Assessing the Risk: The Future of Business in Russia
As conflict continues in Ukraine, businesses that initiated withdrawals from Russia are now in a state of flux. Currently, it is not possible to predict when business might be able to return, nor the quality and speed of that return. Whether business “will” ever return, and if so, “how”, are of equal interest though. Businesses and Non-Government Organisations (NGOs) that wish to return to or enter Russia in the future must expect an altered business environment, in which the market opportunity is different, and the security requirements to operate will be greater in risk and cost. Those planning to be active in Russia in the future should be aware of what that operating environment might look like.
The Yale CELI List, which highlights businesses and their status with regards to activity in Russia, is a useful tool for mapping out the extent of withdrawal by company, industry, and nation of origin. However, what is currently missing from such a quantitative analysis is a perspective on the different challenges which face business, the impacts on various industries, and the difficulties which will face those returning in the future. This lack of comparative insight inhibits any predictions for a return.
The Western business withdrawal cannot simply be examined as a bloc through a shared political motivation for an exodus. Practically analysing the style of withdrawal and what it would take to resume operations is much more difficult but would begin to reveal the disparity of measuring return timelines. Within the homogenised group of “Western” businesses are those such as Netflix and Jabil; both feature on the Yale List, but the respective levels of integration within Russia and subsequent withdrawal are incomparable due to differences in terms of sites, infrastructure, and scale. Jabil has closed a Russian office by withdrawing whereas Netflix had no similar physical presence. They cannot be spoken of in terms of a similar withdrawal or return timeline and the extent of withdrawal is not indicative of the speed of return. Any return for businesses will be uncertain and is likely to be in stages. Furthermore, the infrastructure system that was previously in place is unlikely to remain. There is therefore no clear elasticity in these withdrawals. The experience of returning will differ across various industries with different standards and operating methods.
An empty Prada Store in Moscow. Western businesses are pulling out or limiting their operations in Russia, (Moscow Times, 09/3/22)
Of course, companies might not be given a choice about returning. It is important to recognise that corporations have increasingly been placed within the paradigm of national security and become subject to what has been termed “blended aggression”. This posits that companies are increasingly the proxy targets of cyber and economic warfare through which to weaken a state without direct action against government infrastructure. Therefore, states might impose restrictions that prevent companies from returning to an environment in which they would be perceived as vulnerable. Even if permitted, new risk assessments will be necessary, and locations will need to be investigated thoroughly in case of espionage, damage, or other compromise in the absence of foreign companies. If the view is taken that businesses are extensions of national security, the US is unlikely to want business to re-enter Russia and thus create a vulnerability to exploit. The onus may not be on companies or NGOs as to whether they can return, but instead might be decided by the state.
It is already clear that the operating environment for companies and NGOs will be radically different if they do return. This is the collateral effect of the withdrawal and subsequent business “vacuum”. Big companies withdrawing will reduce the optimization and security of local infrastructure within Russia as less dependence is required, thus affecting small and local business. Those that stay may suffer as there is a decline in infrastructure standard, and when big Western business does return it may find a more difficult and less worthwhile market as operation costs increase to compensate. Russian threats to nationalise businesses that are left behind has promoted the idea that domestic business will fill the vacuum and subsequently prevent certain businesses returning, although the success of this is untested. In the context of emerging markets such as Brazil maintaining relative stability through early 2022, there may be few reasons to return to Russia even when politically viable.
