It’s time for companies to pull out from Russia and friendshore
Over 1000 companies are still operating in Russia at full or limited scale and, therefore, are responsible for funding the Kremlin’s war machine, B4Ukraine reports, a coalition of civil society organizations that aims to block access to the economic and financial resources enabling Russian aggression. Those are the ones that have invested millions and billions of dollars in building plants and factories in Russia providing jobs for thousands of people and generating millions and billions of local revenues. Among them is Danone with its 16 plants and a farm, Nestle with its seven plants, Lactalis with its four plants… Altogether there are at least 50 international companies with 154 production sites in various regions of Russia (see the full list with addresses here). Such companies are highly reluctant to leave the aggressor country, but their exit would have the most significant impact on the Russian economy.
When the decisions to locate production facilities in Russia were made, the companies still hoped for the growing market, cheap labor force, cheap and accessible natural resources, and geographical closeness to Central and Eastern Europe markets. However, given the dwindling domestic demand and high demand of customers in Western countries for corporate accountability in response to Russia’s unprovoked war in Ukraine, it’s time to reconsider offshoring production in Russia and look at more recent trends – reshoring and friendshoring.
Offshoring? Reshoring? Friendshoring?
As a trend offshoring – the relocation of a business process from a country of a company’s origin to another – has been popular for decades among companies seeking a cheaper labor force, better tax conditions, easier logistics, and a nicer business climate.
Next came reshoring. As the global disruption began in 2019 with the pandemic as well as trade tensions between the U.S. and China, companies and countries turned to reshoring – bringing production back to the company’s country of origin. This move aimed at improving the economic resilience of both supply chains and countries’ economies.
Recently businesses have found a middle ground in this -shoring dilemma. Meet friendshoring which is all about placing business production in a country you can call a reliable friend. The one that shares your values and strategic interests.
This also has a lot to do with geopolitics, as Deloitte writes: “Rising geopolitical tensions among trading partners heighten the risk that a single partner could slow down – or cut off—the flow of needed supplies. Policymakers no longer see commercial supply chains for electronics, food, or pharmaceuticals purely in economic terms; today, they’ve become important national security considerations”.
Today, when choosing a place for a production site, it is not enough to just look at the cost of labor and taxes. It is also essential that businesses take into account the values of the country and how aligned they are with the one the companies declare. Companies should also consider geopolitical tensions as 2022 has shown, they can be too much disruption if left unnoticed for a long time. Speaking of which, let’s look at Russia again.
Murdershoring and murdersharing
At least 30 companies that keep doing business in Russia have production sites in Russia. These are Austrian, French, Italian, German, Greek, Hispanic, and American companies. They produce food, medicine, medical equipment, sweets as well as building materials, and other products such as steel wire transformation and coatings, cement, windows, polymers, wood materials, instruments, tires, etc.
One such example is the French producer of canned and frozen food Bonduelle. The company has three factories in Russia and none in Ukraine. In March 2022, Bonduelle acknowledged that it now has to study the impact of the sanctions taken by the international community on the supply of raw materials and finished products, financial transfers, and currency management of the company.
Another bright example of consequences for not paying attention to the nature of the country you try to operate in is tire-maker Continental. After the invasion, the company closed its factory but was soon forced to reopen it. “Our employees and managers in Russia face severe criminal consequences should we refrain from serving local demand,” Continental said, according to Automotive News Europe. This makes Continental sound more like a hostage at the Russian government’s mercy than an independent business entity capable of deciding for itself.
As if the mixture of sanctions, shrinking market, and reputational damage wasn’t unpleasant enough for the businesses, recently the Russian government passed legislation that allows the state to force any business entity into working for military needs on terms and conditions designed by the state. As Financial Times states, describing the new law, it will allow the government to oblige businesses to fulfill state defense contracts and gives the defense ministry and other bodies the right to change contract terms. It would permit authorities, for example, to compel a factory to redirect production towards military needs, and to control how much of a certain product or service the business provides, according to the FT.
This means the companies remaining in Russia because of their plants and factories can soon find themselves directly involved in the war, helping to supply the Russian army with what they may need. And there is only one way to prevent that – pull out of Russia and reshore or friendshore before offshoring in the aggressor country turns a company into Kremlin’s accomplice in the unjust war on Ukraine.