1. Comment
March 21, 2022

Russia-Ukraine conflict – the ultimate ESG conundrum for businesses?

Since Russia invaded Ukraine in the early hours of 24 February, 2022, the Western economic response has only grown in strength concerning both the severity and coordination of sanctions. These sanctions are aimed at hurting Russia in terms of trade and investment, making trading with Russia an unlawful activity and deterring foreign direct investment.

Nonetheless, companies—especially Western companies—that have supply chains and/or operations in Russia have had difficult decisions to make: should they stay, or should they go?

McSanctions

For many international companies, the decision to leave came down to public opinion. For example, Coca-Cola and McDonald’s, two companies synonymous with both American capitalist expansion and globalization, came under increasing pressure to shut down their operations, including a #BoycottMcDonalds hashtag that started trending on Twitter. The companies resisted until two weeks into the invasion.

Coca-Cola ceded first. On March 7, it announced that it would stop trading in Russia. One day later, McDonald’s followed, announcing that it would close restaurants and pause its operations in Ukraine and Russia, while promising to ensure that the salaries of employees in these countries are still paid in full.

Andale! Mondelez

Other companies have decided not to divest from Russia. Those companies—at the time of writing—include Danone, Mondelez, M&S, Burger King, PepsiCo, and Subway. Several of these have complex franchise agreements that prevent them from taking executive action, and several have stated that they will stop supplying these franchises.

However, Danone and Mondelez have vehemently defended their decision to remain in Russia. Mondelez International has said it will ‘scale back’ its operations in Russia and will focus on providing ‘basic offerings’, while ensuring that no new products are rolled out and advertising is suspended. Danone CEO Antoine de Saint-Affrique told the Financial Times “We have a responsibility to the people we feed, the farmers who provide us with milk, and the tens of thousands of people who depend on us.”

This begs the question. When it comes to the fallout from the Russia-Ukraine conflict, which company has done the right thing? And, perhaps more importantly, is there an ‘ESG 101’ for companies when it comes to Russia, or should companies act on a case-by-case basis? At face value, Danone’s argument seems moral and compelling; and McDonald’s offer to continue to pay the wages seems ethical and responsible. But given the situation, will these actions prolong or shorten the conflict?

The power of sanctions against Russia

Quite simply, sanctions are a form of economic coercion. Any political leader remains in power by appeasing the stakeholders required to continue to lead. The power and prevalence of these stakeholders varies in differing political systems. For example, in a democracy, the public has voting power, which means that leaders must appease them to remain in power. Russian citizens have less influence on their leader, but they are still important in the decision-making calculus of Putin.

In Russia, the stakeholders include citizens, policymakers, and other members of the leader’s decision-making inner circle. Western sanctions have targeted oligarchs, the siloviki (Russia’s bureaucrats working closely with Putin in the Kremlin), and naturally they have targeted many industries too.

The trade sanctions that impact industries will have an impact on ordinary citizens, something that critics have pointed out is unfair. However, these sanctions will cause many ordinary Russians to turn against their government, fuel domestic unrest, or force Russians to leave the country, which puts pressure on Putin to end the war in Ukraine.

Danone may have a responsibility to the ‘tens of thousands of people [in Russia] who depend’ on the company, but surely—as a leading Western brand that operates in Ukraine—they have a responsibility to Ukrainians and consumers all around the world who are suffering due to rising prices as a result of the conflict. Surely the ‘right’ ESG decision for companies operating in Russia is to suspend operations and maximize the pressure on the decision-makers, to bring the conflict to an end as soon as possible.