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After Russia boycott moves, corporations will face a much trickier global end game

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A man views a digital board showing Russian rouble exchange rates against the euro and the US dollar outside a currency exchange office. On March 2, 2022, the Russian rouble hit record lows with the US dollar and the euro rates reaching 110 and 122 at the Moscow Exchange respectively.
Mikhail Metzel | TASS | Getty Images

As corporations across all sectors of the economy exit Russia with unprecedented speed, one of the questions being weighed is where this response to an act of unprovoked war fits on the spectrum of leadership decision-making.

Is it a short-term pause; a demonstration of the greater, maybe lasting, influence of ESG in the C-suite; or a significant reshaping of corporate strategy and the economy around the theme of de-globalization?

For experts in international business and management, the current events appear as if they may go well beyond reputation management and to a fundamental shift from the post-World War II period of increasingly global markets and efforts to achieve global scale, which were still firmly in place only about a week ago.

“The world has changed and the C-suite really started taking seriously the parts of the world we don’t want to go to,” said Witold Henisz, professor of management at The Wharton School, University of Pennsylvania. “In 48 hours companies were pulling out and rethinking the post-war world. This is a fundamental break. It isn’t a proxy war or limited incursion. This is not something that has happened since 1940.”

One thing is clear: the “old-school” political risk of conventional international warfare is back, say Stanislav Markus, an international business professor at the Darla Moore School of Business, University of South Carolina, and associate at the Davis Center for Russian and Eurasian Studies at Harvard University. For many decades, large-scale violence had been geographically restricted — for example, to pockets of terrorist activity, civil wars, or drug cartels, and in failed states such as Afghanistan or specific regions of major economies, such as Mexico.

It is too soon to conclude a broader de-globalization trend is accelerating, according to Gary Hufbauer, a fellow at the Peterson Institute for International Economics, but he says for experts already studying globalization data for signs of a reversal, the Russian invasion of Ukraine is potentially significant. From 2010 to 2015, globalization continued to increase, but the rate slowed between 2015-2019. Covid caused the rate of globalization to go backward in 2020, and the question now is: by 2025, will that abrupt reversal in globalization become persistent?

“We may be at a turning point here because of the strong forces against the standard economic forces that drove globalization. There is no quick reversal of this,” Hufbauer said of Russia’s invasion.

Some globalization experts remain cautious about a rush to judgment on the impact of Russia, while noting the rate of globalization has slowed. “The halt in the period of rapid globalization actually goes back further than Trump & the pandemic (important as those have been). It started with the global financial crisis,” said Jeffrey Frankel, a leading expert on globalization at Harvard University and former White House Council of Economic Advisers member.

He cites one important statistic: For some decades, prior to 2008 the ratio of trade/GDP had been rising steadily (trade had been growing twice as fast as GDP). Since 2008-09, the ratio has been pretty flat.

“My best judgement is that the major events with respect to Russia will not further set back globalization. Obviously Russia itself will become substantially cut off; but Russia is a very small share of the global economy,” Frankel said.

ESG’s role

Hufbauer thinks the emphasis on corporate social responsibility has played a role in the swift response and we have seen companies exit markets in the past, such as Cuba and Iran. “But this is unprecedented,” he said. “Big companies in droves. My thinking is that we’ve had this period of emphasis on corporate social responsibility and many CEOs and directors nominally saying they are all for it. With the ‘woke language’ of the moment they would be hard pressed by the background and their statements and the atmosphere not to be out in front of it,” he said.

For some companies, it will be easier to resume business in Russia than others, and at less overall cost. A company like Disney pulling a film release is not in a position similar to BP or ExxonMobil walking away from multi-billion-dollar oil and gas projects, though working in the country has proven difficult for energy firms from well before this crisis. Shell learned just how quickly its reputation would become a headline issue during this conflict for purchasing Russian oil, even though it too announced an exit from its Russian business ventures.

“If you have to pull out under such pressure, you might as well look courageous. No one wants to be the last one still in,” said Henisz, who studies corporate ESG. “What’s happening is coming up in ESG conversations,” he said, but he stressed that he doesn’t believe ESG is the primary driver for the corporate decisions. “The pullouts are not happening because of those conversations. It’s because Russia launched a land war in Europe,” Henisz said.

Brands from Apple to many of its Silicon Valley rivals and fashion luxury houses may not have too much to lose in the short-term from suspending operations, even though Russia is still a reasonable size consumer market with 144 million people. McDonald’s and PepsiCo, which have among the largest revenue exposure to Russia (over 4% each, according to FactSet) among S&P 500 companies, have yet to make a decision. But between the sanctions, inflation in Russia and the rouble crash, it was not a hard call to pull out of the market for many consumer brands right now, says Scheherezade Rehman, a professor of international finance at George Washington University who has advised the U.S. State Department, The World Bank and IMF.

“The reputation risk gets exponential as you wait,” she said, and she added the business isn’t worth the risk. “Having an export market overseas at some point means taking local currency and exchanging it into dollars or euros. You don’t want to be stuck in roubles. That’s not a good business,” she said.

