Déjà-vu all over again: Western companies exit Russia en masse
In my Memoirs of a Russianist: Volume II, Russia in the Roaring 1990s* published in February 2021, my diary entries from the period 1998-2000 devote a good deal of attention to the exodus of Western businesses from Russia following the default of August 1998. In the preceding five years, the number of companies setting up business in Russia and their headcounts in country had grown by leaps and bounds, to the point where there were 50,000 expats and their families in Moscow alone. In the year following the default, the expat population fell by more than 50%.
Most small and medium sized foreign companies that, in fact, lacked the resources to get their arms around the huge and complex Russian market threw in the towel. Large multinational corporations nearly all stayed on, but they halted all further investments in the country and replaced their expat managers, including those in the key positions of general director and finance director, with local staff.
In fact, the promotion of the Russian employees was for those employees a Pyrrhic victory: the departure of the expats meant that Russia was downgraded in the corporate priorities generally. Moreover, the organizational change within Russia was often accompanied by a change in the corporations’ global marketing structure. Companies like the one I worked for at the time as general director, United Distillers & Vintners (UDV), known today as Diageo, gave a strong signal to investors that Developed Markets in Western Europe and North America now trumped the formerly hyped Emerging Markets. The latter would no longer report directly to senior management in headquarters as had been the case hitherto but would instead be subordinated to individual Key Markets. This had the advantage of burying losses in places like Russia within the performance reports of large, established and profitable markets.
I have had reason to think over these issues as we all have read in mainstream media about the closures of the Russian operations of most U.S., European and even Japanese and Korean corporations in the weeks following the start of Russia’s ‘special military operation’ in Ukraine in February.
Whatever the wishes of senior management, today the practicalities of doing business dictated at least a temporary suspension of operations in Russia for the very same reasons as I saw around me in 1998: a collapsed ruble exchange rate followed by great volatility and a compromised banking system. The challenges facing any company running a business entailing importation of finished goods or components from abroad were as great in February 2022 as in September 1998. Thus, at a minimum one had to expect suspension of business activity.
What has changed is the way the 2022 crisis has been driven by geopolitics at the level of Western governments imposing sanctions on Russia and at the level of society in the West, where the ‘cancel Russia’ movement has been promoted by the media. These are factors that skittish business executives could not ignore. Hence, the widespread decision of very big corporations in 2022 not merely to suspend operations but to close down altogether and exit the country.
Does this make sense in the medium and long term? When may these companies reconsider their decision and try to reenter the market? What does the temporary or permanent departure of Western companies mean for Russian firms that may be tempted to fill the void? In what follows, I will try to answer each of these questions.
In conclusion, I will offer a personal observation on the cycles of construction and destruction in business life.
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Does the departure of major corporations from the Russian market now make sense in the medium and long term?
To be sure, the Russian market lost its appeal for Western business executives long ago following a series of severe shocks. The default of 1998 under President Yeltsin was the first. The second came in 2008 during the global recession triggered by the failure of Lehman brothers in the United States and the toxic assets of mortgage loans that had been securitized and sold worldwide by American banks: the Russian economy, alongside other Emerging Markets experienced a very big setback. Then came 2014 when the first hard sanctions were imposed on Russia by the USA and the European Union following the annexation of Crimea and Russia’s intervention in the Ukrainian civil war.
For some industries, for example beer brewing, which has been wholly dominated in Russia by AB InBev, Carlson and a very few other global players, the general rush for the exit in February may have given them a pretext to close what had long ceased to be the money spinners they had hoped for. For other multinationals, like Apple, the share of Russia’s contribution to sales and profit may have been no greater than 1%, so the withdrawal from the market falls within the normal accounting margin of error and could be taken without any adverse impact on share values while resulting in good PR. For still other companies like the international banks operating on the Russian market in consumer banking, the pull-out from Russia entails sustaining substantial pain and multibillion dollar losses.
The decisions taken now with so few apparent reservations or second thoughts represent a total write-off of major investments of senior management time and capital over the past 25 years from when all of global business was knocking at Russia’s front door to get in. As regards consumer goods manufacturers in particular, they also are writing off the possible future rise of the Russian economy and purchasing power in a country of 150 million citizens as it undergoes reindustrialization through government supported import substitution. Vast numbers of good paying high-tech jobs will be created.
When and under what conditions are the companies leaving the market today likely to make a reentry try and what obstacles will they face? From my experience as someone who reported to top management in London headquarters of multinational corporations, I find it hard to imagine that those leaving today will be ready to reconsider resuming activity in Russia in less than five years. The decision to leave is taken at the CEO or Chairman level and no Vice President with regional responsibility will dare come back to them with proposals to reverse such decisions any time soon, since it would be the equivalent of denying the correctness of the decision to leave.
Nature abhors a vacuum and in the meantime, one way or another it is highly likely that the place of those departing will be filled by other companies, first and foremost by Russians. All of which brings us to the question of why the foreign companies have dominated so many sectors of the Russian economy. This is something I witnessed back in the 1990s when the Western businesses were first being set up in Russia. The key lever back then was working capital, which the Western companies had and which existing Russian companies or entrepreneurs did not have. Western industrial and consumer goods may have been better than their Russian equivalents, but that was not the decisive issue. Western goods were offered to wholesalers and retailers either on consignment or on generous credit terms that the Russian manufacturers could not match. An additional advantage of the major Western brands was their marketing and advertising skills.
Today, when Western companies leave, there will be many Russian companies of long standing as well as start-ups that will, with government assistance, have the working capital essential to make a go of it. And once they are entrenched in any given industrial sector, it will be hard for any foreign company seeking to reenter the market to gain traction.
Secondarily, the place of many Western manufacturers in the Russian market may be taken by Chinese and other non-Western corporations who have political backing and see business opportunities in Russia that did not exist for them until now, when global competitors have left the field.
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In a week or two, I will be making an hour-long presentation of my Volume II: Russia in the Roaring 1990s on a St Petersburg radio show called “The History Club.” Back in November 2021, which is when this should have taken place had there been no new wave of omicron, I had a story to tell about the construction of the Western business presence in Russia which I participated in during the 1990s. This was a story that had its positive and negative sides. Some of the companies at the time, such as the intermodal shipping and railway logistics company SeaLand, made a very positive contribution to Russia’s infrastructure while also making a handsome profit on their investment. I knew their story from the inside having been the lead candidate to replace their Russian manager. Other companies were ill-adapted to achieve much in Russia because their internal political wars between the field and the headquarters precluded taking business decisions on the basis of objective profit and loss analysis as opposed to the interests of individual company officers. I knew such companies from having worked in them. Yet, on balance, I think more benefit came from the presence of Western companies in Russia than the damage that the blundering of some caused. A generation of Russian managers was trained in what had been until then alien business concepts and practices.
As I prepare for my radio talk, I find that the subject at hand is truly history, an age gone by. What we built in that decade and in the years since has been largely destroyed in the past few weeks, as Western companies have pulled up stakes. This is sad, but not tragic. It is a good reminder that nothing is forever, that change is the only constant in our lives.
©Gilbert Doctorow, 2022