Report: Reputational Risks Of doing Business in Russia
Over the past two weeks, we have seen an unprecedented brand exodus from Russia. International brands that have been present in the country for many years have made the decision to pull out of their operations, as a direct consequence of president Putin’s own decision to invade Ukraine.
Big consumer brands including Disney, Spotify, Levi’s, Warner Bros, Adidas, Apple and Netflix pulled out days into the war. Luxury brands such as Chanel, Prada, LVMH and Burberry followed suit. Energy firms Exxon, BP, Shell and Equinor announced they were divesting Russian investments and partnerships, and financial institutions Visa, Mastercard, Paypal and American Express, as well as PwC and KPMG, also ceased operations, at least for the time being.
Airbnb not only suspended bookings of its 90,000 rental properties in Russia and Belarus and stopped residents of those countries from making bookings, but also waived fees for hosts and those booking rentals in Ukraine after people from around the world spontaneously began making bookings there with no intention of travelling, as a way of supporting Ukrainian residents. The company’s non-profit arm also pledged to offer free housing to 100,000 Ukrainian refugees.
Given the swift corporate response to the invasion – often ahead of and more tangible than sanctions and statements by international governments – there has been growing pressure on brands that did not take decisive, and early, action. This week, after a building movement to boycott their brands, McDonald’s, Coca-Cola, Starbucks and PepsiCo finally suspended their Russia operations.
Should brands stay or should they go?
The reasons given by brands for ceasing operations in Russia, at least for the time being, are many and varied. There is a complex, overlapping set of factors at play, from taking a moral, political and human stance to show support for Ukraine and its people, to more practical, business-driven considerations, such as logistical, supply chain and manufacturing difficulties, rising costs and trading conditions. In its statement on pausing operations in Russia, for instance, IKEA cited both human impact and supply chain disruption as reasons for its decision.
A third, overarching aspect is reputation: the reputational risk of continuing ‘business as usual’ in a country that is a war aggressor is considerable. Before McDonald’s and Coca-Cola made their announcements, Yale management and leadership professor Jeffrey Sonnenfeld wrote in Fortune: “Despite the cost of abandoning major investments and the loss of business, there is a strong reputational incentive to withdraw. Companies that fail to withdraw face a wave of U.S. public resentment far greater than what they face on climate change, voting rights, gun safety, immigration reform, or border security. A new Morning Consult survey reveals that over 75% of Americans demand corporations cut business ties with Russia after the invasion of Ukraine. These results show rare and equal support across parties and among independents.”
With all this in mind, and with overwhelming support for Ukraine and condemnation of Russia’s invasion among the world’s governments and consumers, businesses that employ thousands of employees in Moscow and beyond – everyday Russians with families, many of whom, as we can see from protests within Russia, do not support their president’s actions – have had to make tough ethical decisions.
In his recent blog on doing business in Russia, Richard Edelman – who pulled out of the agency’s own Russian operations in 2015 at the same time as many other consultancies, in difficult economic and geopolitical conditions linked to Russia’s long-running dispute with Ukraine – said: “There are three classes of companies to consider. Those that have ties with oligarchs or with the state-owned companies must break those relationships.
“The second is asset-light companies with few to no employees on the ground, simply importing products, therefore easy to leave the market especially in light of the pressure of sanctions and supply chain challenges. The third, and most complex case, are the companies that have substantial investment in factories, employees and products — from pharmaceuticals to essential nutrition — relied upon by the Russian people.”
Indeed, in McDonald’s chief executive Chris Kempczinski’s message this week to staff and franchisees of its 850 restaurants in Russia, where it earns 9% – $2 billion – of its annual revenue, he exemplified this dilemma, saying the situation was “extraordinarily challenging for a global brand” that worked with hundreds of local suppliers and partners.
“We understand the impact this will have on our Russian colleagues and partners,” Kempczinski said, underlining that the chain would continue to pay its 62,000 employees in Russia. He added: “The conflict in Ukraine and the humanitarian crisis in Europe has caused unspeakable suffering to innocent people. As a system, we join the world in condemning aggression and violence and praying for peace.”
