Why Is It So Difficult for Companies to Cut Ties with Russia?

Although at the beginning of the Russian invasion of Ukraine, almost all Western companies announced their departure from Russia, ultimately only 520 of them did so, according to a study by Yale University, while more than 1,000 announced their departure. However, the problem is not that they did not want to leave; according to the Financial Times, more than 2,000 companies are still seeking approval to exit the Russian market, but the issue is that the Russian body processing these requests meets only three times a month and considers up to seven requests each time, thus prolonging the exit process.

There are several reasons why it is currently more difficult for companies to leave the Russian market. While some companies quickly announced their intentions to leave, such as McDonald’s or Starbucks, others opted for a slow and ‘orderly’ exit strategy for various reasons. Some companies also cited obligations to their local employees when deciding whether to leave or stay. This was cited as a reason by Unilever, which currently employs 3,000 workers in Russia.

There is also concern about what would happen to companies if they simply shut down their operations in Russia.

– It is clear that if we were to leave our business and brands in the country, the Russian state would appropriate them – and then manage them – said Unilever representatives.

Even selling the company is not a good option. – To date, we have not been able to find a solution that would prevent the Russian state from potentially benefiting further from our company – added Unilever representatives.

Russians Make It Difficult

The Russian government has, of course, made it difficult for companies to leave immediately after Western countries began imposing sanctions on the Kremlin. Specifically, those who want to sell their companies and come from ‘hostile countries’, i.e., those that have imposed sanctions on Russia due to its invasion of Ukraine, must donate at least 10 percent of the sale proceeds to the Russian budget, according to a document published by the country’s Ministry of Finance. Therefore, companies wishing to exit Russia are forced to find buyers for their Russian operations who would continue to operate under a different brand.

McDonald’s, for example, sold its business in the country to a local licensee in May. According to the agreement, the buyer was obliged to continue employing and paying all fast-food giant staff in Russia for two years after the takeover, according to a statement from McDonald’s in May. These moves, along with a labor shortage due to Putin’s extensive mobilization of men, have kept the unemployment rate low and the Russian economy resilient for more than a year of war.

Domino Effect

Since many foreign companies operating in Russia are multinational, closing operations in the country can have a domino effect on their business in other countries. Since such companies are globally integrated, their operations worldwide could be affected by the closure of a subsidiary in one location, explained Saul Estrin, an economics professor at the University of London.

– This interdependence may be small when a subsidiary has exclusively sales and service roles, like McDonald’s and Starbucks. However, interdependence is significant and disrupts the parent organization when a subsidiary procures critical raw materials or intermediate products for the parent that cannot be easily sourced elsewhere – explains Estrin.

Complex global supply chains mean that companies like those in the automotive and machine tool industries would have to change their procurement processes if they close operations in Russia, concluded Professor Estrin.