Business

Why the withdrawal of companies from Russia is important

Why the withdrawal of companies from Russia is important

This comment originally appeared in Fortune.

In corporate boards around the world, major corporations are reconsidering their presence in Russia. Will it make a difference?

There are reasons to believe that will be the case. In the 1980s, the voluntary withdrawal of 200 major corporations from South Africa in protest against apartheid successfully strengthened American foreign policy, in combination with US Congressional sanctions.

In an oft-quoted 1996 statement, New York Times columnist Tom Friedman offered his “Golden Arches” theory of conflict prevention. Friedman proclaimed when a country “has a middle class large enough to support a McDonald’s, it becomes a McDonald’s country, and people in McDonald’s countries don’t like to go to war; they like to queue for burgers.

Nevertheless, the military conflicts between India and Pakistan in 1999 or between Israel and Lebanon in 2014 were not prevented by the Big Macs. Unfortunately, the presence of 108 McDonalds in Ukraine and 847 McDonalds in Russia did little to prevent the war. So, it’s disappointing that McDonalds chose to stay in Russia.

In fact, dozens of top brands from groups such as Estee Lauder, Coty, Hilton, Hyatt and Unilever maintain their presence in Russia. At the same time, more than 230 other major Western companies have reduced their activities with Russia. Experts have suggested various explanations for why some companies pulled out and others stayed.

Despite the cost of abandoning major investments and loss of business, there is a strong reputational incentive to exit. Companies that don’t step down face a far greater outpouring of resentment from the American public than they face on climate change, voting rights, gun safety, immigration reform or border security. A new Morning Consult survey finds that more than 75% of Americans are asking companies to sever business ties with Russia after the invasion of Ukraine. These results show rare and equal support between parties and independents.

Differences in the pattern of corporate disengagement can be attributed to differences in public understanding of the situation in Russia compared to the West. All Russian citizens are in the dark, especially the elderly population which relies heavily on censored mainstream media. The average Russian consumer is (for now) more sensitive to Putin’s propaganda that blames the West and is more likely to punish consumer goods companies.

Exiting may also be a little easier for finance and heavy industry than for consumer goods companies. Fashion and packaged goods companies typically lead the pack in social justice and human rights causes because their brands are likely to be condemned by the public. In Russia’s case, Western heavy industry, business-to-business technology and professional services are leading the boycott.

The far better-informed oligarchs and heads of big Russian business are the main customers of heavy industry, big tech and professional services. They know the truth and understand the boycott – and will likely reconnect with these Western companies without resentment once the crisis is over.

In contrast, US sanctions against South Africa in 1986 passed with an overwhelming 76 to 21 votes in Congress to override President Reagan’s veto. Senator Mitch McConnell and Senator Bob Dole led the GOP majority that challenged Reagan. As McConnell explained, “I think he’s ill-advised. I think he’s wrong, and I think we’ve waited too long for him to come on board.

Reagan’s argument was that the sanctions would actually harm black South Africans and not solve the problems of apartheid, while causing the United States to lose its positive influence. These are the same counter-arguments that echoed today about not harming the Russian people. The purpose of sanctions, however, is to impose pain without the violence of war. Historian Norma Cohen explained this week that the capital’s blockades were critical to Allied victory in World War I.

Sanctions against South Africa included a ban on new US loans and investments in the country, a ban on imports of coal, steel, iron, uranium, textiles and South African agricultural products. African countries, and the cessation of direct air links between South Africa and the United States.

These sanctions alone were not sufficient. Within months of the bill’s passage, several major corporations, such as GM, IBM, Ford, GE, Kodak and Coca-Cola, all announced their complete and collective withdrawal from South Africa as the regime apartheid continued to prove intractable. Even though they made it clear they were pulling out because, as Coca-Cola said, “so little progress [was] towards the dismantling of apartheid”, the companies simultaneously reaffirmed their commitment to the people of South Africa through civic initiatives in favor of human rights. For example, Coca-Cola created a $10 million “Equal Opportunity Fund,” administered by a board of prominent South Africans, including the late Bishop Desmond Tutu, to open opportunities in business. , housing and education for black South Africans, while committing to sell its South African facilities to a group of local investors that included black South Africans.

In total, after the passage of the Sanctions Bill in 1990, more than 200 Western companies severed all ties with South Africa, resulting in a loss of over $1 billion in investments American direct. The companies have remained unified through collective action despite a barrage of criticism. The Nobel Peace Prize laureate, Bishop Tutu, told me at a private lunch I had with him in Atlanta in September 1996 that the message of this blockade of American businesses “was essential to impress on the general public that systemic change was vital or there would be no future.”

Just as the Russian withdrawal will likely cost participating companies billions, an underestimated aspect of South Africa’s collective withdrawal was that it cost those companies dearly. Although South Africa’s population was only about 12% of the US population at the time, South Africa exercised significant control over essential raw materials, giving it far greater economic clout than would otherwise be the case. suggested it by its people. South Africa was the largest gold producer in the world, holding over 75% of all the world’s reserves at the time. The country was also the world’s largest supplier of platinum and chromium, both of which are heavily used in industrial and chemical manufacturing. The withdrawal of almost all major Western companies from South Africa led to an immediate spike in the price of these essential commodities which affected global supply chains and industrial manufacturing.

The radical government of PW Botha fell, replaced by FW De Clerk, who immediately negotiated the release of African National Congress leader Nelson Mandela after 27 years in prison, erasing the scourge of apartheid from the nation’s history .

Vladimir Putin, the most vicious autocrat of this century, rules by tyranny and fear. As he continues to fail, people will lose their fear and he will lose his power.

The collective withdrawal of 200 Western companies from South Africa to protest the apartheid government’s abuses provides a powerful roadmap for why and how CEOs should affirm American values ​​in the face of global challenges.