How does conflict affect corporate reputation? Brittany Golob examines the impact on business of Russia’s annexation of the Crimea

Renowned war theorist Carl von Clausewitz wrote: It would be better, instead of comparing [War] with any Art, to liken it to business competition, which is also a conflict of human interests and activities; and it is still more like State policy, which again, on its part, may be looked upon as a kind of business competition on a great scale. Besides, State policy is the womb in which War is developed, in which its outlines lie hidden in a rudimentary state, like the qualities of living creatures in their germs.

The relationship between business, war and the state has drawn ever closer since 1832 when Clausewitz penned those words. It is no less true today as the world makes sense of the annexation of the Crimea by Russia, throwing what was a relatively peaceful relationship between the former Cold War foes – effectively the members of NATO and Russia and its former republics – into confusion. The impact President Vladimir Putin’s decision has on geopolitics will become clear with time. The impact it has on business, and on the reputation of Russian business, is a tale that can be told and retold throughout modern history, with only the circumstances altered.

The relationship between the general economy and warfare is well-documented, however the challenge for communicators arises when taking into account the ways in which conflict impacts corporate or national reputation. For Cadbury, outposts in places like Zimbabwe and Lebanon made armed violence part of daily life. Bombs from the Israeli Air Force into Beirut forced one factory manager to make do with limited resources instead of shutting down completely. Simon Taylor, current crisis consultant for consultancy Open Road and former global crisis director at Cadbury, says, “It’s amazing what a management can do with half a dozen satellite phones to keep going. The flexibility of western businesses can be quite remarkable in countries where it’s quite difficult to do business.” The business may benefit from its commitment to the local community by sticking it out through a period of violence. In Taylor’s experience, certain factories were of the major job providers in those locations. By staying open, despite violence and loss of capital, local stakeholders appreciate that commitment in future.

Corporate social responsibility, Paul Bell, director of business development at Albany Associates, says is one of the best defences a company can have in such a situation. By dealing with local stakeholders and ensuring the company has a good reputation both in its community and with its investors, it can deflect some of the risks that armed violence poses. The question, he says, in deciding whether to stay open or to cut and run is a balance of how much a company will save by staying versus how much of an impact its withdraw of capital will have.

He points to Aggreko, an electricity company that built its business on the failure of governments to invest in their utility infrastructures. “That’s what happens in war,” Bell says. “Smart entrepreneurs who are prepared to take the risk are rewarded.”

Armed violence is a threat to reputation, and yet, it is a fact of life for certain companies. Those that operate in places with unstable political systems or with a history of violence – often in the Middle East or sub-Saharan Africa – are both aware of the risks when going in and prepared to meet them when they become an issue.

Extractive firms have to have explicit, detailed crisis management plans in place to protect reputation when violence is a known risk. Last January, BP and Statoil found their interests in Algeria under threat from an armed militia. Though they had to shut operations down, their communications to stakeholders throughout the crisis was intended to mitigate both fear and reputational risk. Lonmin’s involvement in the Marikana mining strikes had a massive reputational impact as the company’s inability to communicate with its labour force, coupled with its reliance on local law enforcement, contributed to the breakdown of law and order.

Countries that are aggressors or proponents of violence can have a consequent impact on companies closely aligned to their national brand. German industry took decades to recover from the impacts of World War II. Cold War issues aside, trust in German businesses was not resurrected until particularly recently. Prominent businesses, like Krupp, Siemens and Farben – now among the strongest companies in the world – were accused of complicity in the war, sometimes regardless of evidence, Professor Jonathan Weisen of Southern Illinois University writes in the Journal of Holocaust Studies in 1999. It was not so much what, if anything, these organisations did, but the fact that they were German at a time when trust in Germany’s national brand was at it nadir.

Post-Cold War Russia has also had its share of difficulties in terms of reputation. Business that are partially state-owned or have close ties to the state are still perceived with wariness by businesses from democratic countries.

Taylor says there is a distinction in the ways in which multinational companies are affected by conflict. American defence contractors and private military companies benefitted financially from the wars in Iraq and Afghanistan. Yet for some, like Halliburton and its subsidiary, KBR, the wars had a negative impact on corporate reputation. Taylor says, “In the west, where reputation matters far more than in countries such as Russia or states which are not western style democracies. In the west, there is a big distinction in how Gazprom and the arms of totalitarian or non-democratic countries are viewed.”

The national brand affects the ways in which companies are perceived. James Acheson-Gray, MD of APCO Worldwide’s London office, says strong national brands can withstand minor conflicts, as when the U.S. public balked at France’s opposition to the war in Iraq and things like french fries were renamed ‘freedom fries.’ He says, “France’s brand was far too strong to be vulnerable to this kind of campaign. But a country that does not have a strong brand in the first place is undoubtedly particularly exposed to reputational damage due to conflict. The same is true of a corporate brand.”

