Business Recalibrations and the Ukraine Crisis
Russia’s invasion of Ukraine has ushered in a new era of geopolitical rivalry between east and west. While some western leaders were initially apprehensive around the severity of sanctions[i]—particularly cutting Russia off from the SWIFT network[ii], international outcry and Russia’s continued efforts to capture and control the country have led to a more unified response.
Much of the western world has coalesced around tougher sanctions against Russian government officials, wealthy Russian oligarchs, and Russia’s ability to conduct business.[iii][iv][v][vi] The scope and severity of these measures will likely increase as Russia continues to assert itself against Ukraine. It is our belief that these sanctions will remain in effect long after the current crisis settles.
Russia in turn will likely take a more confrontational approach in the months ahead against western powers and businesses that stand up against its endeavors, even if the measures further alienate Russia from the rest of the world. To date Russia has responded to commercial airspace restrictions in kind[vii]; Russian security officials have stated that they may respond to sanctions by severing diplomatic ties and freezing foreign assets within Russia.[viii][ix]
Effects on Business
Businesses continue to assess their ties to and business within Russia. These moves are almost certainly in response to company requirements to abide by sanctions and export controls imposed by western countries.[x] Potential reputational damage from not responding in a manner that is consistent with Western values is another reason to reassess business dealings in Russia.
Current and near-future challenges for businesses likely include the inability for western airlines to land or access Russian airspace, the inability to import key materials and equipment for business operations or send funds outside of Russia[xi], reduced Embassy and Consulate services to foreign nationals within Russia, and foreigner and local employee safety from increased harassment by Russian security services.
What to Watch
Companies and governments are taking extreme measures to dissociate themselves from the Russian economy, Russia money[xii], and businesses ventures within the country to demonstrate their resolve and comply with government requests.
Certain Western European countries—and specifically Germany—have completely reversed their postures on supporting Ukraine, sanctioning Russia, and contributing more to defense.[xiii][xiv] This dramatic shift may expose Germany—and possibly German and international companies operating in Germany—to future Russian retaliation.
Some companies are taking significant financial hits or placing themselves in the crosshairs for potential Russian retaliation.[xv] The pace and acceptance of these actions will almost certainly increase as the conflict in Ukraine becomes more dire.[xvi] Britain’s BP announced earlier that it would exit a 20 percent stake in a Russian government-controlled oil producer—at a potential loss of $25 billion.[xvii]Facebook and other tech platforms have implemented restrictions on Russia’s state-controlled media to help curb the spread of misinformation; Russia responded by partially restricting Facebook.[xviii][xix]
· In some cases, western companies have offered to donate to the Ukrainian cause directly or pay salaries to Ukrainian employees that choose to or are drafted to fight.[xx]
· Increased pressure from employees to do more to support Ukraine, including offensive measures against misinformation campaigns and potential employee requests to fight alongside Ukrainians against Russian forces[xxi] can put companies in tight spots, violate internal policies, and expose the business and employees even more to Russian retaliatory actions. If companies approve employee requests to take up arms against Russia, would that expose the company and other employees to hostile retaliatory actions?
A real and likely consequence of more assertive government and company postures in the face of Russian aggression is an increase in ransomware attacks and cyber intrusions. These cyber-attacks have the potential to not only affect companies, but the customers, clients, and third parties that rely on government and company services.
The events that have unfolded within the last week in Europe have confirmed a new reality: Russo-western relations are at a new low, and there is no telling how Russia—and particularly Putin—will behave or how far it will go to respond to perceived slights or united responses from companies and governments. Protests within Russia and public outcry to end the invasion of Ukraine[xxii] may lead Putin and the Russian government to take an even more aggressive posture against Russians, Ukrainians, foreigners, and western businesses.
