Trading With the Enemy: The West Grapples with High Cost of Leaving Russia

illustration of Putin Alex Fine

Immediately following Russia's invasion of Ukraine on February 24, a relative handful of foreign-based companies announced they would be leaving Russia. Jeffrey Sonnenfeld, a Yale School of Management professor who is tracking the companies that have left and the ones that are staying, estimates the original number at "several dozen."

Since then, as international revulsion at the war has grown, more than 1,000 companies from around the world have disengaged to varying degrees from Russia.

If the moral case against President Vladimir Putin's attack on his neighbor is undeniable, the business arguments for and against pulling out of Russia can be more complicated. For any company, leaving Russia is complex and time-consuming. And the question of what actually constitutes leaving—sell everything? close temporarily?—can get murky. Not to mention expensive: Shell Oil has said its decision to leave joint ventures with Russian state-owned energy giant Gazprom would cut its quarterly profit by $4-5 billion. J.P. Morgan Chase expects to lose around $1 billion from scaling down its Russia operations. McDonald's is looking at a write-off of up to $1.4 billion for its exit.

Will the growing number of businesses departing Russia, due to either official government trade restrictions or via voluntary "self-sanctioning," cause enough pain to end Putin's war in Ukraine? And at what cost to the Russian economy and the world's?

Yale's Sonnenfeld says self-sanctioning is a more potent weapon than government sanctions, despite the increasing use of the latter by the U.S., even before the Ukraine conflict. According to the Treasury Department, after 9/11 sanctions became "a tool of first resort to address a range of threats to the national security, foreign policy, and economy of the United States." (The U.S. currently has 37 sanctions programs in place around the world.)

"The voluntary business boycotts dwarf the sanctions," Sonnefeld says. "These companies are affecting 46 percent of Russia's GDP by their actions, independent of governmental-executed sanctions. It's enormous."

Sonnenfeld says the model to keep in mind is apartheid-era divestment from South Africa. He recalls a conversation with Bishop Desmond Tutu: "It was his view that the sanctions were helpful, but it was the voluntary business boycott that gave them the heft of both symbolic and substantive levels."

To shame companies who haven't announced plans to leave Russia, a Yale Chief Executive Leadership Institute team of researchers led by Sonnenfeld has graded more than 1,300 companies on an A-to-F scale for completeness of withdrawal. So far, the team found, more than 300 companies are fully exiting Russia. About 170 are listed as "scaling back," reducing some their Russian operations. Nearly 500, the largest group, are taking "suspension" actions, shuttering operations for now but keeping their option to return open. About 160 are listed as "buying time," not making new investments in Russia but maintaining those they already have. And 240 companies are "digging in," conducting business as usual in Russia with no announced plan to dial things back. The "digging in" group includes U.S. companies like Hard Rock Cafe and the medical device firm Medtronic.

Graphic. Degrees of separation. Newsweek

Sonnenfeld says professional service firms, big oil and big tech were among the quickest to react. "We were taken aback that those were the three first movers, and oddly fashion, fragrances, consumer goods, casual dining, even advertising agencies—people who pride themselves on reading public sentiment—were surprisingly late to the game."

In a paper published in May, Sonnenfeld and other researchers argued that leaving Russia is not only morally right, it is also good business. The stock of some publicly traded companies that had left Russia, they wrote, had done well enough since departure to offset the costs of leaving, while the stock of companies that stayed had lagged. In particular, the researchers wrote, "Remarkably, at least six companies which incurred significant announced asset-write downs—Heineken, Shell, Exxon, Carlsberg, AB InBev and Société Générale—have actually seen more wealth created, far outweighing the value of the written-down assets, when taken in aggregate. Perhaps even more surprisingly, each of these companies had positive stock performance after the announcements of their exits from Russia and the values of their asset write-down—after their stocks initially tanked in the period leading up to their announcement in most cases."

Risk and Reward

Timothy Ash, an economist who is an associate fellow in the Russia and Eurasian program at the British Chatham House think tank as well as a strategist at BlueBay Asset Management, says remaining in Russia is a lost cause. "You can understand why they're trying to wind down as gracefully as possible," Ash says, "But in the end, the writing's on the wall. You'd need to be an idiot not to realize that the geopolitical story is fundamentally changed.I think it's just about managing the exit."

For people actually running companies with business in Russia, though, things don't always seem that simple. According to Rachel Samrén, for instance, senior vice president at the Swedish telecom Telia Company, operating in Russia and other authoritarian nations "is not a zero sum question; there are so many complexities."

