Business and human rights: Corporations make mass exodus from Russia
Image credit: McDonald's restaurant closed due to sanctions in Moscow, Russia - April, 28, 2022. Kal'vān/AdobeStock.com
The corporate fallout from the war in Ukraine has been staggering. Since the end of February nearly 1,000 international companies have left Russia as their presence on the ground became increasingly untenable in the wake of the invasion.
Edie Hofmeister has advised corporations on environmental, social, and governance issues for more than 20 years and says she’s never seen anything like it. ‘The dramatic departure from Russia by multinational corporations on humanitarian grounds is extraordinary,’ she says. ‘Even if many of these moves are temporary, it’s rare to see so many of these companies agree on something of this geopolitical magnitude.’
As many sectors were hit by economic sanctions, most multinationals were quick to shutter operations. Some consumer brands were not directly affected by sanctions and resisted repeated calls to pull out of Russia.
However, the threat of global consumer boycotts has brought home the very real reputational risks of remaining in the country. In May, McDonald’s – one of the first Western brands to open in Moscow in 1990 as Cold War tensions were beginning to thaw – announced its intention to sell its Russian franchise. McDonald’s President and Chief Executive Officer, Chris Kempczinski, said: ‘[We] have a commitment to our global community and must remain steadfast in our values. And our commitment to our values means that we can no longer keep the Arches shining there.’ McDonald’s said the move was expected to result in a non-cash charge of as much as $1.4bn.
While exiting a market has clear financial implications, it also raises significant concerns for the workforce left behind. ‘For companies that opt to withdraw from these markets, implementing a responsible exit may be challenging,’ says Alexander Coward, a Senior Adviser at Pillar Two, a boutique advisory firm that helps businesses respect human rights.
Many large businesses, including McDonald’s, have continued to pay staff salaries during the winding-down process. Coward says businesses must prioritise the welfare of employees and contractors in Russia and examine what lessons can be learned for the future. ‘Boards will also need to consider and be able to explain what the threshold would be for them to re-enter those markets and whether they will take a similar approach to other conflict situations overseas,’ he says.
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For now, taking positions that support human rights is winning the day in the world’s largest C-suites
Edie Hofmeister
Co-Chair, IBA Business Human Rights Committee
Some market exits have already prompted disputes. A Russian court recently ordered Dell Technologies – which suspended product sales and services there in early March – to pay a local IT systems integrator $11m for terminating the contract prematurely. A Dell spokesperson told Global Insight the company would not comment on pending litigation, but confirmed it was no longer ‘selling, servicing or supporting products in Russia, Belarus and the Donetsk and Luhansk regions of Ukraine.’
There’s also growing momentum from consumers to seek compensation for service disruption.In April, Chernyshov, Lukoyanov & Partners (CLP Law) launched separate class actions against Netflix and Apple, which both suspended services in the country shortly after the invasion.
CLP Law alleges the companies’ actions violated the rights of Russian consumers and said the lawsuits formed part of a wider initiative ‘to hold Western companies accountable for dishonest actions against Russian users.’
In May, a Moscow court dismissed the Netflix claim. Commenting on the ruling, Konstantin Lukoyanov, a senior partner at CLP Law, told Global Insight: ‘The Khamovniki Court announced its ruling based on a technical issue – the lack of plaintiff’s authority to represent a group. This statement is wrong and contrary to the procedural code.’
Individuals have been able to bring class actions in Russia since October 2019 following revisions to the country’s Civil Procedure Code. However, they are still rarely used, which is one reason why Lukoyanov believes the case was dismissed. ‘We believe that such a mistake is due to the lack of practice in class actions in domestic courts,’ he says. ‘We will definitely appeal the ruling as soon as we get the original text.’
The firm has 15 days to appeal the Netflix ruling. Neither Netflix nor Apple responded to Global Insight’s requests for comment on the lawsuits.
The extent of the corporate fallout could give rise to more class actions, says Hofmeister, who also co-chairs the IBA Business Human Rights Committee. ‘As consumers are impacted by the exodus of these companies, it is not surprising that they may resort to their countries’ judicial systems,’ she says. ‘It might be the “flip side” of ESG stakeholder activism – punish companies for taking a humanitarian stand.’
As in-house legal departments continue to weigh up the contractual, reputational and litigation risks of leaving politically charged environments, Hofmeister says most multinationals seem to think these are risks worth taking. ‘For now, taking positions that support human rights is winning the day in the world’s largest C-suites,’ she says.
However, she warns that less well-resourced in-house teams will have to tread carefully. ‘Companies like Netflix and Apple have the resources to withstand these kinds of consumer lawsuits without much impact on their bottom lines,’ she says. ‘Small and medium multinational enterprises may make a different calculus in weighing the risks of departing and or taking a public stand on human rights in authoritarian countries.’
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