Foreign Companies Could Lose Everything in Russia

McDonald’s—which made capitalist history when it opened its first Soviet restaurant in Moscow 32 years ago—is leaving Russia. So are BP, Shell, Ferrari, Ikea, Ford, Mercedes-Benz, Unilever, and a host of other Western companies. But saying you’re leaving Russia is one thing; getting your belongings out of the country is quite another. Now Russia is beginning the process of nationalizing the assets that Western companies still have in the country. That will cause the companies enormous financial pain. It’s part of today’s new warfare—and there’s no manual for it.

The West’s unprecedented volley of sanctions against Russia is making it extremely difficult for companies to keep operating there. Many others, though, are leaving voluntarily, officially in support of Ukraine but, in reality, often because they know that association with a warmongering Russia would poison their brands. The departures will cause enormous harm to Russia’s economy. Jobs will be lost. Attractive Western brands to which Russians have become accustomed since the opening of that first McDonald’s restaurant in 1990 will no longer be available. Crucial manufacturing will simply no longer exist.

But with their announced departures, these companies are entering an extremely dangerous phase, especially the companies that could have kept operating in Russia despite the sanctions. They have, essentially, told the Kremlin that they’re siding with Ukraine. Manufacturers such as Mercedes-Benz have enormous production facilities in the country: buildings, machinery, components, cars. And for as long as their belongings—factories, equipment, goods, components—are in Russia, they’re at risk. Already on the war’s third day, former Russian President Dmitry Medvedev proposed that Moscow should seize the assets of foreign individuals and companies in Russia. And on March 9, Russia’s governing party said a government commission had begun the process of doing so.

Companies that have left Russia now stand to lose massive sums. (BP was able to sell its share in Rosneft to Rosneft itself—but lost $25 billion.) Given the disastrous state of diplomatic relations between Russia and the West, Russian authorities have a free hand should they decide to seize Western businesses’ assets. The companies can hardly litigate against them, and Western governments can’t plead with the Kremlin on their behalf, especially since they have imposed on Russia sanctions so severe that France’s finance minister, Bruno Le Maire, last week described the situation as an “all-out economic and financial war.” (He later backpedaled.)

But countries can keep going despite the risk of harm and losses—because they pay for insurance. Indeed, there’s a whole insurance segment known as political risk that covers physical loss and damage to assets from wars, civil wars, revolutions, coups, and other violent clashes. Political risk insurance also covers situations that are so dangerous that a company has no choice but to abandon its property. What if a government—in this case, that of Russia—simply seizes companies’ belongings as a way of retaliating against them and Western governments? That, too, could fall under political risk insurance. But it’s not entirely clear because never in the history of globalization has there been a situation where a government might decide to retaliate against its adversaries by seizing companies’ assets.

To be sure, over the years numerous governments have seized foreign investors’ assets. When revolutionaries seized power in China, Cuba, and Iran, foreign companies could do nothing as the regimes simply nationalized the companies’ belongings. According to one academic estimate, during the post-colonial period of 1956-1973, nearly one-fifth of all foreign direct investment abroad was seized by host governments. But most of these seizures were motivated by ideology or financial gain—or sometimes both. A regime seizing foreign assets as a form of retaliation is an absolute rarity. If a government uses seizure as retaliation against economic warfare, one could argue that it constitutes an act of war. And acts of war are unsurprisingly not covered by regular insurance.

You’d think you knew war when you saw it. There’s indisputably a war going on in Ukraine. But is fearmongering involving 190,000 troops at a country’s borders and warships in its adjacent water an act of war? How about devastating cyberattacks? In 2017, many Western companies, including the pharmaceutical giant Merck, were devastated by the massive NotPetya cyberattack that initially struck Ukraine and was later attributed to the Russian government. Because NotPetya was a hostile act perpetrated by a foreign government, some of the affected Western companies’ insurers argued that it was an act of war and was thus excluded by the companies’ regular insurance. (This is known as a war exclusion.) Last month, in a case involving Merck and its insurer, the New Jersey Superior Court sided with the pharmaceutical firm.

Russia’s frequent cyberattacks against Ukraine, now combined with military violence, are likely to result in many more such legal disputes. “This war will bring into sharp focus war exclusions related to cyberlosses,” said Julian Enoizi, the CEO of the terrorism reinsurer Pool Re. “In the age of the internet, how can we refer to an outdated notion of ‘traditional form of warfare’ that does not include cyberattacks when those are not only a reality but a recognized form of modern warfare?”

The departures of Western corporations from Russia may be interpreted by the Kremlin as bombs directed at the Russian economy. Indeed, Laura Burns, an expert on political risk at the global insurance broker Willis Towers Watson, told me that the companies now leaving Russia could be treated by the Kremlin as war-like actors because they’re participating in what has been described as Western economic warfare. And when companies are seen as participating in economic war, governments, even beyond Russia, may be more likely to view them as fair game and try to harm them. The Kremlin would even gain from the seizure of, say, a factory, as it would be seen by the Russian public as saving jobs and ensuring a steady stream of product and services for the population.

Another not-quite-war act may also come the West’s way in Russia’s hybrid war against Ukraine and the Western community: hostage diplomacy. A number of Western citizens are currently serving sentences in Russia for alleged criminal offenses, and none of them is in more peril than Michael Calvey. Last year, Calvey, an Oklahoman who launched a hugely successful Moscow investment bank in the 1990s and constantly remained loyal to Russia despite also having a home in London, was convicted of embezzlement in a business dispute. Even though the case against him was spurious, the court sentenced Calvey to five and a half years of home confinement, which means he’s now stuck in Russia. And just as China did with the two Canadian citizens Michael Spavor and Michael Kovrig between 2018 and 2021, Russia could decide to use Calvey to force the West to make concessions.

War is changing. While a very traditional ground battle is being fought on Ukrainian soil, Russia and the West are squaring off over globalized business. Kinetic wars have manuals; the business war does not. We’re about to learn how it’s fought—and who suffers.