Russia’s invasion of Ukraine has represented an escalation of hostilities that has led to perhaps the quickest and most aggressive and comprehensive economic reactions in history. Prior sanctioning usually has been a slow boil or limited to economies that operated at the periphery of the global economic system. In 2022, we see something completely different – not a total blockade but certainly a level of economic counterattack that is far more than mere slap-on-the-wrist sanctioning we are used to.
What is interesting about the quick response is that it is not simply driven by government action but also by a level of corporate action never seen before. Within days, company after company shuttered activities or broke away from partnerships in Russia. For the few that didn’t, they were quickly named and shamed into acting. There was no opportunity for nuance or prevarication. As Cat Rutter Pooley notes in the Financial Times: “[b]usinesses have rightly decided to quit first and leave legal niceties until later”.
While leaving the legal niceties to later is one issue, there is another that slips by unnoticed – and that is the ethical and moral obligation a firm has to its employees. It is one thing for a company with limited assets in Russia or its activities are mainly via partnerships to take the moral high ground and exit Russia. It is quite another for a firm that is heavily embedded in the country. And what makes this an ethical and moral dilemma and not simply an economic one is when that embeddedness involves other human beings – i.e., employees – versus physical goods and factories. Abandoning physical assets has little more than an economic cost that almost any major firm and their shareholders can weather and, in this case, should do so on moral grounds.
But a more difficult issue is to what extent are the employees of companies with deeply embedded operations – Ikea, McDonalds, PapaJohn’s, etc. – complicit enough to be part of the collateral damage caused by Putin’s invasion of Ukraine? Good companies – and this includes the vast majority of those ‘named and shamed’ into ultimately closing their Russian operations – are not thinking at this time of the value of their assets, but the maintenance of their employees. While some on the list might not see a moral/ethical dilemma – Uniqlo’s statement that it was remaining in the country because “clothing is a ‘necessity of life’” was particularly tone deaf given that Russians were not going to go naked if Uniqlo closed 49 clothing stores (which it now has subsequently done) – the majority are dealing with an ethical dilemma. As one executive said to me about another situation: “at some point you have a situation where the PR optics do not look good, but the ethics imply the decision is right despite this”. For many companies exiting Russia, the good optics do not really have significantly large costs – either to the company or its key stakeholders. For others, the optics may not imply immorality as many suggest, but the fact that the company is struggling with the ethical dilemma of how to protect its own people. Ultimately, the decisions of the executives of these companies will be making an ethical and moral choice that with no easy or clear answer.
Now many of these companies have said they would continue to pay employees. However, the problem is that foreign subsidiaries, like those in Russia, usually only have access to the cash to pay employees by generating revenues inside the country. If they cannot generate those revenues, the only real alternatives are to borrow locally or to transfer in funds from their HQ overseas. Closure implies that local cash flows stop, and few firms will have the cash on hand to pay all employees for more than a short time. Sanctions imply that no funds will be available from outside the country and that any borrowing that could be done within the country has collapsed and is not available. In the end, the multinationals may have no choice but to abandon all their capital – financial, physical and human.
None of this is meant to minimize in any way the brutality of the Russian invasion of Ukraine or the economic, physical, and human toll that the war has imposed on the Ukrainian nation. Nor does it make any excuse for what is a kleptocratic feudal oligarchy at the top of Russian society. What it is meant to bring to light is that while there is overpowering evidence that Thomas Friedman’s “Golden Arches Theory of Conflict Prevention” was wrong – it was wrong because it focused on the wrong thing. It did not account for the human embeddedness that much modern economic integration creates and with the implication that economic embeddedness has more than financial costs. While economic integration might not prevent conflict and economic conflict might destroy economic value, it is also clear that the sort of economic embeddedness that we see in the modern multinational creates moral and ethical dilemmas for executives that do not have simple resolutions and can pit good PR against human morality. We should all expect executives to do the right thing. But we should also recognize that their fiduciary duty will imply real moral and ethical dilemmas.
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