Russia’s assault on Ukraine prompted one of the biggest stampedes for the exit by foreign businesses any country has ever witnessed. Investments built up over years, totalling billions of dollars, are being wound up or sold. But the process is far from complete, even by companies that pledged to pull out, and Moscow has escalated its response. Vladimir Putin last week ordered all rights to the huge Sakhalin-2 liquefied natural gas project to be transferred to a Russian entity — the first time the Kremlin has nationalised a company since the corporate exodus began.
Partners in the far eastern Sakhalin-2 — Shell, Mitsubishi and Matsui — have one month to decide whether to remain stakeholders in the new entity, or opt out and risk not being fully compensated. Shell had written down more than half its previous $3bn book value for the venture, but any hopes of selling its stake, potentially to a Chinese buyer, are now complicated. The Japanese partners are likely to stay; Japan gets nearly a tenth of its gas from Russian LNG. The Kremlin move seems aimed at safeguarding production, unlike at the sister Sakhalin-1 venture, where output has declined by 80 per cent since ExxonMobil vowed to exit in March.
The affair highlights the fact that leaving Russia is much more difficult than declaring the intention to do so. Companies face tricky legal, operational and ethical considerations. Some that said they would leave have not done so fully, prompting accusations of hypocrisy against western business. A Yale School of Management database says more than 1,000 companies have announced voluntary curtailment of Russian operations, of which 305 have made a “clean break” — but another 243 are continuing business as usual.
While writedowns can be costly, a Yale study from late February to April suggested markets were “rewarding” companies for leaving Russia. Equity gains for companies that pulled out “far surpassed” one-off impairment costs for writing down asset values.
But companies pulling out have limited options. Shutting down could leave Russian employees jobless; partly for that reason, the Kremlin initially threatened to nationalise assets of exiting companies, but before last week had shown little sign of doing so. Finding buyers can be hard, when so many businesses are leaving. Some, such as McDonald’s, have sold to Russian buyers but asset sales, if discounted, involve a transfer of value to Russia which may feel wrong. Some companies have tried to ringfence assets from themselves and Russian buyers but that is legally complex.
Many foreign businesses feel an understandable sense of moral responsibility to local staff — especially when Moscow propaganda channels are painting western countries as engaged in a unjustified campaign against Russia and its people. Yet western governments are united in opposition to Russia’s unprovoked war in Ukraine while eschewing direct military involvement for fear of uncontrollable escalation. They have chosen instead to pressure Moscow by economic means. Their populations are being asked to make sacrifices through soaring prices and possible energy shortages.
There is a compelling case for most western companies — except those selling, say, vital medicines — to join this effort. If they have to close Russian operations, they should offer local staff the same terms as if they were withdrawing for purely business reasons. There is another way to help, too. With recovery costs now put at more than $750bn, companies should heed the pleas of President Volodymyr Zelenskyy — and redirect their Russian investments, and more, to Ukraine.
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