Global financial nuclear war

Among the biggest implications of de-globalization is a financial system that could fragment to a much greater extent on a geopolitical basis. Mastercard and Visa pulling out of Russia over the weekend, and PayPal suspending operations in Russia, are part of the response from the corporate world after the unprecedented sanctions imposed on Russia kneecapped the eleventh-largest global economy in a matter of days.

Rehman says while retail brands without their own extensive physical real estate footprints can easily move back into Russia, and there are workarounds within Russia for businesses – email, fax, Telex, she thinks many may choose to stay away given complexities under current conditions and that will have a lasting impact. “You can still make payments, but who wants to do business like that? It will erode,” Rehman says.

While companies won’t state their decisions in these terms, even large ones may choose to stay away because the unprecedented sanctions are not worth attempting to fully understand given the risks of ending up on the wrong side of the U.S. government.

This never before seen type of “financial nuclear warfare,” as Rehman calls it – a coordinated block of a nation on such a scale and so fast-moving, including its central bank, has implications that are large and likely to grow over the longer-term. Cryptocurrencies and fintechs will factor into the future, but there are even bigger changes likely for the core “plumbing” of the global transactions system. With SWIFT now politicized and alternative payments systems already developed in countries including China, Russia and India – as well as in the EU, which didn’t want to be as reliant on SWIFT, which is 80% U.S. dollar dominated – experts says the financial geopolitics will expand beyond this hybrid, kinetic war.

“This sends a powerful signal to other regimes that may run afoul of the West, which controls the global financial infrastructure,” says Markus. “The signal is: create alternative infrastructure asap. We will see a fragmentation of payment networks, a proliferation of state-issued digital currencies, ‘sovereign internet’ (as Russia termed its largely failed effort), etc.”

The global technology talent pool is also being shaken up. Over one million technology professionals work across Ukraine, Russia and Belarus, part of an Eastern European “Silicon Valley” that boomed in recent decades. Gartner, which says 43% of executives were worried about de-globalization even before Russia invaded Ukraine, stated in a recent report that the emerging issue of “digital geopolitics” is one of the most disruptive trends in the technology space.

“The answer should not be a reactive onshoring of capabilities, especially in a world where the current crisis will increase existing shortages of digital skills,” David Groombridge, Gartner Research VP told CNBC via email. “Instead, executives need to navigate a complex balance of competitive advantage, geographic concentration risks, skills availability, legal and regulatory issues, and country risk factors to relocate their IT services.”

Longer-term fears about China’s ambitions

If de-globalization is going to escalate, and China and India’s positions on Russia’s invasion remain nuanced, it didn’t come out of nowhere. The battles in recent years between the U.S. and China over key technology and actions imposed on Huawei were warning shots in what may yet become a much larger divide.

“The global geopolitical realignment, and the early signs of a China-Russia anti-Western partnership, imply that businesses may need to prepare for an emergence of Cold War blocks (amplified by infrastructural de-coupling). The challenge is how to span the blocks effectively and act as a bridge-builder in the eyes of the stakeholders,” Markus said.

This is the more significant issue than the multi-national corporate outlook in Russia. If boardrooms are now playing out a war scenario that snuck up on them, the strategies being devised for Russia are the first draft of a playbook for the far more bleak prospect of potential Chinese aggression against Taiwan.

Russian President Vladimir Putin attends a meeting with Chinese President Xi Jinping in Beijing, China February 4, 2022.
Aleksey Druzhinin | Sputnik | Kremlin | via Reuters

In recent days China has pushed back against any attempt to draw parallels between Russia’s invasion of Ukraine and its ambitions, and has tried to walk a finer line in its stance on Russia than it did initially. In fact, some experts believe China may be the key, or even only hope, in deescalating the Russia-Ukraine situation.

Russia can carve out its “sphere of influence” at the expense of Ukrainian sovereignty, and then it will remain a global pariah on par with Iran, North Korea, and Venezuela, experts say. Executives would need to re-draw supply chains to avoid any reliance on Russia in the future, or turn back to playbooks from the past in which global businesses worked in other autocratic states without the rule of law. They make deep connections to state actors – as well as to societal stakeholders – because in such situations that is paramount since no independent courts can protect foreign investors, says Markus, who has studied these relationships.

There are hopes that China will view the swift, unified response to Russia’s invasion as a reason to move more slowly. But China’s economy is much larger than Russia’s and the corporate repercussions would be extreme if this scenario were to play out in relation to its territorial ambitions. “Which explains the muted corporate response to human rights violations in Xinjiang or Hong Kong,” Markus said. “However, ignoring a brutal violent war (if China repeats Russia’s mistake) for corporations would mean losing their credibility with a broad range of stakeholders. Clearly, advance discussions of such scenarios in the boardrooms are necessary.”

“That’s the bigger issue, people starting to think, what will we have to do about China, in 5 years, 10 years? People are starting to have a conversation they never had before,” Henisz says.”One of the most important conversations going on in board meetings in 2022 will be, what would happen if we have to pull out of China?”

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