Founder and Chairman of the Alliance of Democracies Foundation Anders Fogh Rasmussen speaks during the Copenhagen Democracy Summit at The Royal Danish Playhouse (Skuespilhuset) in Copenhagen, on June 10, 2022. - The fifth edition of the summit takes place from June 9-10, 2022. Philip Davali/AFP/Getty

In June Samrén moderated a "Trading with the Enemy" panel discussion at the Copenhagen Democracy Summit, an annual gathering of diplomats, policy makers and business leaders held by the Alliance of Democracies Foundation. The event, led by Foundation chairman and former NATO Secretary-General Anders Fogh Rasmussen, is designed to encourage cooperation between democracies and to promote their resilience in the face of advancing authoritarianism. (This year Newsweek was a media sponsor.)

Ben Crawford, CEO of CentralNic, a British multinational internet services holding company, told the panel that sudden withdrawal from authoritarian nations like Russia can have unintended downsides. CentralNic manages valuable domain name portfolios for major organizations and businesses. Severing ties with Russia, he said, "would mean they would be lost, this intellectual property, and fall into the hands of cyber criminals, counterfeiters or worse...We, in the end, realized our first responsibility was to maintain that intellectual property. And if that meant that we had to continue to do business with Russia in a small way, that was necessary for something more important."

Kent Walker, Google's president of global affairs, told Newsweek in Copenhagen the tech giant believes it can do more good by maintaining a presence in Russia. Google has suspended all paid services in the country: While users can no longer purchase apps or pay subscriptions via Google Play, they can still access previously purchased or downloaded content and access free apps. "Our contribution is honestly to get the facts out, get the truth out, and we will stand by that and continue to do that as long as we are able to," Walker said. "We are trying to make sure that we are providing sources of high quality information. We want Google search to be an antidote to fake news."

Another member of the "Trading with the Enemy" panel, Wolfgang Niedermark, a member of the executive board of Federation of German Industries (BDI), took a different and more sweeping view: "I think it will be a long term demolition of our business relations with Russia. Governments and businesses must come to terms with the fact that the Russian president has abandoned the minimum consensus of the civilized world. Hence, for the time being with Putin and his team, it's impossible to have whatever you would call normal business relations.
"Ending the fighting alone is not enough for German business to return. For business to resume, there would need to be a fundamental change in the behavior of Russia, which is committing crimes in Ukraine that violate international law. I do not see this change in behavior for the time being."

Chatham House's Ash also thinks Russia's business relations with the west have changed fundamentally and for the long term. "All these companies suffered significant losses as a result of getting out of Russia, so they'll remember that for quite a long time," he says. The Kremlin's plan to nationalize the assets of departing companies, he adds, will further hinder any potential return. "Self-sanctioning has been a game changer."

A Creaking Fortress

The flight of western companies poses tough problems for Russia, where major industries remain heavily dependent on imports despite the Kremlin's "fortress economy" strategy.

According to a 2021 Russian central bank memo, 65 percent of national enterprises were dependent on imports. In June, a survey by Russian building materials and construction industry groups found that Russia relies on imports from the U.S and European Union for at least half of all basic building equipment. Almost 80 percent of Russia's commercial aircraft fleet is made up of foreign-manufactured aircraft, mostly by Airbus and Boeing, both of whom have frozen business in the country. Moscow is seizing hundreds of foreign-owned aircraft stranded in Russia, but will be unable to secure vital spare parts. In May, Russian Transport Minister Vitaly Savelyev admitted that Western sanctions "have practically broken all the logistics in our country."

Car manufacturer Avtovaz, creator of the iconic Lada, froze production in March, unable to obtain necessary components. In June the company resumed operations with its new affordable four-door passenger car, the Lada Granta. The new sanctions-proof model does not have airbags, no-lock braking systems, electronic stability control or emergency retraction locks for its seat belts, and does not meet modern emission standards.

The Russian government has been pursuing an import substitution strategy since 2014, when Western nations first imposed sanctions, then over the Kremlin's seizure of Ukraine's Crimea peninsula and its fomenting of separatist rebellion in the Donbas region. Domestic production and imports from fellow Eurasian Economic Union members, Moscow has hoped, would account for the loss of access to the West. The day after this February's invasion Russia's Ministry of Industry and Trade said import substitution measures "have been established and are operating. This makes it possible to find import substitution solutions for any product ranges if required."

The strategy, however, has produced disappointing results, particularly in the tech and industrial sectors. According to an analysis from GIS Reports Online, Russia's economy is too small and inefficient to make up for the shortfall. Capital outflows have hampered efforts to replace Western imports, leaving Russians to use "second-rate substitutes."

This disconnect is evident on the battlefield. Russia's prestige precision long-range munitions—vaunted in pre-war propaganda—rely on foreign components. Pentagon spokesperson John Kirby said in May that sanctions are part of why "it's harder for Mr. Putin to get the kinds of components that make up precision-guided munitions and his defense industrial base is having trouble keeping up with that."

