Russian officials have said that they will move to nationalize the assets of Western companies that pull out of their country over its invasion of Ukraine, a decision that will cause significant economic harm to hundreds of businesses while, at least temporarily, preserving the jobs of the tens of thousands of Russians employed by them.
As of Monday, at least 375 companies had announced some sort of pullback from Russia, according to a list maintained by the School of Management at Yale University. The list includes companies that have cut ties with Russia completely, as well as those that have suspended operations there while attempting to preserve the option to return.
According to multiple media reports, dozens of Western companies have been contacted by prosecutors in Russia with warnings that their assets, including production facilities, offices, and intellectual property, such as trademarks, may be seized by the government if they withdraw from the country.
Endorsed by Putin
Russian President Vladimir Putin last week endorsed the proposed seizure of Western assets, a plan that was originally aired by a senior member of United Russia, the country’s dominant political party.
United Russia’s proposal went beyond asset seizures, advocating a policy of arresting executives of foreign business who criticize the actions of the Russian government. According to Reuters, another proposal under consideration would target public companies if more than 25% of their shares are held by individuals from “unfriendly states.” A bill put forward by United Russia legislators would allow the government to force such firms into “external administration,” leading to the elimination of existing shareholder rights and the auctioning of new shares recognized by the Russian government.
On Twitter last week, White House press secretary Jen Psaki warned that Russia could face further sanctions or legal action if it goes forward with the nationalization plan. “Any lawless decision by Russia to seize the assets of these companies will ultimately result in even more economic pain for Russia,” she wrote.
New sort of expropriation
There is a long history of governments expropriating the assets of foreign firms, but experts said that what Russia is threatening falls outside the typical pattern. In the past, governments have nationalized foreign businesses in the name of ideology, as Cuba did in the wake of the Communist revolution there, or because they want to capture the revenue going to private enterprise, as with Iran in the nationalization of its oil industry in 1951.
Elisabeth Braw, a senior fellow at the American Enterprise Institute, told VOA that is not what is happening in Russia.
“It’s not about Russia saying, ‘Well, we think we can run these companies better on our own,'” she said. “It’s really about punishing those companies, which makes it so different from various revolutionary governments that have seized Western companies’ assets in the past.”
In other cases of nationalization, Braw said, the government seizing assets typically did so strategically. They chose business sectors, at least in part, based on the assumption that they had, or could quickly develop, the capacity to operate them independently.
But Russia’s threat of blanket nationalization of foreign companies that leave the country would effectively put the Kremlin into the role of operating everything from McDonald’s fast-food franchises to Gillette razor factories to Mercedes-Benz car manufacturing plants.
Experts said that Russia is likely to have a difficult time finding people with the expertise to run many of the foreign firms that might be subject to nationalization. The management ranks of most non-Russian firms have historically been heavily weighted with expatriates, many of whom have been rushing to get out of the country.
“Some businesses, some manufacturing operations, might well fit the Russian model,” James O’Rourke, a professor of Management at the University of Notre Dame’s Mendoza College of Business, told VOA.
Certain kinds of companies, he said, “might be run by an oligarch or a friend of the regime, and it might work out. But I don’t think most of them will.”
O’Rourke said that even if Russia were able to find the managers needed to keep foreign businesses running, supply chain problems may prove insurmountable. McDonald’s, for example, sources its produce and baked goods from multiple different countries, most of which are actively engaged in the international effort to cut off trade with Russia. Gillette’s manufacturing facilities in Russia use machines made in the U.S. and Germany, which will be unwilling to supply spare parts.
The Russian government might be able to score a short-term public relations victory with its own people if it can portray the nationalization of Western businesses as an effort to retain jobs that might otherwise have been lost, said Braw, of the American Enterprise Institute.
However, she said, unless the Kremlin can find a way to successfully perpetuate the companies’ operations without Western expertise or supplies, the PR benefits of nationalization are likely to be short-lived.