The case for Japanese firms to withdraw from investments in Russia
Updated English version of article published in Japanese today in Nikkei Business
Companies headquartered in countries such as Japan which have joined NATO countries’ unprecedentedly tough economic and financial sanctions on Russia are facing a very difficult dilemma. Should companies remain operating in Russia, despite its unprovoked invasion of its neighbour, Ukraine, and despite growing evidence of the atrocities inflicted by Russian troops on Ukrainian civilians? Or should they withdraw, leaving behind years of investment, neglecting the needs of employees and customers, perhaps handing their businesses to the Russian state or to a competitor?
It is the same issue, in principle, as the one facing European and American companies, but Japanese firms inevitably feel more distant from the conflict, both geographically and in terms of history and values. Nevertheless, in the end the right answer will be pretty much the same.
These questions are also not unique to Russia and the war in Ukraine. They arise in any country in which human rights are abused, civil conflict takes place or an authoritarian regime imposes some form of repression. The military takeover in Myanmar in February 2021 created similarly difficult choices. So does Saudi Arabia, where the government ordered the murder and dismemberment of a prominent journalist in 2018. And of course China, both in the mainland and now in Hong Kong, creates such issues every day.
However the war in Ukraine imposes special challenges, beyond those earlier examples, in two main ways. The first is the fact that governments, including Japan’s, have imposed tough sanctions which make business more difficult but also represent a clear public declaration that Russia is considered a pariah state. It is uncomfortable for companies to continue to do business in a country their own government has labelled as an outcast or even enemy.
The second is that the war is being conducted under the full scrutiny of global media, a scrutiny which the government of Ukraine is very smartly using and reinforcing in order to build support for its cause. This makes it harder for companies to keep their decisions discreet or private, and means that employees, customers and shareholders will likely form their own views about the ethics of continuing to do business.
Now that ESG investment – environment, sustainability, governance – has become more popular and influential, it is hard to believe that doing business with a country that commits war crimes and destroys cities should not disqualify a company under any and all of those headings.
So how should corporate executives think about this? A good basis for starting to answer that question is to see what companies are actually doing concerning Russia. Professor Jeffrey Sonnenfeld at Yale University’s School of Management, along with a team of researchers, has been compiling a list of the decisions revealed by 800 global companies since the Russian invasion began on February 24th.
Professor Sonnenfeld and his team have divided corporate decisions into five different categories: withdrawal; suspension; scaling back; digging in; and buying time. When I first checked the list on April 8th for the Nikkei Business submission of this article, there were 37 Japanese companies listed. Of those three were categorised as having announced full withdrawals, while 15 were said to have suspended their Russian business. Yet 13 companies were said to be “digging in”, by which is meant that they are continuing to operate regardless of the war, and four were described as “buying time”, which presumably means they are delaying a decision.
Today, April 29th, when I checked in order to update the article for this Substack version, the list compiled by Yale’s researchers had grown to 47 Japanese firms. During those three intervening weeks, the number listed as having suspended their Russian businesses had grown from 15 to 28, while 6 are scaling back, 6 are buying time and six are digging in. Just one is now categorised as a withdrawal (ENEOS), which perhaps shows the difficulty of interpretation as well as implementation. It still means that 12 of the companies are essentially leaving their Russian businesses unchanged.
But what is the right thing to do? For any board, the first question must concern the attitude of the Japanese government. So if sanctions are being imposed, Japanese firms must obey; and those sanctions also can be taken as an indication about what sorts of activities the government considers to be helping the Russian war effort. It is surely wrong for any company to continue those activities: withdrawal or suspension must be the right answers.
The second question concerns the impact on employees and customers. A firm retains responsibilities towards both groups, regardless of war or politics. But while customers are likely to be able to find alternative suppliers, employees will suffer very directly if the firm ceases operations. Continuing to pay them, helping them to leave the country if they wish, helping them to stay safe, or compensating them generously: these are the most ethical steps.
The third question returns to the topic of the first one, for activities not covered by sanctions. Is the firm’s business helping President Putin’s war effort, even in an indirect way? If it is, through taxes paid or materials supplied, then withdrawal or suspension again look the correct steps. No company would continue operating a business in a country that their country was directly at war with. So they surely should not do so in a country that their government has declared to be an enemy, even if without a declaration of war.
These are tough times for businesses operating in Russia, and they are likely only to get tougher. As my own experience booking flights to travel to Japan has shown, Japanese airlines have responded to their own rather different difficulty of choosing new routes and schedules to reflect the closure of Russian and Ukrainian airspace by constantly buying time. Evidently, they have chosen to believe that the war, and thus the aviation disruption, would be short. Since President Putin appears to have laboured under the same erroneous assumption, perhaps they can be forgiven for their initial misjudgement. Not now, however: the only responsible judgement now for any business is that this war and the associated isolation of Russia is going to last a very long time.
Do let us know if your Nikkei piece had any “pushback” or influence?