The relative lateness of McDonald’s response to the war may well be indicative of some tense conversations at board level behind the scenes, including between CEOs and their communications advisors, as to the right approach to take, and how far to go in terms of the language used in statements. Many of the global strategic communications consultancies approached for this piece declined to comment, and after a recent Page Society meeting on how brands should handle the crisis, Wohl Communications founder and seasoned in-house comms leader Bill Wohl tweeted: “Brands need to [be] cautious and authentic to brand in these moments.”
As communications leaders know all too well, in a world where emotions increasingly trump facts and nuance is dead, sentiment towards even much-loved global brands can shift quickly. At Rud Pedersen Group, group director strategic development and UK managing partner Jon Aarons says: “We’ve seen with big public debates around #MeToo, Black Lives Matter and climate change that business is increasingly sensitive to sudden shifts in sentiment, not only among customers and shareholders but especially their employees.
“Some companies are more reliant on Russian customers than others, and some clearly wavered in the first days after the invasion, biding their time to see how events played out. They also looked across at their sector peers and consulted their staff. But momentum gathered quickly in response to public pressure. For others, Russia has always been a challenging market, with relatively high associated costs and thin margins, so it may have been an easier choice to pull the plug.”
Consultant David Gallagher says the international sanctions placed on Russia have given many organisations an incentive to get out, but agrees it’s not a black and white scenario for many brands: “Either they can’t get paid, don’t want to be associated with the regime, or both. But it’s not quite the no-brainer some might suggest, especially when they have people on the ground – friends, colleagues, partners – in Russia. I suspect those operating there but silent or vague are still assessing their situations, and hopefully those taking a stand see it as a matter of brand purpose or principle, and not just a bandwagon to ride.”
Barbara Laidlaw, managing director of global reputation risk and public affairs at Allison+Partners, says that whether the reasons for withdrawal are based on economic sanctions demanding a cessation of business activity, or company values “it is evident that Ukraine’s Russian invasion highlights yet another moment in recent history where private businesses are deciding to take the initiative and act rather than maintain neutrality.”
There is a further layer to this in relation to Russia’s attachment to disinformation, as Jeremy Cohen, a partner at corporate and creative brand consultancy Blurred says: “Operating in Russia helps insulate the country against sanctions and provides tacit support to Putin’s regime. It won’t be long before Putin points to those brands sticking it out as ‘standing with Russia’. There will be a backlash, and we’ve already seen this with brands who adopted a ‘wait and see’ mentality.”
The investment community is watching
Other communications leaders point to the concerns and expectations of shareholders and investors as an overriding factor in corporate decision-making around the Russia question.
At Hanover, CEO Charles Lewington says: “A good reason for pulling out is that shareholders are asking companies to pause or halt operations – investors today being more activist that many consumers. Those most exposed are consumer goods businesses that have made much of their mission or social purpose, such as Unilever or Reckitt. My guess is that brewers will be next in the firing line despite stopping new investment in Russia.” And he echoed Edelman in saying: “The decision is more nuanced for pharmaceutical companies, since by withdrawing from the Russian market, they are hurting ordinary Russian people not the state.”
Alberto Lopez Valenzuela, founder and CEO of stakeholder intelligence company Alva adds that this is a time when stakeholders expect clarity about where the organisation stands in relation to the Russian invasion of Ukraine. “The entanglement between business and stakeholders is real,” he says.
“Today there’s a clear expectation that businesses will respond to societal crises in a responsible way, going beyond purely financial gains. As we saw with the corporate response to Covid, the current crisis in Ukraine has seen brands respond to the expectations of multiple stakeholders by pulling out of Russia. While the first movers gained a reputational uplift from their swift actions, the situation has soon moved to one of damage limitation for the rest.”
A significant subset of pressure from stakeholders and investors is the growing importance of environmental, social and governance (ESG) in assessing business sustainability, although as Cohen points out, it doesn’t necessarily matter if this originates from cold, hard pragmatism or genuine values and purpose: “Frankly, just as when it comes to other ESG issues – like climate change – we care more about impact than motivation. One thing we tell clients is that saying no to a business opportunity can sometimes be even more impactful than launching a shiny new ESG initiative or campaign. In our shareholder driven society, leaving money on the table is pretty powerful, whatever the motivation is in getting there.”
Reputational risk assessment
“In the current climate, with such a headlong rush to the exits, anyone thick-skinned enough to resist the pressure is risking self-immolation,” says Aarons, who first started advising clients on Russia and Ukraine around 2005, visiting Kyiv and Moscow frequently, and remembers hearing from major banks and others that re-entering after earlier periods of crisis had been difficult and expensive.
