Elisabeth Braw is a senior fellow at the American Enterprise Institute, an advisor to Gallos Technologies and author of the upcoming book “Goodbye, Globalization.”
Saying goodbye isn’t easy.
Hundreds of companies have announced they’re leaving Russia since its invasion of Ukraine began — yet many of them seem to have remained there. Meanwhile, when it comes to China, Apple and other famous multinationals have declared they’re friendshoring to countries like Vietnam, India and even the United States — yet trade between the U.S. and China hit new records last year. So, what’s going on?
The bottom line is that it’s extremely hard for companies to withdraw from countries — especially from ones that are hostile or unwilling to let go.
For example, a much-consulted list maintained by researchers at Yale University reports that over 1,000 Western companies have curtailed operations in Russia. But, in December, trade and business professors Simon J. Evenett and Niccolò Pisani found that less than 9 percent of the 1,404 European Union and G7 companies active in Russia before the invasion had in fact left the country.
A mighty academic brawl has ensued over who’s right. But, in fact, both sides may be right.
The Yale team is documenting corporate announcements promising to curtail operations in Russia, while Evenett and Pisani have documented divestments — and these are very different things.
As Laura Burns, a senior executive at the global insurance broker Willis Towers Watson, told me, “breaking up is hard to do.” And that’s at the best of times.
Wrapping up operations, selling facilities and completing all the paperwork is complex enough when a business has decided to leave a friendly country — but the many companies now trying to exit Russia and China aren’t operating on friendly territory.
When Russia invaded Ukraine and the Western exodus began, Russian legislators and the Kremlin swiftly let it be known that the country might decide to seize the assets of departing Western businesses. While companies ranging from British Petroleum (BP) to the German DIY chain Obi Baumarkt have since made good on their promises to leave, they’ve lost billions in doing so. And Western companies operating in Russia, including those wishing to leave, now have to put their dividends into a special Russian bank account — and that money can only be paid with Russian government approval. BP too reports having money stuck in such an account.
“Leaving Russia is causing a fire sale to begin with, and then companies can only get a trickle of the proceeds out of the country,” Burns said. “Russia seems to be saying that if companies are going to leave, Russia might as well line its pockets. And the signaling that the Kremlin may appropriate assets continues.”
But the financial headaches are only one complication. In a country where lots of companies, executives and officials are sanctioned, even finding a fire-sale buyer presents a bigger hurdle still. Tobacco giant Philip Morris’s CEO Jacek Olczak told the Financial Times last month that even though he’s been having discussions with three serious potential buyers in Russia, “the talks have stalled because nobody knows how I can make it work.”
“When I say I’m leaving or not leaving, it’s completely irrelevant because I tried last year and the reality is I’m [stuck] with this whole thing,” he added.
Given all this, it’s no surprise that companies considering moving out of China are now closely studying how companies departing Russia are faring. And many already know how they want to do so: not by immediately closing up shop in China — the losses would be too big — but by moving some operations to other countries. “De-risking” is the buzzword du jour.
Along these lines, in December, Apple announced it will start using chips made by its Taiwanese supplier TSMC at a to-be-built factory in Arizona. Both Apple and Samsung are also moving the manufacturing of some of their tablets and smartphones — including the most recent models — from China to Vietnam and India.
But moving even relatively simple factories — garment factories, say — is extremely complicated, as it involves not just the plant’s operation but readjusting complex supply chains. Imagine moving your family with a few school-aged children to a new house in a new country, multiply that by a thousand and you’ll get the idea. And moving the manufacturing of sophisticated technology is a thousand times more complex still.
This means friendshoring away from China will take time. And this time lag means that trade statistics between China and the U.S. as well as China and other Western countries will continue to paint a rosy picture — even when the situation on the ground is anything but.
Indeed, Beijing could pull a “Moscow” and try to thwart or delay the departure of the companies it wants to keep around. “Western companies have powered China’s progress, and if certain companies were to decide to leave, that would not please Beijing,” Burns observed. “China does want self-reliance, but it’s not there yet.”
Beijing could thus easily float appropriation threats or start demanding dividends be placed in bank accounts where withdrawals from Western countries can’t be made. Or it could invent completely new threats and obstacles too.
If we haven’t heard many companies announce that they’re leaving China yet, such are the reasons why — and such are the reasons why departures from Russia are moving so slowly. Those of us who’ve never executed a corporate departure from an increasingly hostile country amid a rapidly deteriorating geopolitical standoff would do well not to offer backseat driving — at least not until we’ve studied the complexities of a few of the prospective withdrawals.
* Elisabeth Braw serves as an occasional advisor to Willis Towers Watson.
