Why Western companies still can’t quit Russia

McDonald's is one of the 120 companies that have divested in Russia. Keystone / Roman Pilipey

Despite public and political pressure, the mass exodus of Western firms from Russia hasn’t materialised according to a recent study. Why aren’t more cutting ties with Russia despite pledges to do so?

In early March 2022, just a week after the Russian invasion of Ukraine, ABB became the first major Swiss multinational to announce it was suspending business with Russia. A few months later, it announced a complete exit from the country.

But nearly a year after the start of the war, the company is still “working on completing the exit as soon as possible in compliance with all applicable laws and sanctions”, a company spokesperson told SWI swissinfo.ch. The company had two production sites and around 750 people in the country when the war broke out.

ABB isn’t alone. While big names like McDonalds, Renault and Siemens pulled out of the country, the overwhelming majority of EU and G7 firms operating in Russia have stayed put or have not completed any plans to divest according to a studyExternal link published last week by the University of St. Gallen and IMD Business School.

When Russia invaded Ukraine on February 24, a total of 2,405 subsidiaries owned by 1,404 EU and G7 companies were active in Russia according to the ORBIS database, an internationally recognized collection of company financial information. Fast forward to late November 2022, the report, co-authored by Simon Evenett and Niccolò Pisani, found that only 8.5% or less than one out of ten companies had divested at least one subsidiary in Russia.

Study criticism

Since publication of this article, the IMD and University of St Gallen (HSG) study has received criticism that it overestimates the number of companies that remain in Russia because of the methodology. In particular, Yale Professor Jeffrey Sonnenfeld has argued that the study includes many Russian companies that have operations abroad.

According to a reportExternal link by Swiss public television SRF, the IMD and HSG researchers took data from companies operating in Russia that had at least one location in a Western country. One example is the search engine Yandex, which is a Russian multinational company. It’s holding company is based in the Netherlands.

Yale argues that this is misleading as Russian companies are, in most cases, unable to leave Russia and wouldn’t classify as Western companies. Nataliia Shavpoval, director of the Kyiv School of Economics, also raised questions about the dataset in an interview with SRF.

“Our results are very surprising. They show that companies have resisted pressure from governments, the media and NGOs to leave Russia since the start of the conflict,” Evenett toldExternal link French-language paper Le Temps. At the same time, the results are a reality check on how difficult it is for companies to exit a major market amid geopolitical tensions.

As the war drags on and public pressure wanes, there are few signs that a mass exodus of companies from Russia will happen. The divestment rates barely changed during the fourth quarter of 2022 according to the study despite Russia’s relentless assault on Ukraine.

Easy to say, hard to do

So, why have some companies split, and others hardly budged? Whether the Russian subsidiary is making money may have something to do with it, according to the study.

The 8.5% of companies (a total of 120) that divested by November only represented 6.5% of total profit before tax of all the firms active in Russia from the ORBIS database. There were also fewer exits from firms in sectors that were more profitable, specifically agriculture and resource extraction.

This implies that on “average the exiting Western firms tended to underperform in terms of profitability,” write the study authors. This could mean that, from a financial perspective, these companies had less to lose in cutting ties.

The study also finds that location of the company’s headquarters matters to some extent. Some 18% of US companies with subsidiaries exited Russia. In contrast, some 15% of Japanese firms and only 8.3% of EU firms have divested from Russia. Italian firms were more heavily represented among remaining than exiting firms.  This doesn’t necessarily mean that American, British or French firms are more susceptible to pressure from home governments, say the study authors.

The 90% of companies that still have equity investments in Russia haven’t exited for a range of reasons. The authors suggest that many companies aren’t subject to sanctions and may not want to abandon Russian customers or employees. For example, pharmaceutical companies, including Roche and Novartis, have no plans to exit Russia as medicine is exempt from sanctions for humanitarian reasons.

Companies that haven’t exited despite pledges might not be disingenuous or intentionally buying time, say the study authors. For some cases, “it has turned out to be more complex to find a buyer for their business or the planned divestments have been blocked by the Russian authorities,” Evenett told Le Temps.

The findings complement a running listExternal link of company responses compiled by Yale professor Jeffrey Sonnenfeld. According to the tracking, at least 1,000 companies have publicly announced they are voluntarily curtailing operations in Russia to some degree beyond the minimum legally required by sanctions. The Yale list looks at all business activities in Russia whereas the IMD and University of St Gallen study only looked at equity investments in the form of subsidiaries, where abandoning often entails higher costs.

Swiss companies?

The study didn’t include Swiss companies but the authors plan to include them in a future version. Based on dataExternal link gathered by Swiss public television SRF in January, companies such as ABB, Holcim and Lindt & Sprüngli are in the process of withdrawing.

Of the 9 company responses received by SRF, two companies – Swatch and Geberit – have no plans to exit Russia. A Swatch spokesperson told SRF that the watchmaker continues “to have hope that this terrible war will come to an end. Our branch (100% owned by Swatch) still exists, and we have kept our employees on board”.

The Yale list includes 44 Swiss companies, among them four continue to do “business as usual” in Russia and have announced no plans to change course. Consumer goods giant Nestle along with Novartis and Roche are among the eight companies that are “buying time”, which means they have said they are assessing the situation or postponing investments to some extent but not withdrawing completely. Eight companies have pledges to fully exit Russia but to what extent they actually have is unclear.

Edited by Virginie Mangin.

Note: On February 2, 2023, SWI swissinfo.ch added comments on the study methodology by Yale Professor Jeffrey Sonnenfeld in an infobox.