The multinationals still operating in Russia

Greetings from a cold, grey and sombre Kyiv where I have just arrived to participate in a round-table event with European and American leaders to discuss the future of Ukraine, a year after Russia’s full-scale invasion. Read our live blog today for an update on events. But as I write in my Kyiv hotel, I can report that the city seems mercifully calm: since schools and offices are shut today, the main activity on the streets near me is a solemn ceremony to mark fallen soldiers and civilians.

And the mood among the Ukrainians I have spoken with might be summed up by a comment from Kira Rudik, a Ukrainian parliamentarian: “OMG, we did it. We survived this year!” Or to cite two signs hanging outside my hotel, next to a display of destroyed tanks: “World Help Us” and “All Nations, We Need Your Military Equipment And Personnel Please”.

So what does this mean for western businesses and financiers? During the past year many companies have already provided admirable quantities of humanitarian aid for Ukraine. Now, some are offering support for reconstruction too: last week, a senior team from JPMorgan travelled to Kyiv to discuss future infrastructure investment with President Volodymyr Zelenskyy.

But helping Ukraine is perhaps the ethically easy step; the tougher conundrum for western companies is how to handle their legacy businesses in Russia. See below for our story about this. And then take note of another story that is also an indirect consequence of the Ukraine war: a campaign has emerged in Britain to transform utilities into public benefit corporations to prevent price gouging. This initiative seems unlikely to fly. However, it shows how the invasion of Ukraine and the associated energy shock are changing the social norms around business in subtle but important ways — and fuelling calls for government intervention. This is unlikely to shift back soon, even if peace comes to Kyiv. Read on. (Gillian Tett)

Click here for the FT’s live updates of developments on the first anniversary of Russia’s full-scale invasion of Ukraine

Spotlight on multinationals’ Russian profits

A year after Russian tanks rolled into Ukraine, hundreds of the world’s biggest companies are still struggling to find a proper response — as was highlighted this week by some unusually candid remarks from the boss of Philip Morris International.

“When I say I’m leaving or not leaving,” chief executive Jacek Olczak told the FT, “it’s completely irrelevant because I tried last year and the reality is I’m [stuck] with this whole thing.”

Olczak is far from alone in pointing to an obligation to protect shareholder value, which he said would be damaged by carrying out a fire sale of PMI’s Russian business on Kremlin-dictated terms. While many western companies profess an inability to shed their Russian operations, that still leaves open the question of what happens to the profits they make there.

According to Svitlana Romanko, a Ukrainian environmental lawyer and founder of the Razom We Stand campaign group, there is an obvious solution: for the money to be donated for Ukraine’s defence and reconstruction.

“This money is not moral, but it could become moral if used for some better purpose,” she told me. Ideally, Romanko said, she would want to see companies donate these profits voluntarily. Failing that, she argued, governments should force them to relinquish money earned in Russia’s wartime economy. “I don’t like the word ‘confiscate’, but I’d like to see this money diverted for Ukraine,” she said.

The question of companies’ continued presence in Russia has been the subject of a heated academic debate in recent weeks. Last month, researchers at University of St Gallen and IMD Business School published research showing that of 1,404 companies headquartered in EU or G7 countries and with subsidiaries in Russia at the time of the invasion, only 8.5 per cent had fully quit the country by the end of November.

In a subsequent paper, Yale’s Jeffrey Sonnenfeld questioned the decision to include EU-based companies with Russian ownership, arguing that this distorted the results of the Swiss study. Sonnenfeld and team argue that it’s important to emphasise the extent to which companies are pulling back from Russia — and keep the pressure on those that are simply continuing business more or less as usual.

A database managed by Sonnenfeld and colleagues shows that more than 1,000 companies have publicly promised to curtail operations in Russia beyond the extent required by international sanctions. That contrasts with others who are “digging in” on longstanding Russian business, according to the Yale researchers. This group includes UK-based BT Group, which has continued its partnership with Russia’s Rostelecom, and big listed groups from India’s Reliance Industries to Japan’s Yamaha and Italy’s UniCredit.

But even Sonnenfeld’s latest paper, written with colleagues from Yale and the Kyiv School of Economics, shows that just a small minority of multinational companies have completed a full exit from Russia — 12.7 per cent, only slightly higher than the Swiss estimate.

A recent statement from Unilever gave a sense of the logic that is keeping so many companies in Russia. The company, which has made much in recent years of its ethical credentials, argued that it would not be “right to abandon” its 3,000 employees in the country. Unilever said that if it sold its assets at the knockdown prices on offer — or simply walked away — the main beneficiary would be the regime of Russian president Vladimir Putin.

As the Sonnenfeld team acknowledge, “for many companies with fixed asset investments in Russia, it is impossible to simply burn down the buildings and leave overnight”. But as long as multinationals are still making money from dealing with the Russian economy, the likes of Romanko will keep making their lives uncomfortable. (Simon Mundy)

What are utility companies for?

As energy prices surged last year, UK utilities came under scrutiny for the soaring profits that many were making at households’ expense. If these companies’ core social function is to provide energy as cheaply and reliably as possible, then is it time to make this explicit in their articles of association?

That’s the argument made in a new report from the non-profit Purposeful Company, calling for Britain’s regulated utilities to be reconstituted as public benefit corporations — with a formal duty to promote the interests of wider society.

This is an idea that has caught on in France, where the “entreprise à mission” was enshrined in law in 2019, and in the US, where most states have now passed laws providing for the formation of benefit corporations.

The path has been rockier in the UK. Last April we highlighted the Better Business Act campaign, which has been pushing for a reform of the Companies Act to force businesses to put other stakeholders on an equal footing with shareholders. The government of Prime Minister Rishi Sunak shows no sign of pursuing that idea.

But Purposeful Company co-chair Will Hutton reckons that utilities — given their vital importance to citizens’ lives and the high barriers to entry in their industry — should be treated as a special case. Establishing the concept of public benefit corporations on British soil, he told me, would “create a new asset class of purpose-driven companies” — a paradigm that might then spread well beyond the utilities sector. (Simon Mundy)

Smart read

How to cover the cost of supporting Ukraine? The answer is obvious, writes Bill Browder of Hermitage Capital: rewrite sovereign immunity laws to seize $300bn of Russian central bank reserves that have been frozen by western allies.