The House of Lords’ report on soft power and the UK’s global influence writes that brands act as international ambassadors for Britain. It says, “The UK’s attractiveness and international connections provide opportunities for British businesses to export their products and services, but the UK’s economic strength and the companies behind it also help to forge connections and enhance the UK’s soft power by supporting its international recognition and reputation.”

The connection between business and politics can be of help to certain industries, Dr Marc Langendorf, head of corporate communications at Siemens AG, says. He mentions a Siemens PR campaign that addressed some of the issues surrounding Barack Obama’s reelection. Siemens was then referenced multiple times in the subsequent State of the Union address – a huge PR win. But, he says, this kind of interaction, must be entered into with consideration. “Before you start your communication efforts, you should closely look at which countries you should do that with. In those discussions you always have to be very very careful where you put your stakes and you always have to anticipate what could happen if the political system changes. So that’s always the risk you’re taking, but for that risk you should just be prepared like in all the other areas of communication.”

For a company looking at the bottom line and considering investment in a potentially risky country, the national brand is less relevant. Taylor says companies, and their investors, may value the opportunity offered by investment in a particular country or its industry more than the risks involved, to a point. “From an investment point of view,” Taylor says. “The sad truth is that most investors in the markets are not that fussed about human rights, tragically. However, I do think that if there’s potential economic risk, they will be asking management ‘Is this the right place?’” Bell agrees and adds that boardrooms around the world will likely be reconsidering the risks involved with doing business in Russia.

The current crisis in the Crimea has brought up a different set of issues when considering the links between country, reputation and conflict. Russian industry, while having made headway throughout the past two decades in reinventing itself in the eyes of foreign investors, faces risks because of its still omnipresent ties to Putin’s government.

Taylor says, “They’re in a difficult position. If they want to attract western investment, they’re going to have to distance themselves from the Russian government and that’s a difficult thing to do. What’s going to happen is they’re going to decide that staying on side with King Putin is the safer option in every sense of the word. In return, Russia and Putin will say ‘We’ll support you.’ They’re going to find it very difficult over the next few years to get more western investment.”

Already, foreign investors have begun to reconsider their involvement with Russian companies largely because of geopolitical factors, rather than simple business economics, particularly after the introduction of sanctions by the U.S. and EU. MasterCard and Visa, two of the largest payment services providers in the world, have already stopped serving Russian banks. McDonald’s and Deutsche Post have withdrawn from the Crimea. These actions, on the one hand, alleviate the vulnerabilities that those companies are open to by continuing to operate in a politically-charged situation and on the other signal to investors that it is mitigating the reputational risks associated with that situation. The fact that sanctions have been imposed only makes it easier to make that choice.

Recovering from the detriments the Crimea situation has had on the reputation of Russian business as a whole will take time, but western involvement with Russian extractive, industrial and basic materials companies may persist regardless of politics. Acheson-Gray says, “The financial markets in Russia fell sharply after Putin’s invasion of Crimea, clearly demonstrating that the trust in these companies and their future development had become uncertain. However, since 70% of Russian exports are in the field of energy and it exports very few manufactured products to the west there is clearly a limit on individual consumers’ opportunity to stage a boycott in international markets.” Putin’s stated commitment to investment in the oil and gas economy may be affected by recent developments. Russia produces about 12% of the world’s oil and holds 20% of global liquified natural gas reserves (LNG), according to think tank the American Enterprise Institute. The extractives industry also accounts for 70% of Russian exports, according to EY. There may be two consequences of the Crimea conflict: one in which western companies elimintate Russian businesses from their supply chains in or der to minimise risk, thus costing Russia money in terms of exports and two in which Russian extractives are not affected, due to their prevalence in the market.

America’s decision to sell LNG to Europe may make it increasingly difficult for Russian extractive companies to continue selling to Europe in the short term as well. The IMF’s economic relief programme offered to Ukraine is focused on the lessening of ties between Ukrainian national oil company Naftogaz and Gazprom. The IMF’s statement on the matter says, “Over time, the program will focus also on improving the transparency of Naftogaz’s accounts and restructuring of the company to reduce its costs and raise efficiency.”

Conflict, violence, war and geopolitics all have an impact on the ability to do business ‘as usual.’ Reputation, a difficult thing to maintain in normal circumstances, becomes a key issue in times of war. But, the impact war has on corporate reputation is circumstantial. Bell points to political questions in Qatar as inhibiting western investment on the scale of that seen in the UAE, “Investment decisions are looked at through a prism that is reflecting the political situation. The closer the relationships between companies and governments are, the more a company will be affected reputationally in terms of license to operate.” It depends, Bell adds, on the importance of the company’s offer or bargaining position. Taylor says, “Companies have got to look at the geopolitical risk much more.”

Reputation is one of the most important things a business owns. Conflict, as Clausewitz points out, is inherently linked to the economy. For business, reducing risk during times of geopolitical crisis is tantamount to protecting reputation.