Purse or life: Many global companies still operate in russia. How do their Ukrainian subsidiaries feel, and who will react faster to the pressure?

Purse or life: Many global companies still operate in russia. How do their Ukrainian subsidiaries feel, and who will react faster to the pressure?

Where does the line between economic expediency and cooperation with the aggressor country go?

Purse or life: Many global companies still operate in russia. How do their Ukrainian subsidiaries feel, and who will react faster to the pressure?
The aftermath of the attack on the Retroville shopping centre in Kyiv on March 21, 2022, where, among others, one of the Leroy Merlin stores was located Photo: DR
Photo: DR

Yesterday, on February 23, the National Agency for Corruption Prevention added Auchan Corporation to the list of international sponsors of terrorism. A year after the start of russia's full-scale invasion of Ukraine, it seems at least questionable to continue operating in the russian market. Especially for transnational players that are present in dozens, if not hundreds, of countries and, thanks to such diversification, are not dependent on any country.

However, by February 2023, according to a study by the Swiss University of St. Gallen, only 9% of nearly 1,500 global companies from the EU and G7 had stopped working in the aggressor country. The largest share is made up of German (19.5%), American (12.4%), and Japanese (7%) corporations represented in various sectors: retail, food, household chemicals, trade, finance, and high technology.

The discussion about the unacceptability of working in the russian market, which had been going on for a year now with varying degrees of activity, was reignited last week by the publication of a joint investigation by The Insider, Le Monde and Bellingcat, according to which the French hypermarket chain Auchan delivered food to the russian military in Ukraine under the guise of humanitarian aid. However, aid only to civilians is considered "humanitarian" during international conflicts. Supporting one of the warring parties could bring Auchan under sanctions.

Auchan Retail's office in France categorically denies supporting the russian military. It explains its presence in the russian market by the desire to give the population 'access to food.' The retailer follows the same policy in Ukraine.

The scandal has once again put the Ukrainian representative office of Auchan, which operates two dozen stores in nine Ukrainian cities, in a difficult position. A hasty appeal for clarification to the French office and a public declaration that the Ukrainian team did not know and could not have known about the actions of their colleagues failed to level out the reputational damage and another surge of emotional and very understandable consumer demands: "Get out of the Ukrainian market!"

All Ukrainian subsidiaries of multinational companies that continue to operate in russia are in the same position. The negative messages they are addressed most often manifest themselves in the form of psychological pressure. However, sometimes, as in the case of Auchan, it takes on more radical forms.

Mind has been analysing whether it is possible to expel multinationals tainted by their work in russia from the Ukrainian market, and how much such integrity costs.

What does it look like (and how is it explained) from a legal point of view? Formally, even at the international level, goods for medicine and agriculture (which include fertilizers and food + retail) are not subject to international sanctions. Food, like pharmaceuticals and agriculture, is a vital sector, so it is not restricted for reasons of humanity.

Not all companies in these sectors took advantage of the loophole and eventually left the aggressor country's market, following the self-sanctions. Thus, Mars stopped importing products, and McDonald's immediately closed eight hundred of its restaurants and/or revoked its franchise.

However, many multinational players have shown their condemnation of russian aggression only by ceasing investments in russian businesses and their promotion or by refusing to import non-essential food products. For example, Nestlé, while maintaining its presence in the russian market, has limited its exports of non-critical food products, such as Nespresso coffee.

Unable to play the 'humanitarian' card, the management of some companies referred to the need to maintain economic prudence. "Closing the company and our stores without any reason would simply be a refusal, which is considered premeditated bankruptcy and therefore illegal, as it opens the way to expropriation, which puts our employees in a dangerous situation. We have acted responsibly in our decision to suspend ADEO's new investments in russia," said Philipp Zimmermann, CEO of ADEO group (Leroy Merlin chain), in a video message.

Thus, formally, all European and American restrictions on operating in the russian market can be taken into account by multinationals. "For example, retail is not subject to EU sanctions imposed on russia. It is a personal decision of the management of these companies to leave the russian market. That is, by staying on the russian market, they do not violate sanctions restrictions," states Oleg Pendzyn, Executive Director of the Economic Discussion Club.

On the other hand, formal compliance with the law and ignoring the ethical component is no longer tolerated in Ukrainian society, so it is unlikely to satisfy its citizens.

Is the work of Ukrainian representative offices of multinational companies coordinated with their russian offices? No, it is not.

Since 2014, the headquarters of most of these international players had prudently ensured the autonomy of Ukrainian and russian representative offices, even shutting down common chats, as communication threatened to escalate into conflict. After February 24, 2022, any dialogue became even more impossible, and autonomy became absolute, sometimes taking on a chaotic form. For example, at the beginning of the full-scale invasion, the parent company of DIY retailer Leroy Merlin disconnected its Ukrainian office and its 800 employees from corporate communications.

"Among the international companies that continue to stay in russia, there are several that also operate in the Ukrainian market, and there is a certain collapse. Ukrainian representative offices usually support Ukraine, both publicly and in fact. In particular, they pay taxes to the Ukrainian budget," says economist Andriy Novak, while cautioning that the fact of presence on the russian market is more decisive for him in shaping his attitude towards a company.

Is the decision to stay in the russian market always a manifestation of a thirst for profit? Partly, but not always.

On the one hand, it is obvious that the russian market, both because of its size and the current diminished competition, promises enormous profits. On the other hand, transnationals have acquired many assets over the 20 years of their work in russia. And this baggage cannot be easily taken away.

"European businesses are leaving (the russian market. – Mind), but you need to understand that they have accumulated a large amount of property in russia. They can't leave everything behind until they report to their shareholders and decide what to sell, to whom, and how," explains Oleg Pendzyn. "And the fact it happens at different speeds for different players is normal."

