Are higher supply chain costs the reason just 8.5% of firms have left Russia?

Will Green is news editor of Supply Management
20 January 2023

Just 8.5% of firms with connections to Russia have pulled out of the country despite pressure to do so because of the war in Ukraine, according to research.

A report by two professors analysed Orbis company data and found of 1,404 EU and G7 companies with “commercially active equity investments” in Russia before the invasion, 120 (8.5%) had left by the end of November 2022.

After Russia invaded in February 2022 many firms including McDonald’s, Coca-Cola and Pepsi withdrew or suspended operations in the country following international outcry.

Local authorities in the UK responded by cancelling contracts with suppliers based in Russia.

Research by Deloitte at the time found more than 374,000 firms, mostly in the US, relied on Russian suppliers.

The report, by Simon Evenett, professor of international trade and economic development at the University of St Gallen, and Niccolò Pisani, professor of strategy and international business at IMD Business School, said “reducing commercial ties is estimated to be costly” and “abandoning some of those modes of supply is more expensive than others”.

“Faced with official and media campaigns at home to halt their Russian operations and divest from the country, western firms may nevertheless fail to exit,” said the report.

“This can happen for multiple reasons. For instance, a western firm operating in a sector excluded from official sanctions may decide that it is inappropriate to abandon its Russian customers, who may have played no part in the decision to invade Ukraine or in the prosecution of the armed conflict. 

“In other cases, western firms may not want to abandon long-term relationships with employees or suppliers or decide to cease operations because of the societal relevance of their products and services (for instance, the supply of lifesaving medicines).”

The report said consumer goods company Danone expected to take a hit of €1bn as it disposes of 13 factories that make dairy products in Russia.

However, the report said in the process of divesting, some firms had included “buy-back” clauses in contracts.

“Nissan reportedly sold its Russian subsidiary to state-owned NAMI with a six-year buy-back provision,” said the research, while according to a reported statement from Russia’s Federal Anti-Monopoly Service “it appears that McDonald’s can buy-back its Russian operations within 15 years”. 

“It would seem that even a completed divestment does not mean leaving Russia forever.”

The report concluded: “If the write-offs announced by publicly-traded western companies are anything to go by, divestment, decoupling, and supply chain reconfiguration are likely to be costly to firms, their employees, and their shareholders.

“If those costs must be borne on geopolitical grounds, who should bear them? Answering this question is of the essence since to date western corporate retreat from Russia has been limited.”

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