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Reputational Concerns Mount as US Companies Reconsider Russia

June 15, 2022, 2:52 PM

Reputational risk is a growing concern for US companies grappling with whether to wind down operations in Russia in response to the country’s invasion of Ukraine.

Companies including Microsoft Corp. and McDonald’s Corp. have withdrawn from Russia in the past month after initially suspending their operations in the early days of the war. Both companies said the final move was sparked by the conflict’s impact on their business in the country. McDonald’s went further, however, citing its corporate values and the humanitarian crisis in Ukraine.

Britt Mosman, a Willkie Farr & Gallagher partner who previously worked at the Treasury Department’s Office of Foreign Assets Control, said that virtually all of her clients seeking legal advice on Russia also raise the question of reputation.

Companies are still mainly pulling out of Russia for legal reasons: the steady drumbeat of sanctions and export controls the US imposed since Russia invaded Ukraine cuts off work in the region for some businesses. But reputational and environmental, social and governance factors are increasingly at play as the war and its human rights abuses drag on.

“ESG concerns don’t lead to immediate decisions and immediate consequences,” Mosman said. With these decisions, companies “can be a little bit slower and more deliberative,” she said.

Reputational concerns aren’t only being aired by boards of directors, Mosman said. Questions about ties with Russia have “permeated the hierarchy” of US companies, as employees at all levels worry about public perception, she said.

“In my experience, reputational concerns are being raised by individuals beneath the board of directors, including managers, legal and compliance professionals, shareholders,” Mosman said.

New Standard

The mass of companies exiting Russia has set a new standard for how businesses are expected to respond to geopolitical events in the future, lawyers said.

The sentiment echoes what Edelman public relations CEO Richard Edelman said in a blog post early on in the conflict: “Geopolitics has become the new test for trust. We saw this with the allegations of human rights abuses in Xinjiang and the war between Ukraine and Russia has only reinforced it.”

Companies face continual pressure from shareholders and the general public to shut down operations in Russia. The Yale School of Management, for example, keeps a list tracking companies that remain in the country.

New York Comptroller Thomas DiNapoli, trustee of the state’s Common Retirement Fund, has frozen all new investments in Russian companies. DiNapoli has also sent letters to US companies, including McDonald’s, PepsiCo Inc., The Estee Lauder Companies Inc., and Mondelez International Inc., urging them to examine their business in Russia and consider ending ties.

There are political pressures, too. Last week, Ukraine’s president Volodymyr Zelenskyy urged US companies to shut down their operations in Russia and, instead, open up shop in Ukraine.

High Risk

Brandon Van Grack, a Morrison & Foerster partner who was a lead prosecutor on Special Counsel Robert Mueller’s Russia investigation, emphasized that companies are reluctant to work in Russia because it’s a national security priority for the US, and the enforcement risk is high.

What’s more, sanctions rules can be so difficult to navigate that it’s all but impossible to comply, Van Grack said.

“These laws are so sweeping and complex that it creates so much uncertainty,” he said.

But when it’s legal to do work in Russia, some businesses may still shy away from doing so for a variety of reasons, including public perception and practical hurdles. Hughes Hubbard partner Ryan Fayhee said it can be “a mess” to try and get some banks and insurers or freight companies, for example, to get comfortable with work in Russia, even for lawful business.

Companies are still mulling whether to stay or go months after the invasion because it takes a while to weigh all the thorny variables, lawyers explained.

“Reputation takes more time to assess,” said Fayhee. “Oftentimes it becomes more of the practical consideration, [and the company] just ultimately discovered that for better or worse it was either not workable from a practical standpoint, or not worth it, or both. That takes some time to come to.”

‘Emotional Element’

Companies might be taking time to manage internal disagreements over what the right move is, Mosman said. And some companies may even worry about appearing too cutthroat in avoiding business with Russia.

There’s also the question of laying off employees in Russia, which adds an “emotional element” to an already difficult process for clients, Mosman said.

Companies have tried out a range of approaches as they close out their Russia business. Volkswagen AG, for example, which suspended its Russian operations in March because of sanctions, said on Thursday that it will pay its employees at a car assembly plant if they quit voluntarily.

Companies announcing layoffs often say that they plan to support Russian staff as their businesses shut down. But questions remain as to how large numbers of laid-off employees or the public will respond as shutdowns continue, especially when severance packages dry up.

“How do they protect and do right by these employees?” Van Grack said.

To contact the reporter on this story: Clara Hudson at chudson@bloombergindustry.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com, Melissa B. Robinson at mrobinson@bloomberglaw.com