19 September 2023

A new study by B4Ukraine members takes a closer look at whether companies are genuinely ‘stuck’ in Russia and how they can responsibly exit the market.

The Business of Leaving draws on engagement with over 120 companies and identifies six categories of company justifications for staying, despite the risks. It concludes that, despite challenges, a responsible exit from Russia is possible.

The report defines the responsible exit as an approach in line with heightened human rights due diligence (hHRDD) under the United Nations Guiding Principles on Business and Human Rights, which strikes a balance between reducing the negative human rights impacts of exiting while avoiding complicity or complacency in war crimes.

The study points out that the majority of companies still in Russia justify their continued presence in the market by referencing the negative human rights impact of leaving, without actually undertaking sufficient hHRDD to back those claims.

Most businesses point to the following ‘complexities’ that prevent a clean exit from the Russian market:

THE PROVISION OF ESSENTIAL GOODS AND SERVICES

Six of the top 20 revenue generators in Russia use this justification to continue their operations in the aggressor state. Namely, PepsiCo, Auchan, METRO AG, Danone, Mars, Procter & Gamble claim that they are providing essential goods and services to the local population. While it is true that certain goods, such as essential medicine, align with the notion of essentiality required to sustain life, a considerable portion of products provided by many fast moving consumer goods companies (FMCGs) in Russia fall far below a reasonable standard...

EMPLOYEE WELFARE

Many companies claim that their Russian employees should not be held accountable for the crimes of the Putin regime, highlighting the need to differentiate between the two. Nevertheless, this perspective does not encompass the entirety of companies’ responsibilities towards their employees as it becomes important to explore alternative measures that could ensure protection and safety of their workforce...

Most importantly, the employee welfare argument is impossible to reconcile with the realities of the Russian legislation that obliges companies to assist the government with its mobilization efforts. The British conglomerate Unilever, Germany’s family-owned construction company Knauf, Switzerland’s food and drink processing company Nestlé and many more have confirmed to B4Ukraine their compliance with Russia’s Partial Mobilization Order. Shortly after the invasion of Ukraine, Austria’s Raiffeisen Bank International became a subject of a media story as one of its conscripted employees was killed on the battlefield - despite the company’s request for an exemption.

BENEFITING RUSSIA

...Even though a sale or transfer of assets in Russia may initially seem to benefit the state, a closer examination of the long-term implications and potential drawbacks shows that this does not always hold true. Without the guidance, expertise and support provided by the exiting company, its Russian plants could face significant challenges and could likely experience a decline in value. The loss of access to innovative technologies, specialised management practices and intellectual property could severely hinder the performance and innovation capabilities of these plants.

De facto, the Russian government already controls assets of businesses staying in Russia. Therefore, companies should try to expedite responsible exit strategies based on heightened human rights due diligence processes that minimise the benefit to the Russian state.

FINDING A RESPONSIBLE BUYER

Many companies justify being ‘stuck’ in the country due to the difficulties of finding an appropriate buyer. For instance, some Western companies, such as Renault and British energy giant Shell, in an attempt to comply with Russian laws and sanctions, have agreed to sell their operations to Russian investors or state-affiliated enterprises, prompting some companies to express concern that Russian companies and institutions are “snapping up assets at bargain prices”...

In situations where no credible sale option exists, and in the face of clear direct contributions to harm, companies should write down the loss and/or take the case to international arbitration or seek other legal remedies.

NATIONALISATION AND EXPROPRIATION

...The report details Russian extensive retaliatory legislation which clearly demonstrates that no business continuing their operations in Russia is conclusively safe from having its assets seized by the state. Furthermore, the risks of continuing business in the aggressor state are disproportionately higher and include reputational, financial and legal risks, such as criminal liability for complicity in war crimes. While it is still possible for companies to exit responsibly without losing its assets, it’s unclear for how long this will be the case.

Companies whose assets are seized may consider writing off their assets and writing down the loss or taking their case to international courts.

LEGAL BARRIERS

...Companies affected by retaliatory measures should consider initiating investment arbitration proceedings against Russia whose restrictive regulations simultaneously violate several standards of investment protection, most notable of which are the violation of fair and equitable standard of treatment and prohibition of unlawful expropriation.

Companies with similar claims could consider the possibility of creating a “consortium” of claimants at the pre-arbitration stage of a dispute to exert pressure on the Russian government and to demand acceptable exit terms as a part of settlement agreement...