Economic Death by a Thousand Cuts: Corporate sanctions on Russia are real game-changers

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In my last post published just before the situation in Ukraine escalated, I explained why companies can no longer avoid being social and political actors. Following the Russian aggression that has disregarded every part of International Law, the international community implemented economic sanctions on hitherto unknown scale. Amongst many detailed measures, governments enforced unprecedented asset freezes and cut most Russians banks off from the SWIFT system.

Putin likened these hard-hitting economic sanctions – and the ones potentially yet to come – to a declaration of war. In essence that means, not just military but also economic action by foreign governments are seen as escalating the conflict further. 

We know that consumers and civil society expect businesses to take a stand on political issues. The war in Ukraine, catching everybody off guard, is probably the most extreme case to date as the world is united against the Russian invasion. A brief look at the vote in the UN General Assembly shows the level of unity.

source: https://eeas.europa.eu/headquarters/headquarters-homepage/112080/un-general-assembly-demands-russian-federation-withdraw-all-military-forces-territory-ukraineen

source: https://eeas.europa.eu/headquarters/headquarters-homepage/112080/un-general-assembly-demands-russian-federation-withdraw-all-military-forces-territory-ukraineen

Against this backdrop, a mixture of corporate values, consumer expectations and civil society pressure has led to an unprecedented exodus of Western companies from Russia.

It is also notable how quickly the pressure on companies that so far had not suspended their business operations in Russia grew. It was a matter of mere hours in some cases as the example below shows.

Alberto Alemanno, founder of The Good Lobby, helped spread a list of laggard companies on social media.

Within hours, some of the targeted companies responded.

Or look at the examples of McDonalds and Coca-Cola. As BBC News reported, McDonald’s and Coca-Cola came under immense pressure as they had not pulled out of Russia yet: 

McDonald’s and Coca-Cola have been criticised on social media for failing to speak out about the attacks and continuing to operate in the country. Well-known firms including Netflix and Levi’s have already suspended sales or stopped providing services in Russia. McDonald’s and Coca-Cola have not responded to the BBC’s request for comment. #BoycottMcDonalds and #BoycottCocaCola were trending on Twitter on Monday and over the weekend respectively. Dragon’s Den investor Deborah Meaden also spoke out on social media against the fizzy drinks company, urging people to stop drinking its products.

What was the reaction? On 8th March 2022, Coca Cola put out the following statement on its website:

The Coca-Cola Company announced today that it is suspending its business in Russia. Our hearts are with the people who are enduring unconscionable effects from these tragic events in Ukraine.

What about McDonalds? Also on 8th March 2022, the company stated:

(…) our values mean we cannot ignore the needless human suffering unfolding in Ukraine. Years ago, when confronted with his own difficult decision, Fred Turner explained his approach quite simply: “Do the right thing.” That philosophy is enshrined as one of our five guiding values, and there are countless examples over the years of McDonald’s Corporation living up to Fred’s simple ideal. Today, is also one of those days. Working closely in consultation with our Chairman, Rick Hernandez, and the rest of McDonald’s Board of Directors over the last week, McDonald’s has decided to temporarily close all our restaurants in Russia and pause all operations in the market.

The significance of these combined corporate sanctions against Russia is huge because they too are unprecedented in scale and scope. Jeffrey Sonnenfeld of the Yale Chief Executive Leadership Institute is keeping an up to date list of companies that have withdrawn from Russia (over 300 at the time of writing) – and those that remain. My hunch is, that most of the laggard companies will eventually be forced to withdraw too. Clothing company UNIQLO is one case to watch as at the time of writing, it is defending keeping ist shops open.

It will take some very skillful economic research to estimate the combined economic impact of these corporate sanctions that are not mandated by any government. My impression is that the cumulative effect is massive.

What is clear is that Putin cannot easily turn these actions into “declarations of war” by foreign governments. These corporate sanctions are individual decisions driven by general expectations towards businesses. The official sanctions are targeted and balanced. What we are witnessing in the corporate world is much more scattered. It is economic death by a thousand cuts.