“T that it’s a longer road back this time. Unlike the anti-apartheid boycotts of the 1980s, which were more contentious, there is near unanimous rage in Europe and the US on this issue.”
Laidlaw says the reputational risks of maintaining business relationships with Russia are profound for three reasons: “First, the Russian invasion of Ukraine is so visible that associating your brand with the Russian state will inevitably signal support for the graphic reports and imagery coming out of Ukraine. Second, the current outflow of business is torrential. To stand against it would almost certainly isolate your brand and draw criticism and speculation about your motivations. Finally, business interests in Russia are relatively minor. Gas and oil make up the vast majority of the Russian economy and when brands like Shell, Chevron and BP are withdrawing, there are few arguments for a brand with an even smaller economic footprint to remain.”
Although many brands have been careful to include language around the temporary, or “paused”, nature of their withdrawal from Russia, Lopez Valenzuela points out that the fall-out for those that do not take action at all is likely to be lasting: “While companies that are not pulling out are stating that they have a responsibility to the people they support – such as employees and customers – the challenge is that these companies risk being on the wrong side of history when the conflict has subsided. The longer it takes brands to extricate themselves from the situation, the more reputation-damaging it will be.”
Virtue signalling vs corporate values
As well as the reputational impact in not pulling out of Russia, there are other layers of risk: for those with business in the country, making cautious or vague statements, or no statement, rather than firm commitments or condemnation of Russia’s actions, could be risky. For those without direct interests, there is risk analysis to be done about whether to say anything at all: if a brand is joining the conversation when it has no interest in Russia, that could be perceived as virtual signalling as much as a genuine human expression of support for Ukraine.
Aarons says: “Each CEO has to make their own judgement, knowing their own constituents, about whether to lead or follow. Many business leaders would rather steer clear of public comment on political issues, when opinions diverge. On Brexit, the UK was sharply polarised, but this is different. If you have business in Russia, your employees certainly know about it. The notion that you can keep your head down and avoid comment is unsustainable.
“You have to make that call according to the particular circumstances of your company, but certainly by listening to the workforce and other stakeholders. It has not been difficult to read the public mood in the past couple of weeks and even those companies not operating in Russia are conscious of projecting the values and purpose expected of them. It may not be true of every business in every sector, but those not listening or reflecting on such expectations do so at their peril.”
Laidlaw says she would always advise clients to refrain from taking positions on issues they are unwilling to back up, particularly around sensitive social issue, but in the case of the Russian invasion of Ukraine, “it is a relatively low-risk proposition to voice support and solidarity with the Ukrainian people. Advocating for peace and rejecting war will always resonate positively with the public.”
The changing role of business
As many commentators have noted, the speed of corporate and brand response to Russia’s invasion of Ukraine – despite the complexities – is the latest iteration of significantly evolving expectations, from all quarters, of the role of business in global society.
At Freuds, CEO Arlo Brady puts this in historical context: “Pre-Covid, most multinational corporations were largely thought of as global entities without a home, regardless of place of origin, but today governments are keen to remind them of their geographical roots and are not shy in exerting significant direct and indirect pressure to ‘toe the line’. The use of businesses as a part of the national soft power armoury was commonplace during the height of, for example, the British Empire, but that approach has been avoided in recent times, especially for businesses that fall outside of industries like oil and gas that have traditionally been thought of as being ‘geopolitical’ by nature. I think the advent of vaccine diplomacy, and some of the aligned corporate/national Covid strategies that have been deployed changed all of that.”
Looking to the immediate future, in his blog Edelman says “geopolitics has become the new test for trust” in business. “We saw this with the allegations of human rights abuses in Xinjiang and the war between Ukraine and Russia has only reinforced it. The line between policy and geopolitics continues to become less clear and more difficult for business to navigate. This is a window into the future, with enhanced expectations of employees, consumers and investors motivating companies to act in a broader societal interest.”
Laidlaw is even firmer in her analysis of the implications of doing business – or not – in Russia for brands and the custodians of their reputations: “The days of corporate neutrality are over. Remaining ambivalent about major issues invites the public to assume that your brand either does not care about what is happening in the world or outright supports bad actors. This is an important trend for reputation management specialists to note, as it has and will continue to be characteristic of the corporate role during major events.”
