From McDonald’s to TikTok, why are big brands bailing on Russia?

The rush of brands out of Russia stands in contrast to the response to controversies involving countries such as China.

McDonald's sign
McDonald's is among dozens of big brands that have cut ties with Russia over its invasion of Ukraine [File: Luke Sharrett/Bloomberg]

As Russia faces unprecedented sanctions following its invasion of Ukraine, an equally extraordinary number of corporations are pulling out of the country – often going above and beyond what is required by law.

From Shell, Exxon, Boeing and Airbus, to Apple, Disney, TikTok, McDonald’s and Starbucks, top brands and industry leaders are suspending their operations in Russia or making plans to wind down ongoing business operations.

Even global consulting firm McKinsey, which has not shied away from working with controversial clients including Saudi Arabia and OxyContin-maker Purdue Pharma, said late last week it would cut ties with the Russian government and state-owned entities. McKinsey’s statement followed similar moves by competitors, including Boston Consulting Group and Accenture PLC.

“I think the strength in numbers matters because you didn’t see any companies withdrawing on day one,” DJ Wolff, a partner at the US law firm Crowell & Moring specializing in sanctions compliance, told Al Jazeera.

“There were public comments about it, there was concern about it, but there wasn’t a sort of announcement of ‘We’re out of Russia.’ You’ve seen a consistent groundswell globally every day, as more and more people are getting behind the ‘We’re opposed to the invasion camp,’ which has made it politically easier for companies to step up and say, ‘We’re withdrawing.’”

guard tower in Xinjiang
Russia’s invasion of Ukraine has attracted a much stronger corporate response than reported human rights abuses in China’s Xinjiang [Thomas Peter/Reuters]

The far-reaching corporate exodus stands in stark contrast to how global corporations have responded to other recent crises involving controversial governments, from coups in Myanmar and Thailand to the civil war in Syria.

The reaction is also far stronger than the corporate response to reports of genocide and forced labour in China’s Xinjiang province – the last time companies distanced themselves from a country in large numbers – that saw some Western firms cut ties with the Chinese cotton industry.

That may be because violence is not only happening live on social media but also on the doorstep of Europe and the headquarters of many major corporations, analysts say, easily evoking memories of World War II and the Cold War.

“The Xinjiang crisis is occurring in an incredibly tightly-controlled media environment where information about the extent of abuses – and actual images of the abuses – are extremely hard to come by,” Cullen Hendrix, a professor at the Josef Korbel School of International Studies at the University of Denver, told Al Jazeera.

“We aren’t seeing images of Chinese artillery shelling civilian targets or large numbers of women and children struggling to cross the border with Mongolia or Kazakhstan. We’re seeing just that in Ukraine. And that’s what is forcing action. Similarly, Crimea unfolded in front of our eyes and on our screens but was a near-bloodless annexation with very few casualties.”

There are also more pragmatic realities to consider as well, Hendrix said, such as the size and importance of China’s economy, which is about ten times larger than that of Russia.

‘Fear of unintentionally breaching rules’

Many companies may also be engaging in “overcompliance” as they anticipate future sanctions, said Agathe Demarais, director of global forecasting at the Economist Intelligence Unit.

Since the beginning of March, some 1,200 new punitive measures have been rolled out by the United States, the European Union, Switzerland, Japan, the United Kingdom and other countries, according to German journalism non-profit CORRECTIV. Even so, there is still a lengthy list of Russian entities, corporations and individuals who could yet be targeted.

“Essentially, companies are so worried about falling foul of US sanctions that they let go of all activities, even those that would not be subject to US sanctions,” Demarais told Al Jazeera. “This is something that also happened quite a lot in Iran, especially after the US left the nuclear deal: many EU companies could technically remain in Iran, but still chose to exit the market for fear of unintentionally breaching rules.”

Overcompliance has been particularly strong in the energy industry, where oil and gas companies had begun to withdraw from Russia even before sanctions were broadened this week to target energy or energy-related payments. Many companies will have to write off losses in the billions, including BP, which is due to lose $25bn as it divests from Russian partner Rosneft, according to the Reuters news agency.

For many firms, doing business has also become simply too difficult due to practical concerns around payments, shipping, and insurance, said Rachel Ziemba, an adjunct senior fellow at the Center for a New American Security.

Russian companies face restrictions on borrowing and equipment imports that are likely to limit their ability to conduct business for the long term. SWIFT, the international payments system, has cut off several major Russian banks, while credit card companies Visa, Mastercard, and American Express are also suspending operations.

Numerous freight and cargo companies have suspended shipments to Russia, while some insurance and reinsurance companies have stopped covering Russian companies. Oracle, Microsoft, Google, Apple, and Dell have all limited business with Russia, disrupting cloud-based applications and databases essential to corporate operations.

“Once some companies announced plans to leave, others followed both because of political or operational pressure or because suspensions from other companies made operations more difficult,” Ziemba told Al Jazeera.

“For example, shipping companies ceasing cargo to and from Russia made it difficult to ship cars, while the combo of sanctions and capital controls made it difficult to be paid for items. Some companies like the tech companies explicitly were lobbied to exit or cut off operations, and others responded to shareholder or stakeholder pressure.”

U.S. President Joe Biden
US President Joe Biden has banned imports of Russian oil, gas, and coal [File: Kevin Lamarque/Reuters]

The mass suspension of operations in Russia by the services sector has had an effect similar to pandemic-inflicted supply chain disruptions, said Michael Moore, a professor of economics and international affairs at George Washington University.

“There’s all this oil in the machinery that has to do with services, that we’re completely oblivious to as consumers, and those are being disrupted: accounting services, financial services, insurance services, software, databases online to let your software operate like it’s supposed to,” Moore told Al Jazeera. “And it’s a complicated world out there, and if one part is pulled out, then it’s very difficult to easily replace that, at least in the short term.”

Companies have already been proven correct in anticipating future sanctions.

On Tuesday, US President Joe Biden announced a ban on Russian oil, natural gas and coal imports to the US, a move aimed at “targeting the main artery of Russia’s economy”.

“There’s not a lot of arrows left in the quiver, other than some of the energy sanctions,” Moore said.

“Three weeks ago, I wouldn’t have thought that there’s any way that the US would have cut off access to the Russian Central Bank to their dollar deposits. That’s kind of technical but that’s a huge thing — that doesn’t happen, at least with major economies. I wouldn’t have thought that the European companies would go along. And so the unthinkable is happening.”

Source: Al Jazeera