Management under sanctions – Economics – Kommersant

The managerial potential of Russian top managers has always been in the shadow of owners and major shareholders. Western sanctions have become an additional problem in the last year. An independent economist discusses the range of possible scenarios for the development of the situation for Russian top management in a column for Kommersant Alexander Zotin.

Manager, shareholder, state, employees, clients. The balance of interests of these groups, in theory, should create growth and development of the economy. But harmonic theory often runs into harsh practice. In institutional theory, much attention is paid to the contradiction between the principal (owner) and the agent (executive manager). But the management problems are by no means limited to this. For example, in the recent forced sale of the Swiss bank Credit Suisse to its rival bank UBS, the Swiss state, represented by banking regulator Finma, bypassed the interests of shareholders, depriving them of the opportunity to vote on the transaction.

Russia has its own set of contradictions. As we wrote before, in fact, we did not have a class of CEO in the Western sense. This is one of the problems of the Russian economy, where, as before, only shareholders and founders of companies are perceived as decision makers.

The state is accustomed to communicating only with owners, often taking into account the interests of employees, but top managers in this configuration have so far been poorly traced.

In the past 30 years, another additional dimension has been superimposed on the already established reality of a relatively weak class of managers in Russia in the past 30 years – sanctions from unfriendly countries (the first large packages went from 2014 and sharply increased in 2022).

The unprecedented sanctions pressure on Russia is spurring it to restructuring in many areas: the transformation of foreign economic relations, the rethinking of industrial, monetary and fiscal policies.

But the sanctions also affect corporate governance. There is a change in the role of owners and managers in relation to their business.

Here we have a whole matrix of possible scenarios: the first one is when both the company and its owners/top managers are not subject to sanctions; the second – owners / tops under personal sanctions, but the company – no; the third – when the owners / top managers are not under sanctions, but they act against the company; the fourth is that both the company and the owners/managers are under sanctions.

The first option can be skipped, the fourth is also quite simple: top managers and owners have nothing to lose in it. Such is the case, for example, of Alexei Mordashov, the head and main shareholder of Severstal. The third scenario is the personal choice of managers and shareholders. However, there were no mass exoduses of managers from sub-sanctioned companies, with the exception of the “Varangians”-foreigners.

The examples from the fairly common second scenario are illustrative. As a rule, managers who have fallen under personal sanctions leave the company and thus do not create additional risks for it. These are the stories of Vladimir Rashevsky, left board of directors of SUEK and a post of the CEO of Evrokhim, Dmitry Konov, left SIBUR, Andrey Guryev Jr., departed from the post of CEO of Phosagro, Alexander Shulgin, left post of CEO of OZON, Tigran Khudaverdyan, folded powers of the managing director of Yandex, and a number of others.

But there are exceptions. So, the head of Norilsk Nickel, Vladimir Potanin, remains its president, despite personal sanctions. Economists explain this decision by the fact that the company is a global player in the nickel and platinum markets in particular, so it is probably protected from sanctions by this very fact. However, in reality, the situation is more complicated: Norilsk Nickel is part of the Interros holding structure, already with its own managers – and it, in turn, is under sanctions, which may create additional risks for the international activities of the non-ferrous metallurgy giant.

Another aspect of the effect of sanctions is the activity of a particular company. For example, the sanctioned banks Sberbank and VTB (together with their CEO) in terms of business have adapted well to the new conditions. Since their activities are oriented towards the domestic market, they have, in a sense, even become beneficiaries of the withdrawal of foreign banks from Russia.

Companies that used to take loans abroad are now doing so with the help of Russian banks. But for companies (and their managers) working primarily with the external sector (oil and gas and metallurgy), the risks have grown.

Not only do we need to restructure all foreign trade logistics due to direct sanctions, but there are also risks of extraterritorial secondary sanctions.

An important case from foreign practice is the detention of a top manager of the Chinese telecommunications giant Huawei. In December 2018, at the airport in Vancouver, Canada, the authorities at the request of the United States arrested CEO and daughter of the founder of Huawei Meng Wanzhou and demanded her extradition to the United States (Meng’s plane flew from Hong Kong to Mexico in transit through Vancouver). Meng was accused of a Huawei-controlled company doing business with Iran, with HSBC bank involved in the payments and some transactions going through US clearing. At the same time, Huawei itself was not under sanctions at the time of Meng’s detention; the company fell under them later, in 2019.

Meng’s detention was significant for three reasons. First, Washington has raised its hand against a representative of China’s top elite. Secondly, in such cases of secondary sanctions (that is, not directly against the CEO of Huawei, but against Iran), the United States, as a rule, has previously taken actions against companies, but the managers were not touched. Third, and most importantly, US allies were willing to break their own laws.

The US arrested Meng at the hands of Canada. But the actions of the Canadian authorities look illegal from the point of view of international law. In Canada, there were no sanctions against Iran similar to the US ones. Thus, the basic principle of extradition laws, applied in almost all countries of the world, was violated: the actions of a person must be illegal both in the country requesting extradition and in the country of current residence (not to mention the fact that in the first hours of her arrest, Meng had no access to a lawyer). As a result, Meng spent almost three years under house arrest and was released to her homeland only at the end of 2021.

The lesson for the CEO of any large Russian company is obvious (in fact, there are several similar less high-profile cases that require close study, including by corporate lawyers – see, for example, Research handbook on unilateral and extraterritorial sanctions. Cheltenham, UK: Edward Elgar Publishing Limited, 2021). The West does not stop at breaking its own laws, the rule of law does not work in this case

In theory, the Ministry of Foreign Affairs together with other federal executive authorities could deal with the legal struggle for the rights of Russian companies and their managers. Perhaps some intergovernmental agreements within the framework of the BRICS or other organizations are required.

For example, opposition to primary and secondary sanctions could become the basis for expanding the same BRICS. However, little has been done so far in this area. Therefore, at the moment, the priority for any Russian top manager should be to ensure the maximum security of their own company (even when building business with friendly countries), and for companies, respectively, of their personnel and managers.