Corporate Responses to Political Turmoil: Cutting Business ties to Russia – Tutkimustietoa Finsif-stipendiaateilta 2023 3/9

Despite widespread condemnation of the attack, company exits from Russia depended on economic realities 

In February 2022, the world was profoundly impacted by the alarming news of Russia’s invasion of Ukraine. This conflict triggered a global response, compelling numerous companies to swiftly make consequential decisions regarding their future operations in Russia. The objective of our thesis was to dissect the underlying factors influencing these decisions; specifically, we delved into whether and how social and economic factors steer choices during a humanitarian crisis.

It is essential to recognize that these corporate decisions do not occur in isolation; rather, they take place in a dynamic and fast-paced environment. A widely known perspective on a company’s purpose, articulated by Milton Friedman in 1970, summarizes that a company’s sole objective is to maximize shareholder wealth. However, corporate sustainability and the stakeholder view have since gained prominence, expanding the array of factors that influence a company’s decision-making process. 

Following the invasion, numerous companies promptly voiced their condemnation of the war and extended their sympathies to the Ukrainian people. Many of these companies also indicated their intention to re-evaluate their presence In Russia in light of the invasion. Nevertheless, our research unveils only limited evidence that a company’s commitment to sustainability, as measured by their social responsibility score, would have influenced their decision to withdraw from Russia. While we do not discern a significant connection between a company’s social responsibility score and their exit decision, we do observe indications that companies providing humanitarian relief to Ukraine or contributing to Ukrainian causes were more predisposed to exit Russia. 

In our master’s thesis, we investigated the drivers behind companies’ choices to withdraw from Russia following the outbreak of the Russian invasion of Ukraine. We also studied the market’s reaction to these withdrawal announcements and potential peer influence impacting the pull-out decision. This study extends the preceding, limited research on the Russia-Ukraine conflict, primarily exploring stock market reactions and the economic and operational spillover effects of the war. 

The study encompasses a sample of 596 companies that have either announced their intention to cut business ties to Russia and cease operations there, or who continue to operate as usual in Russia. The companies are not required to have already executed their exit to categorize as cutting ties to Russia, but that they have announced their intention to exit. Out of these 596 sampled companies, 440 (74%) declared their intent to exit Russia after the commencement of the war in February 2022, while 156 (26%) have not disclosed their intentions or have expressed their intent to persist with operations in Russia. We assess the likelihood of making the exit decision and further explore the timing of these determinations and the market’s response to companies declaring their exit. Additionally, we investigate the attributes of companies that were among the first to announce their exit versus those that did so later, aiming to identify patterns suggesting that the exit decisions of more robust peers influenced the choices of their less robust counterparts.

We find that companies with high economic exposure to Russia have been less likely to make an exit decision, reflecting the difficulty of cutting ties to Russia. We find limited evidence on whether a company’s social responsibility is linked to an exit decision: the company’s social pillar score does not explain the exit decision, but companies providing humanitarian aid to Ukraine were more likely to announce their decision to pull out from Russia. We also demonstrate that larger firms have announced their exit decisions earlier, as did firms with high capital intensity. Furthermore, we find that companies announcing their exit intentions later, as well as companies with higher social scores, experience less negative announcement returns. Additionally, we find that companies that demonstrated stronger share price development between the outbreak of the war and the exit announcement day experience less negative abnormal returns, implying that the market evaluated companies’ abilities to navigate their operations amidst the crisis and their potential to execute a successful exit from Russia. Finally, we do not find credible evidence that stronger peers would have announced their exit decision first, indicating a low likelihood of a leader-follower phenomenon. 

In conclusion, we determine that the most pivotal factor influencing the decision to withdraw was the company’s level of exposure to the Russian market. Hence, our findings suggest that prevailing economic considerations bear more weight than social responsibility in shaping corporate decision-making during a crisis. Despite the widespread discussion and emphasis on corporate responsibility in today’s operations, it appears that economic consequences still wield the most influence over corporate actions.

Alli Rytsölä 

Associate, Boston Consulting Group 

Eveliina Kanervisto 

Consultant, Oliver Wyman 

Link to study can be found here.