Speech to a Conference on Eurasian Security

Is the economy ‘in thrall’ to politics?

The subject of this Special Session was curiously taken up by a columnist in The Financial Times on 8 August of this year. Martin Sandbu wrote:

“One of the oldest and most persistent ideas of the western enlightenment is the civilizing force of free economic exchange. The belief that trade and political concord reinforce one another – at times called doux commerce or “gentle commerce” – goes back at least as far as Montesquieu’s writings 300 years ago.”

In his brief essay, Sandbu noted how this concept has not proven itself in the past twenty years with respect to both Russia and China, which did not become properly civilized, meaning appropriately subservient to the West. But he remains optimistic that the underlying principle is valid.

I am compelled to disagree.  The contrary argument, that trade is controlled by governments for their own purposes and cannot have decisive influence on foreign policy, has been demonstrated far longer ago than twenty years. And when you descend from the Olympian heights of Sandbu’s essay to reality on the ground, the picture is indeed grim.

The first thought when I agreed to speak about whether trade can bring countries together and prevent wars was that the biggest trading partners in Europe before the outbreak of the First World War were precisely Germany and Great Britain. But a fierce war broke out between them nonetheless.

Later in the 20^th century we witnessed the victory of hope over experience: repeatedly statesmen encouraged trade as a means of restoring or ensuring peaceful relations.  Trade was a large component of the détente policies promoted by U.S. President Richard Nixon in his outreach to the Soviet Union. I saw how this worked firsthand as a young man in the second half of the 1970s in my capacity as consultant to the boards of directors of several major U.S. corporations helping them to define and implement strategies for establishing joint ventures in the Soviet Union both to produce there and to develop a market for their finished goods to be exported there.  This was in a variety of domains including infant nutrition and heavy engineering, but mostly in agribusiness. I watched this on the still rising curve in 1975 and then in the fast descending curve later in the decade following the replacement of the Republican administrations of Nixon and his successor Gerald Ford by the Democratic administration of Jimmy Carter, who was guided by the arch anti-Communist, anti-Russian Zbigniew Brzezinski.

Under Carter, the Soviet Union was accused of egregious human rights violations.  At the top of the list was the issue Jewish emigration to Israel, which was then strictly controlled by Moscow and was exploited by Washington for propaganda points. The U.S. administration gave signals to business that cultivation of the USSR was no longer favored. Export controls were used to stop delivery of large computers and other valuable advanced technologies which Moscow was negotiating to acquire. The Soviet invasion of Afghanistan in early 1980 put a decisive end to détente in its business dimension. The Carter administration introduced sanctions that effectively closed down U.S. agribusiness activities in the USSR. Everything quickly went into reverse and most companies looked for the exit. I felt the change directly. My project to win for Burger King the designation as official supplier of fast food to the Moscow Summer Olympics was the first to be cancelled.  Other clients departed one by one and I had to shut down my consulting firm.

I asked myself at the time why business was so quick to follow the directives of the U.S. government, first to enter and then to leave the USSR market.  I understood then that big business is highly dependent on good relations with Washington because of the assistance it regularly receives looking after its interests in a great variety of dimensions including negotiation of favorable treatment for its exports in bilateral and multilateral trade treaties. It is dependent for favorable decisions on mergers and acquisitions. It is dependent for favorable treatment on tax and regulatory issues. And it cannot afford to appear to be unpatriotic by flouting interdictions on trade with one or another foreign country.

There was also a second period of my professional experience in trade development, in the 1990s, when I was hired for a succession of appointments in different companies to work in Moscow. That was a time when the tenure of experts like myself to head up operations in Russia was brief: you would set them up and be replaced by someone from headquarters who had the trust of the CEO. I directed the Moscow representative offices of two of the world’s largest manufacturers and marketers of alcoholic beverages, the Canadian company Seagram & Sons, and the British firm now called Diageo. The former disappeared in corporate mergers in the late 1990s; the latter today is still the biggest producer of whisky in the world and has a very large portfolio of spirits and wine. Thus for several years in Russia I was known as Mr. Smirnoff vodka, or Mr. Johnny Walker whisky. My title then was Country Manager for Russia and the CIS. For six years, I participated in presentations to Board members and saw the inner workings of their planning.  Regrettably, what I saw did not strengthen my belief in the rationality of decision-making in very large corporations.

Perhaps in middle management what is taught in business schools with respect to business development  based on sophisticated financial calculations and risk analysis is performed according to the textbooks. But at the top levels of corporations, decisions to enter or leave markets are very often driven by emotions and herd mentality. The top managers are keen to beat competitors to the imagined pot of gold in a new market, and a lot of romance enters into the thinking of how big that pot of gold may be.  But gold was not the only consideration. No, there were pressures to succeed in a difficult market like Russia and so to prove to peers and to investors that their management structure was more competent than their competitors’. Looking outside their business peers, they are also keen to appear before government authorities as flag bearers in conquering new markets.  And, on the other side of the ledger, they are keen to avoid reputational damage by staying in markets that the public wants to punish for some real or imagined offense to shared values.

During the 1990s, I witnessed just how much money and management time of top executives went into starting and developing their business in Russia. But then the global financial crisis of 1998 struck. It started in Southeast Asia and spread across the globe, hitting Russia especially hard due to the financial and overall economic weakness of Russia under Boris Yeltsin when the transition from planned economy to market economy was led by ignorant Western theorists promoting the neo-Liberal “shock therapy.” Russia defaulted on its loans.