As western governments recalibrate their exposure, relations, and projections globally in Europe, and in Russia, so must businesses. What are the potential risks from opening or expanding offices in Germany, the Baltics, or Europe? Are contingency plans needed when executives and employees travel to Eastern Europe? Should more-frequent cyber pen tests be conducted to test the vulnerability of company networks? Does a decision to speak out or not to speak out against the Ukraine crisis or future crises affect employee morale and the ability to attract new talent?
These are all questions that C-Suites and companies must consider or implement, regardless of the outcome in Ukraine. In this hyperconnected world, companies that are looking to grow and mature can no longer assume their size and/or limited exposure shield them from potential retaliation or fallout.
Sources:
[i] Ali Harb, “As Russia-Ukraine crisis ramps up, Biden faces sanctions dilemma”, Al Jazeera, February 23, 2022.
[ii] David Meyer, “Anger explodes at Germany, Italy, and Hungary over Europe’s failure to cut Russia off from SWIFT payment network”, Fortune, February 25, 2022.
[iii] Amanda Macias, Thomas Franck, “Biden Administration expands sanctions against Russia, cutting off U.S. transactions with central bank”, CNBC, February 28, 2022.
[iv] Michael Shields, Silke Koltrowitz, “Neutral Swiss joins EU sanctions against Russia in break with past”, Reuters, February 28, 2022.
[v] Russell Hotten, “Ukraine conflict: What is Swift and why banning Russia is so significant?”, BBC News, February 27, 2022.
[vi] No Author, “In rare stand, South Korea, Singapore unveil sanctions on Russia”, Al Jazeera, February 28, 2022.
[vii] Allison Lampert, David Shepardson, “Europe and Canada move to close skies to Russian planes”, Reuters, February 27, 2022.
[viii] No Author, “Senior Russian security official issues stark threats to the west”, Al Jazeera, February 26, 2022.
[ix] Maxim Rodionov, Olzhas Auyezov, “Russia to seize foreigners’ funds in retaliation – RIA”, Reuters, February 26, 2022.
[x] Norihiko Shirouzu, Nick Carey, Meg Shen, “As sanctions bite, Volvo suspends car shipments to Russia”, Reuters, February 28, 2022.
[xi] Igor Ivanko, “Putin Bans Russians, Companies From Transferring Cash Abroad”, The Moscow Times, February 28, 2022.
[xii] Kate Clark, Berber Jin, “Startup Founders, VC Firms Reexamine Ties to Russian Investors After Attack on Ukraine”, The Information, February 26, 2022.
[xiii] Bojan Pancevski, “Germany to Raise Defense Spending Above 2% of GDP in Response to Ukraine War”, The Wall Street Journal, February 27, 2022.
[xiv] Christoph Steitz, Riham Alkousaa, Maria Sheahan, “Nuclear, coal, LNG: ‘no taboos’ in Germany’s energy about face”, Reuters,February 27, 2022.
[xv] Brad Smith, “Digital technology and the war in Ukraine”, Microsoft, February 28, 2022
[xvi] Stephanie Baker, “The List of Foreign Companies Pulling Out of Russia Keeps Growing”, Bloomberg, February 28, 2022.
[xvii] Jenny Strasburg, “BP to Exit From Stake in Russia’s Rosneft Following Pressure From U.K.”, The Wall Street Journal, February 27, 2022.
[xviii] Elizabeth Culliford, “Analysis; Moscow battles big tech to control the narrative”, Reuters, February 27, 2022.
[xix] No Author, “Meta’s Ongoing Efforts Regarding Russia’s Invasion of Ukraine”, Meta, February 26, 2022
[xx] Daniella Genovese, “US tech company in Ukraine: Employees volunteer to flight Russia”, Fox Business, February 26, 2022.
[xxi] Alia Shoaib, “President Zelensky appeals for foreign volunteers to come to Ukraine and enlist in a newly formed ‘International Legion’ to fight the Russian Invasion”, Business Insider, February 27, 2022.
[xxii] Dasha Litvinova, “Russians Are taking to the Streets to Protest the invasion of Ukraine”, Time, February 28, 2022.
