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Caught in the middle: Why companies leaving a country under sanctions isn’t always the best choice

Mar 22, 2023

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Companies with international operations should be thinking about how to deal with the threat of political disruptions and the implications of exiting countries they work in.

When political relations with foreign countries turn hostile, businesses are often caught in the middle. Non-governmental organizations may argue that continued presence in the country is unethical, and governments may impose legal restrictions, known as international sanctions. Yet running away is not always the best response.

Russia’s illegal invasion of Ukraine has been a wake-up call for companies, bringing to the attention of corporate boards the growing use of sanctions by governments around the world, which leave companies in the crosshairs of political disagreements.

“When conflicts like Russia and Ukraine occur, a lot of the Western focus is on whether or not a company stays in the country,” says Klaus Meyer, Professor of International Business at Ivey Business School, who recently published an academic literature review on sanctions as well as an article on managing disengagement after major political disruptions.

 “The pressure is on exit, but if you look at what's happening on the ground, it's not obvious that a panic exit, where you sell to the highest bidder, is really serving the purpose you want to achieve. You need to look at whom you’d be selling the business to and whether the new owners will respect your ethical standards.”

In his article, It’s Hard to Say Goodbye: Managing Disengagement during Political Disruptions, published in AIB Insights, Meyer offers an in-depth analysis of the implications of disengagement, and proposes a framework for companies to consider as they analyze their best course of action amid current or possible future sanctions. The paper, International business under sanctions, published in the Journal of World Business, offers a broad-reaching review of the academic research available on sanctions and their impact on businesses – considerations Meyer says businesses need to be aware of in order to navigate the new rules of the game.

Disengagement at different levels

Those who choose to stay in an environment deemed hostile by their home government can find several ways to manage and comply with political pressures to disengage, including discontinuing the sale of international premium brands, imposing a freeze on new investment or halting technology transfer and staff training. Some of those choices will have a bigger impact than others, depending on the operations and on the capabilities of the host country.

It’s also important to consider the business and ethical implications of any decision because in some cases companies could hurt their own operations more than the economy of the country facing sanctions, or they could leave innocent workers out of a job.

“Most sanction regimes don’t force companies to divest, but there may be constraints on new investments, or technology and resources available, or you may have operations in that country that aren’t separate, as was the case with Carlsberg,” says Meyer, pointing to a case study he also authored about Carlsberg Breweries. That case looks at the beer maker’s growth path against the background of economic transition and political change in Russia from the 1990s to the 2022 invasion of Ukraine, as well as the urgent ethical and operational challenges that crisis created.

Adherence, loopholes, and efficacy

In his paper, Meyer also discusses the loopholes and workarounds companies and governments in the targeted country will find to reduce the impact of the sanctions, such as trading through a third country or rebranding their product. They can also lobby governments to be exempt ahead of expected sanctions. All of this allows protecting interests in the short run, but whether it is ethical is a different question.

“If you look at the political impact, there is very little evidence that sanctions actually lead to regime change. An extreme example would be Cuba, which has faced sanctions from the U.S. for the best part of 70 years, without any political change,” says Meyer.

“Some studies show that Russian companies had been building up inventories before the Russians invaded Crimea in 2014, so they anticipated that political conflict coming and reoriented to prepare. There is also statistical evidence that Turkish exports to Russia went up in 2022, suggesting Turkish companies have been filling gaps left by Western companies.”

One instance where sanctions worked well was South Africa, since they played an important role in helping end Apartheid.

“In that case, the reason they were successful was the interplay between domestic opposition and the sanctions regime,” he says.

Strategic choices and critical thinking

To better understand their impact, Meyer and his colleagues say more academic research is needed around how companies react to sanctions, not just in topical cases like Russia, but also historical ones like Myanmar.

“At present, we as International Business (IB) scholars neither know enough about how these important decisions are made, nor are we in a position to advise multinational enterprise (MNE) managers regarding the nontrivial costs and benefits associated with each of these strategic choices,” the paper concludes.

“A study of IB under sanctions also has the potential to advance the key theoretical frameworks that have been used to understand different aspects of multinational corporation behaviour when the external environment is relatively stable and predictable.”

On the corporate side, companies need to spend time thinking through exit strategies as part of their political risk analysis, well before sanctions are announced – an exercise his article is hoping to support with a proposed decision tree for firms, laying out how they can think through the implications of their choices.

“We suggest that MNEs facing pressures to exit due to political disruptions should organize their decision process in three steps,” says the AIB Insights article, which was co-authored by Saul Estrin, founding Head of the Department of Management at London School of Economics.

“First, to clarify the financial implications considering the implications of disengagement for operations outside the focal country. Second, to assess the ethical implications of continuing operations in the country. Third, if they opt to disengage, to assess the merits of alternative disengagement strategies, including partial and full exit.”

But Meyer says there’s also “a communication challenge because the general public doesn’t fully appreciate the complexities of exiting a country you have operations in. The interface between the formal sanctions, which is the focus of the review paper, and the social pressure on companies is very important.”

“And while a better understanding is important, it needs to be paired with actual actions on the ground.”