The global end game for corporate boardrooms will become more challenging and protracted following unprecedented Russia boycotts.

• After Russia's invasion of Ukraine, companies from various industries worldwide have withdrawn from the country at an unprecedented pace.
• While the exits may be most significant for oil and gas companies like BP and Exxon Mobil, which had multi-billion dollar oil and gas projects underway, retailers, payment companies, and entertainment brands like Disney could return more easily and suffer less in the short-term given limited revenue exposure.
• ESG concerns and reputation management are important factors, but there is a possibility of a prolonged period of de-globalization in business relationships and economies due to Russia's territorial aspirations and the resulting fears about China and Taiwan.

With corporations rapidly leaving Russia in response to the unprovoked war, a question being considered is how this action fits on the leadership decision-making spectrum.

Is the pause in the market a temporary break; a show of the growing, possibly enduring, impact of ESG in the executive team; or a fundamental shift in corporate strategy and the global economy towards de-globalization?

The current events seem to indicate a significant shift from the post-World War II era of expanding global markets and pursuing global scale, which were still firmly in place just a week ago.

According to Witold Henisz, professor of management at The Wharton School, University of Pennsylvania, the world has undergone a significant shift, prompting the C-suite to take a more serious approach to the parts of the world they previously avoided. In just 48 hours, companies began withdrawing and reevaluating their post-war strategies, marking a fundamental break from the past. This is not a limited proxy war or incursion; it is a change that has not occurred since 1940.

The "old-school" political risk of conventional international warfare has resurfaced, according to Stanislav Markus, an international business professor at the Darla Moore School of Business, University of South Carolina, and associate at the Davis Center for Russian and Eurasian Studies at Harvard University. For many years, large-scale violence had been confined to specific areas, such as terrorist activities, civil wars, drug cartels, and failed states like Afghanistan or certain regions of major economies, such as Mexico.

Gary Hufbauer, a fellow at the Peterson Institute for International Economics, believes it is too early to conclude that a broader de-globalization trend is accelerating. However, he suggests that experts studying globalization data are already looking for signs of a reversal, particularly in light of the Russian invasion of Ukraine. From 2010 to 2015, globalization continued to increase, but the rate slowed between 2015-2019. Covid caused the rate of globalization to go backward in 2020, and the question now is whether the abrupt reversal in globalization will become persistent by 2025.

Russia's invasion may have resulted in a turning point, as there are strong forces opposing the standard economic forces that drove globalization, according to Hufbauer. He stated that there is no quick reversal of this situation.

While some globalization experts remain cautious about the impact of Russia, they note that the rate of globalization has slowed. According to Jeffrey Frankel, a leading expert on globalization at Harvard University and former White House Council of Economic Advisers member, the halt in the period of rapid globalization actually goes back further than Trump and the pandemic. It started with the global financial crisis.

Since 2008-09, the ratio of trade/GDP has remained relatively stable. Prior to that, the ratio had been steadily increasing, with trade growing at a faster rate than GDP.

According to Frankel, the major events concerning Russia will not negatively impact globalization. Although Russia will become increasingly isolated, its impact on the global economy is minimal.

ESG’s role

Hufbauer believes that the focus on corporate social responsibility has contributed to the quick response, and we have seen companies withdraw from markets like Cuba and Iran in the past. However, he said, "This is unprecedented. Big companies are leaving in droves. My theory is that we've had a period of emphasis on corporate social responsibility, and many CEOs and directors have been saying they support it. With the 'woke language' of the moment, they would be under pressure to take action, given their background, statements, and the current atmosphere."

Shell is withdrawing from all Russia oil and gas operations, unlike Disney, which is not in a similar position to walk away from multi-billion-dollar oil and gas projects.

Henisz, who studies corporate ESG, stated that if one must withdraw under pressure, they should do so with courage. No one wants to be the last one remaining. He explained that while ESG discussions are becoming more prevalent, he believes that they are not the primary reason for corporate decisions. According to Henisz, the withdrawals are due to Russia's invasion of Europe.

Brands such as Apple, Silicon Valley rivals, and luxury fashion houses may not suffer significant losses in the short-term by suspending operations in Russia, which has a population of 144 million. However, companies with the largest revenue exposure to Russia, such as McDonald's, Starbucks, PepsiCo, and Coca-Cola, have been slower to make a decision. On Tuesday, McDonald's announced it would temporarily suspend business at all of its 850 Russia locations, followed by the other companies making similar announcements later in the day.

