Businesses are unlikely to face similar pressures in an Asian crisis.
March 23, 2022
Russia’s invasion of Ukraine has triggered an unprecedented economic and financial blockade of the world’s 11th-largest economy. But even more striking than the unified stand of so many governments around the world is the massive voluntary exodus of international corporations from Russia. Some have closed indefinitely, others have suspended sales, while yet others have halted operations. For some, it looked like the end of an era: When McDonald’s opened its first Russian restaurant on Moscow’s Pushkin Square two months after the fall of the Berlin Wall, it symbolized the winding down of the Cold War.
The corporate exodus unfolded surprisingly swiftly, from a few dozen companies in late February to over 400 by March 23. Not every company has left, of course; some, like Koch Industries, have dug in, while others, such as Eli Lilly, are only providing essential medical supplies. Still others claim to have exited but have kept their businesses going by creating supposedly independent legal entities. What is remarkable is those that have left are not just leaving money on the table but in some cases could see the loss of decades’ worth of investments. For BP and Exxon Mobil, the exits meant a withdrawal from multibillion-dollar energy projects, and there is a risk of the Russian government nationalizing their assets. BP alone could lose $25 billion by leaving Russia, which is more than a quarter of the company’s market capitalization.
BP is among a handful of companies for which the pullout has massive repercussions. But it is an exception, because for most global companies, the Russian market represents only a small part of their business. For these companies, the much larger implication of the pullout is the precedent it could set for a far more important market: China.
Already, China risks getting enmeshed in the web of Ukraine-related sanctions as it emerges as the single most important country potentially undermining sanctions on Russia. U.S. President Joe Biden warned Chinese President Xi Jinping there would be “consequences” if Beijing were to help Moscow in this way. What’s more, the unprecedented sanctions against the Russian economy could provide policymakers with a playbook for a future crisis with China. Witold Henisz, who studies the impact of political risk on corporations at the University of Pennsylvania’s Wharton School, said that one of the most pressing questions in boardrooms following the Russian invasion is: “What would happen if we have to pull out of China?”
For most companies, the loss of Russian revenues is a tolerable sacrifice. Apple, for example, loses iPhone sales at the rate of only about $3 million a day. But if Apple were to lose access to China—either because of sanctions or other pressure to disengage—losses would be two orders of magnitude higher. Apple is the top-selling brand in the world’s largest smartphone market, with China revenues of around $280 million a day during the fourth quarter of 2021.
While the world focuses on Ukraine and the Russian bombs raining down on its citizens, there is no dearth of worrying signals about China. According to U.S. intelligence, Russia has requested military and financial assistance from China. Beijing is allegedly open to helping out, and its banks may already be playing a role in sanitizing sanctioned Russian financial transactions. Alongside Biden’s warning that China risked U.S. countermeasures, similar messages have come from America’s Secretary of State Antony Blinken and National Security Advisor Jake Sullivan. And there are other signs that Washington considers Russia’s invasion of Ukraine to have increased the risk for a conflict with China. U.S. Navy Adm. John Aquilino, who heads U.S. Indo-Pacific Command, recently told the House Armed Services Committee that the war was a wake-up call for the military to prepare for a future conflict with China.
All these signals that their biggest international market and most important part of their supply chain is under increased scrutiny by U.S. policymakers will not be lost to corporate CEOs doing their geopolitical homework. And they will surely have considered the precedent that pulling out of Russia might set.
But U.S. companies need not worry. Similar sanctions or other pressures to withdraw from China are unlikely for three reasons.