1,576 organisations around the world currently on its list, only around a third have withdrawn. Obstacles erected by the Russian government have certainly limited or delayed divestment, but speculation is rife that some business leaders are not that aligned on the merits of decoupling.

“If we look at the long list of Western companies still operating in Russia, I suspect many of those left have no intention of leaving and are hoping to ride out the storm so they can go back to business as usual,” says Peter van Veen, ICAEW’s Head of Corporate Governance. “However, where there is a discrepancy between customer expectations, previous bold pledges to leave and the reality that they are still operating more or less as before, this could be a ticking reputational time-bomb.”

Van Veen accepts that the challenges to exit are by no means insignificant: “No Western company wants to increase their exposure to Russia, so selling the local operations is proving difficult. Even if you can find a buyer, it’s going to be heavily discounted. The other consideration is that you don’t want to sell the company to a buyer who is only interested in your IP and technical know-how. And any potential local Russian buyers are most likely on the sanctions list.”

Regardless of their circumstances, saying nothing is a flawed strategy, particularly as stakeholder interest ramps up. Yale School of Management’s analysis was originally presented as a simple ‘withdraw’ versus ‘remain’ register. The list now consists of five categories, graded school-style from A to F for the completeness of withdrawal. 

“People are watching and analysing and they are going to pull you up – fairly or unfairly – if you’re still there. So the more transparent you are with your investors and stakeholders, the less likely you’re going to suffer significant reputational damage,” Van Veen says.

“If you’ve decided to pull out, you need to follow through, or at least explain why you haven’t been able to do it yet. If your strategy is to stay put, again, you should be able to explain that to your investors and stakeholders along with how you are going to manage the not insignificant reputational risk of doing so,” he adds.

The Yale list shows some well-established consumer brands who have made no statements on their plans for the Russian market and continue to make their products available in Russia. “The most dangerous strategy is to carry on regardless, hoping no one will notice, because sooner or later someone will. Once the recriminations start, people won’t remember the long-winded technical explanations as to why you haven’t left Russia. No one will care.”

Be transparent, be proactive and don’t wait for the bad publicity to hit, Van Veen advises. “Frankly, once you’re on the back foot on this, are stakeholders going to believe you on other critical issues such as your ESG story or your climate claims? Once people start doubting your story and form the view that you are no longer an ethical business, you have a big job on your hands to re-establish that trust.”

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