In a Swiss ski resort last month, a European CEO in his late fifties lamented that geopolitics was making his life terribly complicated. He had been raised in the golden age of postwar peace and globalisation, a world where business was mostly seen through the prism of growth prospects and cost efficiencies. Now he was being asked to pick a side in a fast-fragmenting world — and he was finding it hard.
“Three years ago we did not talk about these things. The fact that we do is frankly scary,” he said on the fringes of the Davos World Economic Forum.
This is one reason why nearly a year into Vladimir Putin’s war on Ukraine — and despite western economic sanctions, pressure from activists and the lack of near-term resolution to the conflict — western firms that had established a presence in Russia have largely stayed put, according to St Gallen university professor Simon Evenett. Uncouple they simply won’t.
At the end of last year, fewer than 9 per cent of the 1,404 EU and G7 companies with operations in Russia before the invasion of Ukraine had left the country, Evenett and IMD Business School professor Niccolò Pisani reported in a paper published last month.
Where there have been divestments, it has tended to be of less profitable businesses, and some of the western sellers have included buyback clauses — perhaps in the hope that this war will be resolved soon and life can return to normal.
“The generation of corporate executives in their 50s and 60s have never had to deal with geopolitical risk,” Evenett said. “It’s a profound shock to their mental and world view. They are genuinely struggling with this brave new world.”
To be sure, companies that have promised to leave are finding it hard to do: few buyers, huge discounts, local restrictions on winding down businesses and what Evenett calls the “Hotel California effect”: if Russian authorities prevent you from getting the money out of the country, why bother selling?
Some executives also like to reverse the moral argument. What is worse, they ask: continuing to pay taxes in Russia, or leaving billions of dollars behind, which will in turn fund the war effort? This is a swipe rivals generally throw at French bank Société Générale, which took a €3.1bn loss after it sold Rosbank in April to a company founded by Vladimir Potanin, a Kremlin-friendly billionaire now targeted by US sanctions.
Or perhaps it is just hard to leave money on the table and bid farewell to the peace dividend we foolishly took for granted.
One of the lessons of the Russian example, for policymakers, is that western businesses are out of sync with the times and may run counter to governments’ geopolitical goals. “Russia is a dress rehearsal for China,” Evenett said.
Uncoupling from Russia was supposed to be relatively easy; that is to say inexpensive — its economy is relatively small and the well-known and documented risks of doing business there as a foreign investor meant there was never a big rush of western investment. Companies might think they can ride this conflict out.
But imagine a similar military conflict involving China — not a far-fetched prospect, according to General Mike Minihan, head of US Air Mobility Command, who predicted that Washington and Beijing would probably go to war over Taiwan in 2025.
For every US dollar of foreign direct investment in Russia, about $8 are invested in China, Evenett pointed out. Western CEOs might need to adjust to the age of geopolitical dislocation faster than they think.