The decision for many consumer brands to withdraw from the Russian market was not difficult due to the combination of sanctions, inflation, and the rouble crash. According to Scheherezade Rehman, a professor of international finance at George Washington University, the reputation risk increases exponentially as businesses wait. For companies without a significant physical presence and few employees in the country, the risks and operational challenges outweigh the benefits. Rehman advised that having an export market overseas means exchanging local currency into dollars or euros, and being stuck in roubles is not a good business decision.

Global financial nuclear war

The de-globalization trend could result in a more fragmented financial system on a geopolitical basis. Additionally, companies have responded to the unprecedented sanctions on Russia by pulling out and suspending operations in the country, which has severely impacted the eleventh-largest global economy in a matter of days.

Rehman believes that retail brands without significant physical real estate holdings can easily re-enter Russia, and there are workarounds available within the country. However, she thinks many businesses may choose to stay away due to the complexities under current conditions, which will have a lasting impact. According to Rehman, while it is possible to make payments, conducting business in this manner will erode over time.

Large companies may avoid doing business with countries subject to unprecedented sanctions due to the risks of facing consequences from the U.S. government.

The coordinated blockade of a nation on such a massive scale and at such a fast pace, including its central bank, has significant implications for the future. Cryptocurrencies and fintechs will play a role, but even bigger changes are expected for the core infrastructure of the global transactions system. With SWIFT now politicized and alternative payment systems already in place in countries like China, Russia, India, and the EU, financial geopolitics are likely to expand beyond the current hybrid, kinetic war.

Markus states that the West's control of the global financial infrastructure sends a message to other regimes to create their own infrastructure as soon as possible. This will result in a fragmentation of payment networks and an increase in the use of state-issued digital currencies, including Russia's "sovereign internet" initiative.

The technology talent pool in Eastern Europe, which includes Ukraine, Russia, and Belarus, is being disrupted. This region, often referred to as the "Silicon Valley" of Eastern Europe, has experienced significant growth in recent decades. Gartner, a technology research firm, has reported that the emerging issue of "digital geopolitics" is one of the most disruptive trends in the technology industry.

David Groombridge, Gartner Research VP, advised CNBC via email that the solution to the current crisis should not involve a reactive onshoring of capabilities, particularly in a world where there is already a shortage of digital skills. Instead, executives must strike a delicate balance between achieving a competitive advantage, managing geographic concentration risks, addressing skills availability, navigating legal and regulatory issues, and assessing country risk factors when relocating their IT services.

Longer-term fears about China’s ambitions

If the de-globalization trend continues and China and India maintain their ambiguous stance on Russia's invasion, it was not an unexpected development. The recent conflicts between the US and China over critical technology and actions taken against Huawei were precursors to what could potentially become a larger rift.

Markus stated that the global geopolitical realignment and the early signs of a China-Russia anti-Western partnership suggest that businesses may need to prepare for the emergence of Cold War blocks, amplified by infrastructural de-coupling. The challenge is to effectively span the blocks and act as a bridge-builder in the eyes of stakeholders.

The more significant issue than the multi-national corporate outlook in Russia is the war scenario that has snuck up on boardrooms, which is being used to devise strategies for the potential Chinese aggression against Taiwan.

Some experts believe that China may be the only hope in deescalating the Russia-Ukraine situation, as it has tried to walk a finer line in its stance on Russia than it initially did and has pushed back against any attempts to draw parallels between Russia's invasion of Ukraine and its ambitions.

Russia can gain its "sphere of influence" at the expense of Ukrainian sovereignty, and it will remain a pariah on par with Iran, North Korea, and Venezuela, experts predict. To avoid any future reliance on Russia, executives must redraw supply chains or revert to past strategies of working in autocratic states without the rule of law. Markus, who has studied these relationships, emphasizes the importance of making deep connections with state actors and societal stakeholders in such situations, as there are no independent courts to protect foreign investors.

The possibility of China viewing a swift and unified response to Russia's invasion as a reason to move more slowly has been suggested. However, China's economy is significantly larger than Russia's, and the corporate consequences of such a scenario in relation to its territorial ambitions would be severe. This explains the muted corporate response to human rights violations in Xinjiang or Hong Kong, according to Markus. Ignoring a brutal violent war (if China repeats Russia's mistake) for corporations would mean losing their credibility with a broad range of stakeholders. Therefore, advance discussions of such scenarios in the boardrooms are necessary.

In 2022, one of the crucial discussions in board meetings will be about the possibility of withdrawing from China and its potential impact.