Several multinational companies have opted to walk away from Russia following its invasion of Ukraine. However, some companies in the pharmaceutical and food sectors are still operating in the country, although they are offering only basic supplies for humanitarian reasons. Denying Russians products such as baby formula could be seen as inhumane – infants in the country have nothing to do with the aggression of its leaders after all – but where to draw the line?
This ‘should I stay or should I go?’ dilemma has been a challenge for many companies and investors, with some trying to strike a balance by changing their strategies or business models. This has been the case for a number of pharmaceutical and food companies that have stopped investing in Russia but have kept on providing what they say are essential goods in the country.
Pharma’s medicine emergency
Russia is a key market for several big pharma names, due to having either manufacturing plants in the country, or because they sell so many of their products there.
Bayer, GlaxoSmithKline, Johnson & Johnson, Novartis, OTCPharm, Pfizer and Sanofi are among the top producers by sales volumes in the Russian pharmaceutical market, according to a report published by the DSM Group.
However, many of the big foreign pharma companies rethought their approach toward the country in the aftermath of the invasion of Ukraine. A common theme seems to have emerged whereby pharma companies will continue to serve the Russian market, purely to provide life-saving medication to the people who need it.
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Pfizer has announced it will maintain a humanitarian supply of medicines to Russians but halt all new investment into the country. It will also donate all proceeds of the supply of medicines to Russians to provide direct humanitarian support to the people of Ukraine.
GlaxoSmithKline will also use any profits from its operations in Russia to support humanitarian relief efforts. The company is prioritising the supply of products that are essential for people’s health in Russia but has stopped advertising or promoting its products in the country.
Johnson & Johnson has stopped selling personal care products in Russia but is to continue supplying medicines and medical devices (which are excluded from Western sanctions).
Big pharma companies have reconsidered their clinical trial footprint in Russia in response to the Ukraine invasion.
Food for thought for consumer goods sector
Apart from the pharmaceutical companies, many operating in the food and consumer goods sector – among them Mondelez International, Nestlé, PepsiCo, Danone and Unilever – have decided to keep providing basic supplies to Russia for what they generally cite as humanitarian reasons.
For example, Unilever has announced it is suspending all imports and exports of its products into and out of Russia but will continue to supply everyday essential food and hygiene products that are made in Russia to the people in the country.
Nestlé and Danone have suspended investments in Russia but are still providing essential goods such as baby food. Both companies are among the market leaders in the baby milk sector (see chart below). Danone will maintain the production and distribution of fresh dairy products and infant nutrition in Russia, while Nestlé’s focus will now be on providing infant food and medical and hospital nutrition.
It’s important to note Nestlé has shifted its position since the invasion. Initially, the company said it would suspend capital investment and stop advertising in Russia – but continue to sell “essential” food products.
Nestlé had faced criticism from Ukraine’s President and Prime Minister over its ongoing presence in Russia, prompting the Swiss giant to, at first, defend its position. However, on 23 March, the company issued a fresh statement that said it would further cut the products it would sell in the country, including ending the sale of KitKat chocolate and Nesquik drinks.
Asked to detail which products Nestlé was pulling from the Russian market and which the company deemed to be “essential” and remain on sale, a spokesperson told Just Food: “The vast majority of coffee, pet food and also confectionery will be suspended. We are in the process of finding solutions for our factories. Essential food is strongly focused on infant food and medical nutrition. On the medical nutrition side, it’s things like infant formula for infants with allergies or tube-feeding foods like Peptamen and Isosource.”
PepsiCo's stance is to continue to sell daily essential products in the country, such as dairy products, baby formula and baby food, but it is suspending all capital investment and advertising in Russia.
PepsiCo has given another reason for continuing operations in the country, and that is to support the livelihoods of the 20,000 Russian associates and the 40,000 Russian agricultural workers in its supply chain as they face significant challenges and uncertainty ahead.
This is an argument that Danone’s CEO, Antoine de Saint-Affrique, also makes. “We have a responsibility to the people we feed, the farmers who provide us with milk, and the tens of thousands of people who depend on us,” he said in an interview with the Financial Times.
These companies would argue that protecting so many jobs is compliant with ESG criteria, but such moves can also be seen as important for meeting the 2030 targets of the UN's Sustainable Development Goals (SDGs). It could be argued the mass exodus of international companies from Russia will negatively impact the SDGs, given that it will cost many thousands of jobs and bring about an increase in poverty levels.
Profits? Morals? Which way are companies turning over Russia?
Such stances, however, risk dampening the impact of the sanctions imposed upon Russia.
“Sanctions do not work if applied half-heartedly," says Daniel Clarke, an analyst at GlobalData. "Except for the pharmaceutical sector, the non-Russian companies left in Russia are putting money before morals and profit before people. They either do not care or do not understand how sanctions work. Some companies have said that they are remaining in Russia because they have a moral responsibility and obligation to consumers. This is a tone-deaf response to the concerns of consumers worldwide, including in Ukraine, who face the continued direct or knock-on effects of the conflict.
“As important as the Russian market may be, doing business there will impact corporate reputations and see companies lose stakeholder loyalty and fall behind their competitors on ESG.”
International companies operating in Russia face a key dilemma due to the Russia invasion of Ukraine – to stay or to leave the country. Whether companies decide to leave Russia as a response to the sanctions, or to stay because of complex franchise agreements preventing them from taking executive action, or to remain for humanitarian reasons, there are different sets of ESG risks that are going to face. However, it remains to be seen how the Ukraine-Russia conflict will end, and how this will influence the international expansion plans of the multinational companies after the war.
Many multinationals – particularly those in the pharmaceutical industry – can point to humanitarian reasons to justify their continuing presence in Russia, and have backed this by donating the profits to organisations supporting the people of Ukraine. As Clarke says, however, for sanctions to work they have to come with a heavy impact, and some of the companies still active in Russia may find, as the conflict continues, that their justifications for operating in Russia become more and more unpalatable as the suffering in Ukraine worsens.
This article originally appeared on our sister website Investment Monitor.