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25 Jun. 2023

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Business in russia: how doing business in the occupying country affects the reputation of international companies

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Business in russia: how doing business in the occupying country affects the reputation of international companies

After the start of the full-scale invasion, most international companies left the russian market. Find out more about how continuing to operate in russia affects business reputation and how to "pay off" the list of war sponsors

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Since the first days of the full-scale russian invasion of Ukraine, many international companies have left the russian market, but many businesses continue to work for the occupier, despite the fact that the war has been going on for 16 months and the number of victims is increasing every day.


Economic Truth, within the framework of the ANTS project "russian assets as a source of recovery of the Ukrainian economy", which is implemented in cooperation with the National Democratic Institute (NDI) with the financial support of the National Fund for the Support of Democracy (NED), conducted a study and analyzed what the companies that continue to work in russia and what are the prospects for those companies that refused to pay taxes in the russian federation from the first days of the war.


How did the war in Ukraine affect world business? Let's talk further.


How does international business help russia wage war?


Now the entire economy of russia works exclusively for the war. Over the past year, defense spending has increased by 40%, and national security spending by 90%. So, from now on, every third ruble paid by Western companies to the federal budget goes to killing Ukrainians and supporting the putin regime. From this we can draw a clear conclusion that business cannot be outside of politics.


For example, the Austrian Raiffeisen Bank paid EUR 560 million to the budget of the russian federation in 2022. The russian authorities spent a third of these funds on the production of missiles and projectiles. In general, international companies pay 18 billion dollars in taxes to the russian budget a year, these funds are enough to finance two months of war in Ukraine.


Also, business continues to support the war not only with funds. The French supermarket chain Auchan supplied russian military products to the front. American Schlumberger serves russian oil and gas fields. OTP Bank and Raiffeisen Bank issue loans and credit holidays to the military.


Most businesses are participating in the mobilization, handing out summonses to their employees and keeping their jobs.


Which corporations continue to work in russia and increase their profits from this?


Hundreds of Western firms at the beginning of the war promised to leave the russian market or reduce the volume of work, but instead continue to work and even increase profits in the absence of competition. Among them are Philip Morris, Raiffeisen Bank, Mondi, Mondelez, Unilever.


According to the Kyiv School of Economics (KSE), in 2022 Ritter sport increased its profit by 91%, Mondelez – by 38%, Japan tobacco – by 26%, Mars – by 20%, Mondi – by 15%. Raiffeisen Bank benefited the most, which quadrupled its profits in russia during the year of the war.


List of international war sponsors


The National Agency for the Prevention of Corruption (NAZK) created a list of international sponsors of the war. Now the sponsoring companies of the putin regime are known all over the world.


The international public and Western politicians friendly to Ukraine are boycotting the representatives of this business. Such activity is already bearing results.


For example, in the winter in Denmark, a scandal broke out around the Danish company Rockwool, which supplies soundproofing to the Ministry of Defense of the russian federation even in wartime. And already in May, the Copenhagen parliament voted to withdraw from municipal tenders companies that work in the russian Federation, including Rockwool. Thus, the thermal insulation manufacturer lost an order from one of the largest developers in the homeland.


Also, being on the NACP list had a bad effect on the work of the world's largest food manufacturer, the American corporation Mondelez, which owns the Oreo, Jacobs, and Milka brands. She faced a boycott of her products in Sweden and Norway. The largest amusement parks, football associations, railway, shipping and aviation companies, retailers, the municipality of Gothenburg and the furniture giant IKEA refused to cooperate with the manufacturer.


The Danish shoe manufacturer Ecco also feels the consequences of the decision to stay in russia. As the Copenhagen Post writes, on the anniversary of the invasion of Ukraine, the headquarters of the company was attacked.


The effect can be stronger if other major cities supporting Ukraine join the boycott: Paris, Berlin, London, New York.


How do companies try to avoid getting on the NACP list?


Several international companies, after their publication in the list, approached the NAKC with a proposal to remove them in exchange for support of the Armed Forces or other "good deeds". One of the retail chains, and there are only two of them on the list - "Auchan" and "Metro", gathered Ukrainian suppliers of food products and offered the best shelves in European supermarkets on preferential terms. The manufacturers refused the offer.


Attitude of investors


Most investors see risks in working on the russian market and take this into account in their financial plans. Shares of companies that remained on the market of the russian federation became more unstable. On the contrary, the shares of the same business that ended cooperation with the russian Federation are more stable, because they survived the exit from the russian federation.


Every day, the attitude towards companies that continue to work on the russian market is getting worse, but it is no longer possible to exit it with small losses. From December 2022, to sell a business in russia, it is necessary to obtain permission from the Ministry of Finance of the russian federation, make a 50% discount on assets and pay an additional tax.


It is profitable to leave russia


Despite the strict exit conditions that the russian leadership developed for international companies, about 1,500 companies refused to be complicit in the crime. The business was forced to sell production at a low price, did not receive profits, and lost strategic markets. This kind of financial racket from the Kremlin.


Therefore, companies that have suffered significant losses and suffered as a result of the aggressive actions of the russian authorities have the right to claim compensation for these losses at the expense of confiscated russian money. Their lawyers can help governments work out ways to compensate.




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The Ukrainian market is the future


The American newspaper The New York Times calls Ukraine "the world's largest construction site", for which thousands of companies are preparing to compete. When Ukraine receives the frozen russian assets, a large-scale reconstruction process will begin with multibillion-dollar projects, which will involve large international companies. However, not everyone will be able to participate in this, because probably one of the main criteria for admission to reconstruction projects will be the company's lack of business in russia.


It is hard to imagine that, for example, the Italian cement manufacturer Buzzi Unicem, which works with the Ministry of Defense of the russian federation, would be allowed to enter into contracts for the restoration of residential quarters in Mariupol.


How can the Ukrainian government stimulate international business?


The Ukrainian authorities must carry out a number of reforms that would facilitate the business climate. Also, the authorities of Ukraine could create certain incentives for companies that leave the russian market: preferential tax conditions, involvement in interesting investment projects, etc.


The change in the negative attitude towards Western companies that continue to work in russia is gradually turning into a trend. At the same time, companies that left the russian federation in the first months of the Great War may benefit from their choice during the seizure of russian assets and the reconstruction of Ukraine.


Photo: The Conversation 




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