Video Recording of Expert Panel on "The Ukraine-Russia Conflict's Impact on International Business"--23 March 2022 Sponsored by the Penn State Smeal College of Business Center for Global Business Studies

 

 
Penn State University's Smeal College of Business's Center for Global Business Studies sponsored a panel discussion on Wednesday, March 23 from 3:00-4:30 pm.

Donna Bahry, professor emerita in political science, provided insights from her expertise on Russia from a geo-political and historical perspective, and placing the conflict in a larger context of politics, culture,ideology and internal politics. 

Smeal's Svetla Vitanova, assistant teaching professor in finance, focused on how sanctions affect the Russian currency and central bank, with a focus on the short and long term impacts of policy choices and the role of oil and natural gas in the calculus.  

Dan Cahoy, professor, Dean's Faculty Fellow in Business Law, and Research Director of Center for the Business of Sustainability, discussed key international legal issues raised by economic sanctions focusing on the development and effects of sanctions regimes from a legal as well as from a perspective on business impacts. 

Larry Cata Backer, professor of law and international affairs and W. Richard and Mary Eshelman Faculty Scholar, focused on the business and human rights aspects of business response with an emphasis on  virtue signalling strategies (business risk); defensive measures built around complicity, sanctions and legal and business risk, and active measures framed around autonomous interventions in the conflict. 

A recording of the panel discussion can be found here: Ukraine-Russia Conflict's Impact on International Business. An extended summary of my presentation also follows below.

 

The business response to the Russo-Ukraine War might be usefully divided into three categories of action: (1) virtue signalling strategies (business risk); (2) defensive measures built around complicity, sanctions and legal and business risk, and (3) active measures framed around autonomous interventions in the conflict.

Virtue signalling.

Virtue signalling is the easiest of the measures undertaken by enterprises.  It requires virtually no analysis but is instead directed by strategic considerations--being perceived to be taking some act in solidarity with what may be perceived to be the way the wind blows among consumers and investors in key areas respecting the conflict.  And the object is then to leverage that by undertaking action that fits within the herd instinct (protection in crowds as well as leverage).  Thus for example one wonders about the cause-effect, or false cause dynamics of announcements of business disengagement with Russia. One can be petted for conformity--for example by inclusion in Virtue Lists of enterprises that have taken action in this respect.  The list maintained by elements of the Yale School of Management is fairly typical and itself contains its own normative objective embedded in its own descriptives:

Since the invasion of Ukraine began, over 450 companies have announced their withdrawal from Russia—but some companies have continued to operate in Russia undeterred.  Originally conceptualized as a simple "withdraw" vs. "remain" list, our new list of companies now consists of five categories: 

1) WITHDRAWAL - Clean Break: companies completely halting Russian engagements/exiting Russia; 

2) SUSPENSION - Keeping Options Open for Return: companies temporarily curtailing operations while keeping return options open; 

3) SCALING BACK - Reducing Activities: companies scaling back some business operations while continuing others;

4) BUYING TIME - Holding Off New Investments/Developments: companies postponing future planned investment/development/marketing while continuing substantive business; 

5) DIGGING IN - Defying Demands for Exit: companies defying demands for exit/reduction of activities

This is not to suggest that virtue signalling is a bad thing.  It is merely to suggest that this tends to be  an important element in business response to stress that may affect their objectives.  Responses that create an expected appearance and that protect markets and relationships with key stakeholders and constituencies are always to be preferred in the first cut of analysis.  And that has appeared to be the case in the Russo-Ukraine War. But it is easy, as well to forget both its utility and limits. 

Defensive Measures.

Defensive measures are an equally important element in the analytics of corporate responses to the Russo-Ukrainian conflict.  But here the calculus is much more complicated and the lines of risk are less easily defined. In the first instance, the issue touches on the business and legal risks of direct involvement in the conflict or with its principal actors (with its apex in state organs). Here defensive measures and virtue signalling well designed, can merge in useful ways for business. More difficult is the calculus of complicity in and around the conflict.  And here the analysis and strategic decision making becomes both more complex and riskier. 

In both cases,direct and indirect involvement (complicity) companies must consider several legal, markets based,and international normative constraints that will affect both their calculus and their approach to responding effectively. This is especially important in the context of corporate responsibility,within global production chains and beyond the control of any single state) to respect human rights. The spectrum of risk that must be considered can be divided in legal risk, business compliance (markets based) risk, and quasi legal (soft administrative) risk. For a more technical discussion see The Russian Invasion of Ukraine and Business: Responsibility, Complicity and the Responsibility to Respect Human Rights Under the UN Guiding Principles for Business and Human Rights.

Legal risk: These include sanctions regimes. Sanctions regimes are tricky.  They can exist at the local, national, or international level.  And chances are there is virtually no real effort at coherence (especially at the operational level), nor is it likely that one can avoid inconsistency or conflict among these measures. Where the enterprise is managing a global production chain--the recognition and coordination of sanctions regimes along its production or value chains becomes a challenge that in turn requires an administrative architecture to manage--presenting corporate boards with options for compliance that may become complex as the sum of contextually autonomous regimes. In the US there has been much focus on targeted sanctions regimens.  But it is also important to note the critical importance of Global Magnitsky determinations as well as the modification and projection of sanctions related authority through the mechanisms already in place for controlling export and imports through administrative oversight and approval measures (CFIUS). These sanctions can manifest in a variety of ways--country specific, product (petroleum or cats), and targeting individuals. One encounters all in the Russo-Ukraine war. 