A report published in April by the London-based Royal United Services Institute concurred: "Although it will be possible to manufacture some components in Russia—albeit at greater cost and potentially with reduced reliability—many components of Russia's complex weapons cannot be replaced."

Oleg Ignatov, senior Russia analyst for Brussels-based policy think tank International Crisis Group, tells Newsweek, "Russia will try to avoid sanctions as far as it's possible; Russia tried to do it in the past after 2014, because Russia is technologically dependent—I think even the Russian military industrial complex is technologically dependent—on Western technologies from Western production." He adds, "They will not be able to purchase everything in Russia. It's not possible...The quality of life will decrease among Russians."

"This is a big problem, how to live without Western companies, how to live without their products. It seems that there is no public plan in Russia, nobody is discussing a plan," Ignatov says. "It seems that they're trying to solve problems when they come. To react, not to predict reality...They still believe that the West will have to reconsider its sanctions, because it can't live without Russia. It's still their main hope."

Collateral Damage

Russia has economic leverage of its own in fossil fuel and food exports—elements Moscow is desperately trying to exploit to undermine Western support for Ukraine and force EU and NATO nations to ease sanctions.

Putin and other top officials have said the only way to ease the looming grain crisis is to ease sanctions. The Kremlin is also banking that Europe's dependence on Russian oil and gas cannot be quickly solved. "You cannot switch it off, like the light from one day to the other," BDI's Niedermark said at the Copenhagen conference. "There shouldn't be more harm to ourselves than we can create for Russia."

Palestinian workers work in a wheat mill, in Deir al-Balah in the central Gaza Strip, on March 1, 2022.- Russia's invasion of Ukraine could mean less bread on the table in Palestine, Lebanon, Yemen and elsewhere in the Arab world where millions already struggle to survive. The region is heavily dependent on wheat supplies from the two countries which are now at war, and any shortages of the staple food have potential to bring unrest. Majdi Fathi/Getty

Russia is too large an economy to be exorcized from world markets without consequence. "Russia is a very big economy, it's not Iran," Ignatov says. "It will be a huge precedent to exclude such a country from the world economy. It will be very difficult. Russia understands this and the Western countries understand this."

More zealous-than-expected corporate self-sanctioning has taken the White House by surprise, raising fears of deepening inflation, according to a Bloomberg report. It cited an unnamed source close to Treasury Secretary Janet Yellen who said capital flight from Russia is contributing to the highest U.S. inflation rate in 40 years. Bloomberg also cited people familiar with efforts to encourage U.S. agricultural and shipping companies to boost purchases and transport of Russian fertilizer, key elements in soaring food costs.

Administration officials have even wondered aloud if U.S. companies might be making a mistake in fleeing Russia completely. Ambassador Jim O'Brien, head of the State Department's Office of Sanctions Coordination, recently asked: "At the end of the day, is removing elements of U.S. soft power where the U.S. wants to be?"

Yale's Sonnenfeld says, "That speaks to an economist's naivete, or a diplomat's lack of grounding in reality. Being there is not influence. Being there is endorsement. Royal Dutch Shell, Texaco and Chase Bank were still doing business at the outbreak of war with Nazi Germany. They had to be outed. There was no constructive engagement there. They were just profiteering off distress."

Meanwhile, European leaders are warning citizens to steel themselves for economic pain. At the Copenhagen Summit, European Parliament President Roberta Metsola told Newsweek "At the end of the day, our citizens are facing—in some parts of Europe—quite extensive unemployment, but also a winter where they can't pay their bills and heat their home."

She added, "Putin is staring down the world, hoping that we would blink first. But we cannot do that. Our economic sacrifices today are our investment in our and in our children's ability to live in a free and democratic world."

The West's resolve in breaking with Russia is being watched closely around the world, particularly in Beijing, where Chinese leaders have shown little interest in U.S.-led calls to help uphold the post-World War II international order.

"We are currently learning, painfully, that there are no certainties in dealing with autocracies," BDI's Niedermark told the Copenhagen panel. Because China is a much larger economy than Russia's and one closely intertwined with the West's, sanctions against Beijing—if China were to invade Taiwan, for example—could produce intense economic blowback.

"If we run into a similar trend with China then you cannot protect anyone any longer," Niedermark said. "The result will be really economic turmoil, because the dependency on Chinese raw materials, processed raw materials, rare earth, metals, and intermediate products, and of course, consumer products, is huge."

David Brennan is a diplomatic correspondent for Newsweek. Follow him on Twitter @DavidBrennan100.

Correction 9/3/22 9:54 AM: This article has been corrected to remove a description of Koch Industries as "digging in" in Russia. In a July 28 memo to employees, Koch Industries COO and president Dave Robertson said the company had sold two glass plants it owned in Russia, adding, "We continue to condemn Russia's actions and aggression in Ukraine."