Control Risks has supported dozens of clients and spent hundreds of hours discussing their challenges in Russia. Based on our clients’ experiences in Russia in 2022, and our own, we identified the following recommendations for international companies operating in countries with high political risks:
Plan your exit in advance and act quickly
Start planning your exit strategy as early as your market entry. At any given moment during your operations in a high-risk country, you need to be aware of the criteria against which you will have to exit. Once these criteria are met, you should be able to move quickly.
We had clients in Russia who approached us with requests to develop trigger-action response plans several months after the war started in February 2022, by which time some critical triggers had already been activated.
Your exit scenario will not be perfect. Although it will be possible to model the behaviour of major international organisations by observing how they mobilised after the start of the war in Ukraine, it will be difficult to predict how the authorities will react in the next major country whose geopolitical ambitions result in international regulatory pushback.
Nevertheless, based on the Russia experience, we can still infer a degree of restraint from local officials (in the case of a country hitherto tightly wired into the global economy). These officials are unlikely to act immediately to strip your business of its assets from the first day of conflict. It took Russia more than six months to develop such mechanisms and apply them against existing Western firms.
If sanctions against local businesses come in monthly waves, as they did in Russia, an early exit offers the advantage of leaving a broader pool of potentially non-sanctioned buyers for your local assets. International banks may also be more inclined to participate in such transactions before sanctions ratchet up.
The experience of Russia-based organisations shows that recognised international providers of professional services – from auditors to law firms to management consulting services – will also seek to curtail their operations in this troubled territory.
Even if you plan your exit strategy in advance, there can be developments – based on contradictions between regulatory demands, external or local, and the reality on the ground – that are difficult to foresee but need a swift resolution. One way to approach such challenges is to have a crisis management team of senior decision-makers to get things done quickly. Longer-term strategic planning needs to be supported by an authoritative team capable of making and implementing decisions in real time.
Know who will run your business before they start
Once a crisis of this kind occurs, the first thing organisations tend to do is to withdraw expatriate executives, as happened in Russia, with local managers taking over daily operations. If local managers are already in place and you decide not to exit the country, their importance for the business – and your dependence on them – increases. Simultaneously, supervising them will become more difficult: local authorities will seek to curb the influence of “unfriendly” countries over their domestic economy, and sanctions will limit travel and financial transactions. Exit through management buy-out with a buy-back option – something that a significant portion of global companies chose in Russia – has its own risks: to the ethos, integrity and professionalism of your local managers facing an increasingly precarious future. Elsewhere, if you exit through sale to a local business, your local managers will be likely become targets of government officials on behalf well-connected local buyers willing to exploit their connections to get a better deal from you.
It is crucial that you review the profiles and relationships of your local management team throughout their employment, not simply in a crisis, so that you can be confident that you are depending on the right people. It is more straightforward to do this as you enter the country and build the local management team, and every time a new member joins.
It is not enough to understand integrity risks associated with your managers. You need to be prepared for such contingencies as a military draft that might target your eligible managers.
Be clear about the identities and profiles of your second-, third-, and fourth-order suppliers and clients
Map as many of your connections to the high-risk country as possible, both internal and external, in advance. We are already seeing this happen more regularly in higher-risk markets, owing to the regulatory and ethical requirements, though it is also generally becoming a requirement for corporations, given the supply chain regulations in the EU and some European countries.
Many companies have quite a vague idea of how interconnected their business is. Quite a few companies we worked with in Russia have been caught off guard, suddenly learning that the banks they use to pay their providers and staff were comprehensively sanctioned, or landlords of the properties they rented were placed on the sanctions lists.
When international regulators impose sanctions on a country you have business interests in, you do not want to be scrambling to check that your third parties are safe to work with. Furthermore, should you find high-risk parties among them, a painful (and possibly perilous) disengagement process will follow. This research should therefore be thorough, covering not only your suppliers and vendors but also clients, partners, and agents, as well as the banks they use.
As experience in Russia has shown, if you delay this exercise you will likely see a range of new faces with obscure profiles emerging as the owners of major local government-friendly companies that are critical for your business in place. Determining who really has control in an environment where the government allows or encourages corporate records to disappear from the public eye will require investigation. The quality of local corporate records will deteriorate dramatically. Whatever remains may in some cases no longer provide meaningful answers about the ownership and control of your counterparts, including, most importantly, the most sensitive ones for your business.
Be aware of your audience
In home markets that are hostile to Russia, companies that did not announce an exit early on in the war or that did not execute it quickly enough after announcing their exit face increasing reputational pressure at home for contributing to the Russian economy and for ultimately feeding Russia’s war machine. For example, the Moral Rating Agency (MRA), based in London, has turned the spotlight on international companies who remain, particularly ones who make charitable donations to Ukraine while maintaining a commercial presence in Russia. Of course, just walking out of the door will often mean leaving loyal and devoted local staff in the cold. In some cases, abrupt exits will negatively affect the lives of vulnerable local consumers such as children, pensioners, and hospital patients. All action and inaction will have consequences.
International companies working in high-risk countries need to be keenly aware that they exist in many different contexts – domestic, international, and country-specific. In the current context, your statements will be perceived differently at home, across different countries and regions, or even in another country where you operate that is also wary of possible military intervention. These contexts will create different expectations. Any communication by the company, both external and internal, needs to be calibrated to manage the full range of potential expectations.
By not considering the various interpretations of statements, you may find your company facing more than painful moral dilemmas. It could lead to disputes and legal battles initiated by officials or business counterparts in the countries your business plans to leave, as they seek to exploit the sudden vulnerabilities of departing companies that the local government will have no incentive to protect. Similarly, local staff facing an imminent loss of jobs and incomes may become opportunistic and make any exit more costly and problematic. You may also face reputational risks with important stakeholders inside and outside the country affected by the crisis and your exit, especially if their strategies and expectations are different to yours.
And finally, there is a time dimension to the expectations you create. At a certain point in the future you may be asked why you did what you did in Russia but are not doing the same in a different country in a similar context.Managing challenges wherever your headquarters are is a hard balancing act, but it is essential for weathering another geopolitical crisis of a similar scale. The lessons learnt in Russia provide a useful framework for structuring your thinking about future challenges.