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The Long Road to Russia and ESG

Vladimir Putin has been a controversial figure for some time, especially in the West, notwithstanding the current situation in Ukraine and its long build-up. In 2015, Putin ordered military intervention in the Syrian civil war, and in 2016 Russia was implicated by the US intelligence community in tampering with the US Presidential Election.


It is also widely acknowledged that Putin has murdered and attempted to murder his opponents, irrespective of where they might reside in the world: think Litvinenko and Skripal to name only two. Now that Russia has finally and openly instigated an attempt to the takeover of a sovereign nation, the impact on ESG for corporates and trade will likely be considerable.


Hindsight


As pointed out by Bloomberg’s Saijel Kishan, on the very same morning that Vladimir Putin had his troops cross the border into Ukraine and kick off one of the most significant military operations in Europe since the Second World War, the people overseeing the $5 billion pension fund for the Church of England decided – perhaps at long last - it was time to shed their portfolio of Russian investments.


Certainly, in and around that time, there were still entities interested in purchasing those assets and, by the 1st March, $11 million – their stake – had been offloaded. Equally, BP Plc until recently owned a stake in Rosneft PJSC, a Russian energy company with a somewhat dubious environmental track record.


At around the end of February, the British Government finally pressured BP to sell the holding because of the now political and social consequences of being linked to Russia and its regime. Another recent example of financial divesting in the new moral economic climate is that of DWS Group.


It is around 80% owned by Deutsche Bank AG and recently stated that it won’t make any new investments in Russian securities indefinitely and plans to suspend the subscription of any new shares that have significant exposure to Russia.


In fact, Moisson for the Financial Times in March wrote in an article about how asset managers and data analytics firms have failed in their duty to assess ESG risk regarding Russia. It is difficult to see this as being anything other than true: if ESG requires due diligence from businesses to fully assess risk and social standing, one wonders how any organization can have continued to do business in or with Russia for so long.


Some quarters have in fact been surprised at how long severe sanctions against Russia have taken. After all, Putin sent troops into Crimea as long ago as 2014 and his track record for perceived international violations and murder is a long one. In particular, in the case of the attempted murder of




an ex-Russian military officer called Sergei Skripal in Salisbury, England in 2018 (as well as his daughter Yulia). According to the Organization for the Prohibition of Chemical Weapons, the two were poisoned with a Russian-developed nerve agent called Novichok. Establishing that ultimate culpability for the assault was high up in the Russian government, it became clear that at the very least the UK had to take some steps against Putin.


As set out by the BBC these were to expel 23 UK-residing Russian diplomats who were undeclared intelligence officers, increased checks on private flights, customs, and freight, and Russian state asset freezing where there was evidence it could be used to threaten UK nationals or residents, Ministers and Royals to boycott the 2018 FIFA Russian World Cup, the suspension of high-level bilateral contacts between the UK and Russia, and plans to consider new laws to increase defenses against “hostile state activity.”


It may well be with the benefit of hindsight but the latest insult by Russia would seem to indicate that more staunch measures were required before Putin decided to wholesale invade Ukraine in 2022.


Forbes


Figure 1 shows the top 10 foreign companies operating in Russia (as of 2019 and published by Forbes and reported on through the Moscow Times). The French retailer Auchan topped the list that year with revenues of $5.14 billion.


The Japanese car manufacturer Toyota Motor came next with $4.91 billion, and in third, it was Japan Tobacco International with $4.76 billion. Of those three, and as this writer understands it at the time of forming these words, two are continuing to operate in Russia, and one of those two according to the Retail Insight Network, is indeed Auchan (the other being Japan Tobacco International).


The longstanding opposing political dispositions of the east and west might suggest that it is more likely to be companies residing in the west that will extract their business from Russia as a result of the Ukrainian invasion. If this is the case, Auchan’s continued presence in Russia is particularly disappointing.


Other companies in the top 10 that appear to be continuing their business operations in and with Russia are the American food industry giant PepsiCo (according to the Independent), and the French retailer Leroy Merlin (according to the New York Times). In contrast, there are four companies that have announced their operations are ceasing or winding down in Russia.


They are Toyota Motor (according to Reuters), the Swiss-American tobacco company Philip Morris International (according to Al Jazeera, the German Volkswagen Group (according to their own website), and the Swedish-Dutch IKEA (according to the Guardian).


Taken together and based on their 2019 revenues, the four companies that appear to be continuing their business in Russia account for over $18 billion compared to those businesses removing their business that account for over $17 billion. If all of the businesses on Forbes’ list turned their back on Russia, it would be a combined shortfall for Russia of nearly $43 billion.


Time Will Tell


ESG measures taken by businesses that affect Russia, and the sanctions issued by governments directed at Russian interests, are intended to hurt the Russian government in order to dissuade it from continuing to wage war on Ukraine, and to at least think twice about waging war on anyone else.


Intentions or not, whether or not that is the ultimate outcome is speculative. It may well be that it is the Russian populace that suffers and the government simply carries on regardless.


If a government such as Putin’s is willing to persecute a people already so culturally similar to itself in the first place (like the people of Ukraine), it would not be surprising if that same government felt little or no compassion for the plight of the people of its own country.


The economic deprivations of Russia’s citizens – the most evident victims of Russia’s global financial isolation – does not appear likely to shift Putin from his course. Time will tell. With any luck, new emerging ESG ideals will help Ukrainians in their hour of need.


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