How can we speed up the process of their withdrawal from russia? Protests, consumer boycotts and international pressure will have an effect sooner or later, Andriy Novak is sure.

"For almost all large international companies, the concept of image is crucial. So, if there is a public action, a protest, or even several against the company's continued operation in the russian market, they will sooner or later close their representative offices. Nowadays, in the information age, something happens when it gets a lot of publicity," he says.

According to Andriy Novak, the Ukrainian government systematically raises this issue, reminding the international community which global companies have not left the russian market yet.

"Ukraine, as a country suffering from russian aggression, not only can but must bring to the public, to the level of international relations any global company that continues to operate in the russian market and thus co-finance the war," he says.

What is Ukraine's state policy towards the Ukrainian business of transnationals that remain in russia? As mentioned above, Ukraine is making significant efforts at the state level to put pressure on international businesses to stop working in russia.

There is a somewhat ridiculous mechanism inside the country, implemented by the National Agency for Corruption Prevention (NACP), which compiles a list of companies that are international sponsors of the war.

There are no legal consequences of being included in the list. The only visible effects are conditional image losses for the companies involved and PR for the agency itself. However, the companies included in this list are included in the World-Check database of the international company London Stock Exchange Group, which is mandatory for businesses to use when checking their counterparties.

It is worth noting that the NACP's list does not include multinational companies whose work in Ukraine is critically important for filling the state budget.

How important is the presence of such companies in Ukraine? The level of significance differs depending on the industry and is derived from the activity of the business, all of whose representatives have been affected by the full-scale war. However, multinationals tend to be more resilient. For example, the level of staff reductions in such companies is lower than the industry average.

Another delicate point that should not be discounted is that many TNCs are major donors to the Ukrainian budget and generally make a significant contribution to the stability of the economy.

For example, the tax revenues of the tobacco giant Philip Morris in March-April 2022 amounted to UAH 5.8 billion. Amid a general decline in budget revenues during this period, the company's excise payments reached about 63% of the total excise revenues from tobacco products in Ukraine.

At the same time, Philip Morris International has not left the russian market yet. And the company's CEO Jacek Olczak commenting for the Financial Times said that he does not see any possibility of doing so at the moment. According to him, the tobacco group has been discussing sale options with at least three serious potential buyers, but the negotiations have reached a deadlock due to restrictions imposed by the kremlin.

Is there any practical sense in putting pressure on the Ukrainian offices of multinationals? It can't hurt, but we can't expect a significant effect.

Ukrainian offices do not influence decision-making by global players. Even on the page of the Ukrainian representative office of Auchan, a company that has been breaking records of unpopularity in recent weeks, the most common conclusion of outraged commentators is "let's write to the French." "We understand your emotions," Auchan Ukraine responds in the same thread.

Similarly, the Ukrainian retail business of the German METRO chain has been consistently criticized for the actions of its parent company, which continues to operate in russia. Although, this decision was made at the level of the owner, not the Ukrainian office.

The correctness of the implementation of sanctions restrictions is controlled by the EU, which Ukraine can request to see if a particular case is a violation of sanctions.

"Therefore, even in the case of Auchan, I would be very careful with swinging the sword. In such a situation, Ukraine can raise the issue at the diplomatic level, including reminding the French authorities of the problem and discussing it with partners," says Oleg Pendzyn.

And if we are to follow the calls for protests, it makes sense to do so in the centre of decision-making or at the political level. For example, on the anniversary of the invasion, rallies in support of Ukraine are being held throughout Germany to remind Europeans of the war. And, among other things, to convey the message that it is unacceptable to work with russia. It is planned to place children's shoes and candles on the square in front of Bonn City Hall in memory of the children who have died as a result of the aggression. As a reminder, one-fifth of the international companies remaining in russia are German.

Putting pressure on an autonomous Ukrainian division of a multinational corporation does not bring this goal any closer. The most likely consequence of such activity is the closure of the few international businesses remaining in Ukraine, which will involve the dismissal of employees.

For example, Auchan Ukraine is an employer for 5,000 Ukrainian citizens.

Can such companies leave the Ukrainian market on their own initiative? Yes, of course, but it is unlikely to be associated with protests or angry comments on the social media pages of Ukrainian representative offices.

For example, one of the most criticized multinationals by Ukrainians, Leroy Merlin, has already closed four of its six supermarkets in Ukraine. For reference, the company has 112 stores in russia, which account for 18% of the group's sales.

It is a sad irony that one of the few Leroy Merlin stores in Ukraine was located in the capital's Retroville shopping centre. This shopping centre was attacked by a russian Kalibr missile in March 2022 and suffered serious damage. The company did not restore it. Another tenant has taken it over.

At the start of its Ukrainian expansion, the French company had plans for a chain of 25 stores.

Where is the absolute red line then? No considerations of economic expediency or even the formal absence of a sanctions' violation work if a multinational corporation, while remaining on the russian market, directly supports the aggressor's armed forces and is somehow integrated into the military campaign.

Such happened to one of the leaders in the production of canned vegetables, the Bonduelle group, when it became known that 10,000 baskets with the company's products and a postcard "Come back with victory" were handed over to the russian occupation forces for the New Year holidays. The company explained it by participating in the charity event "Basket of Goodness" (!) and stated that they did not know the final recipient.

In this case, instant self-sanctions were imposed: Ukrainian consumers began to reject the products, and the largest retailers, including ATB and Novus, removed them from their shelves. For reference, Bonduelle's sales in russia and neighbouring countries amount to approximately 150 million euros per year, while the Ukrainian market accounts for less than 10 million euros.

What can be considered direct support for the russian army – for example, whether the loan repayment holidays provided by russian branches of Western banks to russians fighting in Ukraine is up to everyone to decide for themselves.

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