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Within a week of Russian attack on Ukraine, countries around the globe passed the most severe and coordinated sanctions of the last century. In a furious pace, transactions between Russian Central Bank and Russian Central Bank and Russian travel within and through the airspace of 33 countries were banned, billion-dollar projects were halted, several Russian banks were prevented from using SWIFT, and prominent insiders of Putin’s circle were each banned.

The immediate effects for companies that invest in and work in Russia have profoundly altered the business climate in Russia, no matter the results of the war. Companies are already making crucial strategic decisions at a rapid speed. Unsatisfied with the decision to stop operations in Russia, numerous companies have decided to end all connections with Russia and the Russian administration — long-term, multi-decade lengthy partners in a matter of days.

The current situation in Russia could mark the first time we’ve witnessed sanctions trigger the rapid self-sanctioning of businesses; however, they’re likely not to remain the only one. The situation is rapidly changing — at the time of writing, we’re just three weeks from when the war began. We have seen several first-ever trends that could continue to factor in future crises and conflicts. Even for companies that haven’t been directly affected by the conflict, the sanctions will have a global impact over the long term, not only on firms’ obligations in crisis and situations but also on their ability to create a positive difference.

Backchannel diplomacy

Conversations with government officials informally are a standard aspect of business in virtually every nation. When there is a war, this simple fact means that companies are often in contact with both sides of the conflict. Following the Russian invasion of Ukraine and the ensuing Western sanctions in responsebackchannel corporate diplomacy must become more important to the international business plan. However, establishing a dialogue is only the first step to consider the process of preparing companies; how they incorporate these details into their current strategic plan for political risk could mean the difference between an exit that is successful and a resounding failure at the point of crisis.

Companies operating in Russia have seen their operations affected, and many have taken surprisingly strong positions. In the lead-up to this point, many modern companies have re-examined their appraisals of risk and value in-depth and breadth in preparation for events that require quick decisions on whether or not to separate from a particular nation and gain a greater understanding of the world of politics and the consequences. Others took to the “business as usual” route.

Let’s look at two companies with different approaches before the crisis struck: BP and Renault.

After 30 years of developing its operations, the board of BP took just three days to agree to the possibility of losing $25 billion when it sold its shares in Rosneft, which is Russia’s state-owned gas company. BP struggled against Putin’s corrupt ruling oligarchy over several years before reaching an arm’s length relationship. However, the speed at which BP pulled out resulted in BP having a rapid exit plan in place even with the relationship.

However, the carmaker Renault is dependent heavily on its Russian market for 12percent of its revenue through its major stake in AvtoVAZ, which is the biggest carmaker in Russia and has a business partnership with the Russian state-owned manufacturer of missiles planes, AK-47s, and aircraft that has been subject to Western sanctions since 2014. The business relationship means it is expensive to withdraw out of the Russian economy, and the reduction of 37 percent of its value since the Russian military invasion of Ukraine makes it more expensive to remain. Renault is deeply involved with players in Putin’s war machine. Despite putting off some of its activities because of logistical problems due to sanctions, Renault seems to have been unable to develop a viable exit plan or prepare for the tough sanctions.

The two BP and Renault both have strong Russian connections. However, although Renault thought those connections to be the most crucial aspect of doing business with Russia, BP was more aware of the possibility of taking decisions that could impact their business and preparing to deal with the situation. For BP backchannel diplomacy, it was integrated into the overall structure to give information on risks; for Renault, it was all about enhancing a relationship.

It suggests that companies could need to keep governments in trouble in check while interacting with them. It’s a delicate balance business will often need to create capacities for.

Politics, Positions, and Ethics

Although the gap between politics and business was not as clear as many would like to believe, managers must now defend their own firm’s ethical policies and the policies of their business partners (or the countries they partner with). Late movers pay the cost. For instance, McDonald’s restaurants are operated by franchisees; however, they are not located within Russia or Ukraine, with corporations owning the largest percentage of restaurants. McDonald’s did not speak up regarding the riots during the initial two weeks. It was then forced to respond to the widespread protests against it by stopping the sales of its products in Russia.

In the process of seeing more companies quit, the political and public pressures that were once spread across a multitude of firms are now magnified to the handful of companies that remain, which increases the risk to their reputation. Similar to the first benefits of leaving and relocating, there are also final drawbacks of a withdrawal motion.

When crises or political events happen, businesses tend to resort to a short-term approach. However, unprepared companies can be harmed for decades or years when they make the wrong decision regarding whether they should remain or leave. Suppose actions were taken by Russia against Ukraine suffice to justify disengagement. What does this mean for companies operating in nations with regimes that have more human rights violations and the support for crimes against humanity?

Managers should be asking themselves two concerns when evaluating their operations overseas.

What are your requirements for leaving the country, particularly when the country’s politics are not in line with your own? Furthermore, how far past the legal or sanctioned obligations do you want to go? The answer to this question can be very different across industries. For instance, financial services firms’ performance of due diligence has already become a multibillion-dollar expense. The transition from being a business is much easier than with factories and retail stores.

What do you expect from your current conditions and your plans regarding a return? It is believed that the war between Russia and Ukraine will be relatively swift; however, studies of the authoritarian regimes that invade neighboring countries demonstrate that the opposite is the case: Putin is much more likely to remain in the power he has than to be removed and continue the conflict, even at a lesser level of intensity even if the consequences are domestic. If the purpose of companies is to conduct business, they’ll have to bear the reputational and financial penalties of doing business. If the objective of businesses is to conduct ethics-based business, the business must put peace first over everything other considerations. In practical terms, that means it’s becoming more difficult for ESG raters to justify the high social scores for businesses operating in countries with unpopular political views, especially when these politics can be directly linked to war crime tribunals.

The Sanctions to Come: Are You Ready?

For most companies that have Russian investment and operations, the attack on Ukraine is tragic but not completely unexpected, particularly for companies operating in Russia at the time of its invasion of Ukraine in 2014. Business leaders knew the risks of conducting businesses within Russia and had experienced previous incursions and horrendous human rights violations. Yet, even those who had contingency plans for the event that Russia was attacked again were shocked by the speed at which things changed. This is partly due to sanctions being typically implemented and implemented for a long period, with no real force or without loopholes. However, these sanctions were quick and severe, requiring firms to make faster decision-making. This is a precedent company must take lessons from.

With time, Russian intervention in Ukraine altered the role of businesses in responding to sanctions. Particularly, many companies have self-imposed restrictions, sanctions, and withdrawals that are far more than the requirements of government sanctions. More importantly, these actions are a refreshing method of operation for businesses doing business in other countries where there is unacceptable violation of human rights. Businesses that have decided to leave Russia and the Russian market are taking note of their customers and trying to align their business strategies to the opinions and values of their customers.

Whatever the outcome of the Russian invasion, business leaders must recognize that their environment has changed. Businesses and investors need to reconsider the strategies and models they need to adapt to the ‘brave new world’ where entering a nation is seen as an implicit endorsement of that country’s policies. Managers must be prepared not only for the Russian consequences but also for a solid, responsible strategy for the next nation that disrupts international peace and entices conflict. Knowing where it could be, and maybe even taking action before it is at the point of no return, could be the distinction between getting acknowledged as a socially responsible business or risking a full write-off.

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