Within a year of the onset of the 1998 crisis, more than half of all expatriate managers had been let go, business plans for investments were slashed and current operations were greatly reduced. In their business plan presentations to the Board, Senior Vice Presidents in my company predicted that the economic collapse in Russia would follow the Thai example and would last for five years or more.  They had no feel for Russia, for the difference in scale in the economy and value of exports from Russia on global markets compared to Thailand.  So decisions to remove Russia from the “promising markets” and place it under the wings of a mature market like Germany for purposes of budgetary allocations and financial reporting were made lightheartedly.  Of course, the economic realities soon proved that Russia’s recovery was much faster and more sustained under the new Russian President, Vladimir Putin, than had been supposed.  But once senior vice presidents in a big corporate hierarchy convince the Boss of something, they dare not recommend a reversal of course two years down the road.  No, it will take a decade and change of management at the respective levels before someone will dare to say that the Russian market is indeed promising. I note in passing that nothing has changed in corporate cultures since then; the same length of time will be required for big businesses that have departed Russia 2022-2023 to be ready to return.

These are the most relevant findings I took away from my business career as an expatriate manager in Russia working for major corporations.  These findings are important for government officials in the CIS to know to avoid illusions about the strength of foreign businessmen as a lever for improved state to state relations.  And big business is usually what such governments think of first as their potential friend and point of leverage with foreign states.

However, I must add a further observation from my own personal experience with medium and smaller sized businesses that is also very relevant to today’s discussion.

Very large corporations can afford to make investment decisions on the basis of “gut feeling” of top executives and the ambitious but not well researched presentations of their assistants.  Small and medium sized companies do not have such a luxury.  In my experience, they tend to be more results oriented, less political.  This is especially true of family owned companies, such as constitute the German Mittelstand.  I know, I worked for such a company based in the Schwabisch countryside which had the daring to create a jeans manufacturing Joint Venture in Petersburg in 1993 for which I opened the Russian sales operations.

The culture of medium sized businesses varies greatly from country to country in the West. The most adventuresome, least bullied by politicians are such businesses in Italy. But they are everywhere more likely than large corporations to chart their own course under less influence from the preferences of their national governments.  They look for “work arounds” to do business  just on this side of the law in these times of sanctions.  I think they merit special attention and can provide some continuity to relations in present conditions.

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In the foregoing, I have shared some impressions from my personal experience in international business. Now in the concluding part of my presentation, I would like to introduce some information that comes from major Western media with regard to the departure of big business from Russia as from the start of the Special Military Operation. Based on a much broader sampling than my personal experience, these accounts confirm what I was saying about the herd behavior of large corporations.

Considering how much time, money and senior management involvement went into establishing the Western business presence in Russia in the 1990s and in the new millennium, it is absolutely amazing that today’s leadership of these companies decided after the start of the Special Military Operation to leave the Russian market as quickly as possible, whatever the cost. Not a backward glance or regret at all.

Some companies moved very fast, often by turning their Russian assets over to local management for a nominal price on condition that they have the right to buy those assets back and reenter the market at some point in the not too distant future. This is what happened to McDonalds and to Ikea. Others were less decisive and found themselves trapped in the more severe conditions that Moscow imposed on would-be parting corporations, effectively inflicting the loss of half or more of the value of the assets plus payment of a special tax to the Russian government. And still others spent a long time negotiating with potential Russian buyers of their assets only to find that the Russian government blocked the sale and essentially nationalized the assets. Such was the fate of Danone, the French dairy products company and Carlsberg, the Danish brewer and owner of Baltika. The outcomes were different but the wish of the foreign owners to leave the market and turn their back on decades of investment was the same.

In parallel to those foreign companies which left the Russian market voluntarily after February 2022, there were many companies which were compelled to do so because their business activities came directly under the sanctions that the EU imposed on trade with Russia in many domains, but in particular in energy, that is, oil and gas.

In an article dated 7 August, The Financial Times gave the figure of 100 billion euros in direct losses suffered by European companies on their operations in Russia. The figure was arrived at by examining the 2023 financial statements of 600 European groups. The losses took the form of “asset impairments, foreign exchange-related charges and other one-off expenses as a result of the sale, closure or reduction of Russian businesses.” Half of the combined losses were incurred by energy and utility groups.

Have we heard a word of complaint by European companies over these losses, over the EU policy of sanctions on Russia?  No, not a word.

The country which suffered the greatest losses was the country most dependent on cheap Russian gas and other critical inputs for its manufacturing industry, Germany.  Another Financial Times article, dated 30 August 2023, tells us “Nearly a third of German industrial companies are planning to boost production abroad rather than at home amid increasing concern over the country’s future without Russian gas…”

Has German industry filed public complaints over its government’s policies with respect to Russia?  The answer is an unequivocal “no.”  German industry is more willing to vote with its feet and invest abroad than to stand and fight its own government over policies that destroy German competitiveness.

What we see today in Europe with respect to trade with Russia tells us that the economy is indeed ‘in thrall’ to politics and is incapable of exercising a moderating role.

I do not mean to say that this is a universal law.  We know, for example, that expansion of sanctions against China’s electronics industry, in particular the clampdown on export of high technology semiconductor manufacturing equipment, has sparked resistance among Dutch and other suppliers of such equipment and components. And in the United States, an opinion article published in The Financial Times on 15 August tells us that “US industry is getting its way on China.” The question was the degree of restrictions that the Biden administration is placing on American investment in China. 

Nonetheless, resistance of business to government diktat with respect to trade is exceptional. The cowardly herd departure of Western businesses from Russia is the rule.

©Gilbert Doctorow, 2023