The last decade has seen the security function within business shift from risk aversion to one of enabling opportunity. It is highly likely they will suggest avoiding Russia for two reasons now as it is both a risk and no longer an enticing opportunity. The Corruption Perception Index has consistently placed Russia in the bottom fifty countries since 2014, ranking them against indicators of corruption impacting the public sector. Furthermore, the issue of insurance acts as both an indicator of risk as well as contributing to the unattractive market prospects. Insurance providers in areas such as political risk that normally sell multi-year contracts will be halting potential deals involving Russia or increasing rates in line with the risk. This insurance normally covers aspects such as government seizure of assets in-country, and current threats to seize Western assets have clearly increased the gamble for these insurance providers, with some refusing to issue insurance across Eastern Europe. An increased cost of insurance would signal that Russia is an area of significant operating risk, as well as hindering the potential for any profit opportunities to be exploited by business. This model of insurance is an increasingly useful indicator as one survey found an increase in the number of international companies that bought such coverage, from 25% in 2019 to 48% in 2022, which shows that companies are beginning to prioritise the issue. A further survey confirmed this fear is not unfounded, with 75% of respondents claiming they experienced a “political risk loss” so far in 2022, compared to just 35% in 2020. Therefore, there is a diminishing opportunity for business in Russia moving forward due to increased risk affecting the required expenditure to operate.
There has been much discussion by the media over potential precedent for this situation. Most cited are the examples of “disinvestment” in South Africa when 200 American businesses withdrew to mount political pressure over the system of apartheid, and the influx of business towards the end of the Soviet Union in 1991. The problem with these examples is that eventual returns were precipitated by a change in the political context, whether the ending of apartheid in South Africa, or the collapse of the Soviet Union in 1991. Companies are now in an uncertain position with regards to returning because historical precedent would suggest that a significant political change will have to occur for return to become an option – and that is difficult to foresee. Furthermore, the limbo period in both examples took years to be resolved, with “disinvestment” being upheld for around five years in the case of some businesses, from 1985 into the 1990s. The use of precedent is not very compelling in this context, as the only similarities are conceptual, and it does not suggest a return to Russia will occur soon.
Many have reflected on the lack of a similar response in 2008 during the Russian invasion of Georgia, and relative inactivity after Crimea in 2014. Reasons abound such as the relatively small period in which the attack on Georgia occurred, not allowing sanctions to develop. Furthermore, it is commonly acknowledged that the 2010s saw a rise in the relationship between companies and social consciousness – where they did not feel compelled in the 2000s, they must now act. The UK government business guidance on Russia also cites the chemical attack in Salisbury as part of a “challenging backdrop” for business in Russia (although this guidance has not been updated since February 2021 and would likely be more stringent now). These events must be seen together as part of a longer period in which Russia has revealed itself as a non-secure and unstable business environment. The post-1991 optimism that stretched into the 2000s has been dispelled. The evidence has mounted since 2008, with some large businesses beginning a de-escalation of involvement since 2015 such as Google and Apple. This is the culmination of a linear trend in the perception of Russia as a market.
Contrary to the general trend of mistrust though, Chinese businesses in Russia saw an uptick in activity from 2014. The response of Chinese business going forward will also impact the future business environment for Western companies. The choices they make will affect the market that Western business might want to re-enter in the future; will it be overcrowded or even hostile to Western business? However, whilst the Yale List shows that there is a general trend of more Chinese businesses staying than withdrawing, it is certainly not conclusive. Many are “digging in” by the standards of the Yale List, looking to weather the current turmoil, but some firms, such as DJI, have been forced to withdraw or suspend operations in response to negative press surrounding involvement in the conflict. The assumptions on Chinese business staying are based more on an idea of political cohesion between China and Russia which is oversimplified, and if the market is no longer attractive to Western business, then China may feel the same. It is not entirely clear whether the future Russian market will be stabilised by Chinese business or if they too will avoid a risky investment.
The haste with which business left Russia is unlikely to be replicated if they return. Whoever makes the first move will be watched keenly by rivals, observing the challenge of re-integration into the Russian market. But this all depends on when Russia becomes a politically viable market, and there is no telling what event will precipitate that, or how likely it will be to occur. The immediate response from insurers and governments has labelled Russia as an area of high risk which is too unsafe and expensive to be considered a prospect for businesses. If they return, they will be met with new scenery, an altered and potentially more hostile infrastructure, and a surrounding corporate eco-system with new competition (domestic or otherwise) to which they must adapt.