The investment ban comes after more than 600 multinational companies announced their intention to voluntarily leave Russia, while making the country less attractive to companies planning to stay. At least 155 companies resisted is asking to exit or scale back operations there while 96 others are delaying new investment or trying to buy time, according to Jeffrey Sonnenfeld, a Yale professor who tracks business investment in Russia.
“You don’t have to eat at McDonald’s to feel the impact of its closure,” said Aaron Klein, senior fellow at the Brookings Institution. “For average Russians, seeing branded Western companies leaving Russia sends a message that they are in danger of returning to the Soviet era of society.”
US expands sanctions on Russia as questions about effectiveness rise
Intel’s exit comes after more than two decades of business collaboration at a research and development center near Moscow, where teams of engineers are reportedly working on advanced chip technology for use around the world.
The company said it was halting business operations there ‘with immediate effect’ in response to Moscow’s unprovoked attack on neighboring Ukraine, according to a Wednesday declaration on its website. This stopped all shipments to Russia and Belarus on March 3, and has previously issued statements condemning the violence.
“We are working to support all of our employees in this difficult situation, including our 1,200 employees in Russia,” the company wrote in an unsigned statement. “We have also implemented business continuity measures to minimize disruption to our global operations.”
In announcing the new sanction measures, the Treasury Department also said it would stop US banks from processing Russian debt payments in dollars, bringing the country closer to default. While the first sanctions were aimed at severing Russia’s ties with the global business community, those announced on Wednesday were aimed at making that split permanent.
“Today [executive order] will ensure the lasting weakening of the global competitiveness of the Russian Federation,” reads a White House fact sheet on the new measures.
The investment ban is unclear to many US companies that continue to operate factories and other facilities in Russia. Over time, maintaining these facilities will require some form of investment, which could require the United States to scrutinize individual company decisions, said Ariel Cohen, nonresident senior fellow at the Atlantic Council, a think tank.
“Is the investment intended to renovate existing production lines? If you need to replace parts of machines, even entire machines, does this come under these penalties? Cohen asked. “The answer is between Treasury and legal interpretations on a case-by-case basis.”
Koch Industries, which operates a large glass production company in Russia, has already suspended new capital investments but has been reluctant to shut them down.
In an emailed statement Wednesday, company spokesman David Dziok said Koch would “comply with all applicable sanctions, laws and regulations” regarding its operations, and would “closely monitor the situation and change our decisions if the circumstances warrant it”.
In a March 24 email to employees, President and Chief Operating Officer Dave Robertson said abandoning his glass factories in Russia “would do more harm than good” because it would expose employees to prosecution or harassment by the Russian authorities. Moreover, he added, Moscow would seize the factories and keep them open anyway.
“Yes [Koch] If we left these glass facilities, it would give full control of the assets to the Russian government, which we believe would keep them in operation and capture 100% of the financial profits,” Robertson wrote.
In the letter, Robertson also said the company “condemns the heinous actions of the Russian government in Ukraine.”
Some legal experts have argued that the Biden administration deliberately left the definition of “investments” ambiguous to force companies to determine for themselves the level of legal risk they wish to assume by continuing to operate in Russia. Many companies will likely err on the side of caution, said David Szakonyi, assistant professor of political science at George Washington University.
“Companies doing business in Russia are going to have to spend a lot of time and resources to fully understand this new investment rule, which in turn could create enough incentive to pull out of the Russian market altogether to avoid get it wrong or cross the line,” Szakonyi said.
“The executive order prohibits new investment so that it does not impact existing factories,” the Treasury Department said in a statement. “As is customary for the implementation of other executive orders, the Treasury’s Office of Foreign Assets Control will issue additional public guidance for the private sector. Each company faces different circumstances and we are in touch closely with the private sector to answer individual questions.
Sonnenfeld said the investment ban is likely to have minimal impact on companies’ long-term plans, as few multinationals want to pursue new Russian investment at this stage. Some may try to redefine what counts as a new investment, as opposed to a capital upgrade to maintain existing operations.
The White House continued to grant exemptions to companies that support sectors important to humanitarian activities, which it specified to include food and agricultural products, medicines and telecommunications services that connect the Russian people to the outside world. .
Several U.S. companies have cited the exemption as justification for continuing sales there, including Cargill, one of the world’s largest agricultural companies. Last month it suspended all investment in Russia but said it would maintain a staff of around 2,500 there to continue supplying ‘essential foods’ such as bread, infant formula and cereals. .
For other companies, the decision to pull out of Russia is complicated by contracts with business partners. Major US hotel chains, including Hyatt and Hilton, continue to operate hotels in the country that are owned by third-party companies.
A Hyatt spokesperson said the company is “currently evaluating new measures and [continues] to assess our existing agreements with third-party entities that own Hyatt hotels in Russia. Hilton spokeswoman Meg Ryan said the company will continue to comply with all applicable trade sanctions.