Emerging, as well, are now measures that effectively legalize what had been until a few years ago, markets based business compliance measures.  Regimes of disclosure have been augmented and focused on the conflict.  More importantly, several key states (international France and Germany)and the European Union have now legalized the traditional markets based mechanisms (grounded in international norm standards) around complaisance related human rights due diligence regimes,  The French Supply Chain Due diligence Law and the recently enacted German Supply Chain law may pose a complacence risk,  But also to be considered are the refocus of disclosure legal rules--for example the Modern Slavery Acts (Australia and the UK) that may be refocused more intensely on labor and related conditions in the conflict zone but also around entities and states that may be deemed to contribute to contribute to Russian aggression. Here hard law (legal risk) and soft law (markets based) risks align. 

Business compliance (markets based) risk. Business compliance risk is built around two key trends.  The first is the development of an international normative and institutional framework for defining both business responsibilities in global production, and also the measures (best practices) that ought to be undertaken in operationalizing these soft law normative frameworks.  These include the UN Guiding Principles for Business and Human Rights, and the OECD Guidelines for Multinational Enterprises. But they also include derivative and amplifying structures--for example, ISO 26000--and legalized versions of these structures in national systems, for example the French and German Supply Chain Due Diligence and Supply Chain laws referred above. The second is the increasing trend toward the governmentalization of the private sector. That governmentalization is the manifestation of a couple of additional sub-trajectories.  One is grounded in the mechanisms for the realization of compliance and accountability regimes in which the state oversees compliance and sets the normative baseline and the entity is expected to manage the internal regulation of its operations to meet these obligations. In effect, the emerging mechanisms of regulatory management require the transformation of entities into privatized administrative organs of the state. The other is the leverage value of this project of governmentalization through compliance to project national public regulatory power through the private law internal regulatory responsibilities of business entities across its entire production chain--no matter where the chain operates. This, then, serves as a new form of privatized extraterritorialization of law. 

Both transnational (soft) normative standards as well as its operationalization through governmentalized (quasi-administrative) compliance based economic actors is evidenced in the actions and expectations of business in the Russo-Ukrainian war. Both involve complex balancing to avoid both direct breaches of human rights and indirect complicity in the human rights violations undertaken by or under the direction of states.  But because one is dealing here with global production chains extending over many states, indirect complicity and involvement also becomes an important point of strategic engagement-  Examples: (1) US drones used for agricultural surveillance and shipped to an Indian joint venture partner are then repurposed and delivered to the Indian government for transshipment to Russia where it can be used in Russian operations against Ukrainian soldiers; (2) In an orgy of virtuesignalling a pharma company pulls out of Russia taking with it the only source of a drug essential to the treatment of a condition whichif untreated that produce intense pain and fatalities.  

But the calculus is complicated.  Some organs (eg the Norwegian SWF) have suggested to any contribution to positive economic operations in a targeted territory (in that case Myanmar) can be deemed to facilitate the ability of a government to engage in human rights breaching conduct and thus any engagement could lead to a finding of complicity. But what about a company what chooses to shut down an operation resulting in mass unemployment, or worse where as a result of the action the host state punishes the workers because they cannot "get" the departing enterprise. Principles of prevention-mitigation-and remediation under the UNGP help to some extent.  These suggest an ordering of priority based on severity of impact, and acknowledging that the action calculus may produce a human rights breach no matter what action option is chosen,  In that case the calculus ought to maximize the likelihood that the value of prevention and mitigation exceeds the damage that will have to be remedied. This is a hard calculus indeed! But for business the calculus is clear--it is one that favors prevention-mitigation measures (most severe effects first), and then mitigation-remedial measures (pay for what can't be avoided).

Business compliance (markets based) measures do have some emerging systems of dispute resolution and non-judicial remedial mechanisms.  Foremost among them are the Special Instance (eg complaint-like) actions that may be asserted before a National Contact Point (constituted for that purpose as a non judicial dispute resolving body). These have sometimes proven useful as mechanisms for managing corporate action. They are likely to be invoked in the context of the Russo-Ukrainian war.  But their impact, like other forms of judicial intervention, will be more long term than immediately effective. Even more long term will be the possible actions that may be filed under regional human rights conventions (European Convention and the European Court of Human Rights, as well as the OAS Convention and its OAS Human Rights Court). In both cases the issues of direct and complicity based demands will likely be considered--against enterprise choices in the context of the Russo-Ukrainian War. These, in turn, may likely use the normative framework of the UNGP or the OECD Guidelines. 

Active Measures. 

The merger of economic entities into their global production chains (see here) has produced a strong trend toward corporate autonomy--autonomy from states and other entities whose regulatory authority may be significant but territoriality limited (subject of course to the counter trend of governmentalization discussed above (see the more detailed discussion in Global War, Non-State Collectives, and the De-Centering of States--Interesting Hints of Lessons From the Russo-Ukraine War). The Russo-Ukrainian War will likely significantly strengthen the autonomy of actors managing global production chains, The most visible example of this was the provision of internet for Ukraine by action of Elon Musk's entities. Entities. One encounters here not just the provision of Starlink terminals but also decisions respecting the militarization fo products, the decisions respecting supply of parts andmaterial,andother action.  What distinguishes this as new is the autonomous decisionmaking power now shifts form states to the enterprise.  And those decisions may well be analyzed through the lends of human rights or sustainbility due diligence. 

"But not just MNEs.  The great non-state actors have also acquired an element of autonomy that permits them to choose sides and act independently of the choices made by states in whose territories these NGOs might operate.  And because these are, like MNEs, entities with abstracted territories (Fractured Territories and Abstracted Terrains: Human Rights Governance Regimes Within and Beyond the State)  this multi-spatial disaggregation within any specific territory becomes more likely.  States have recognized this power, to some extent by enacting blocking and monitoring legislation." (Global War, Non-State Collectives, and the De-Centering of States)