Decision Vision Episode 158: Should I Stop Doing Business in Russia and Belarus? – Mike Blake, Brady Ware & Company
The Russian invasion of Ukraine prompted host Mike Blake to reflect on the issues which now affect whether companies should stop doing business in Russia or Belarus. He shared his own personal experience working and living in the region, and how sanctions now make doing business not only possibly illegal, but virtually impossible, given the shutdown of banking, access to technology, and other sanctions. Mike also discussed questions around sourcing materials from other places, physical and personal risks, the potential for persecution, the impact on the economy in Russia, and much more. Decision Vision is presented by Brady Ware & Company and produced by the North Fulton studio of Business RadioX®.
Mike Blake, Brady Ware & Company
Michael Blake is the host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms, and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. He is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.
Mike has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.
Brady Ware & Company
Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth-minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.
Decision Vision Podcast Series
Decision Vision is a podcast covering topics and issues facing small business owners and connecting them with solutions from leading experts. This series is presented by Brady Ware & Company. If you are a decision-maker for a small business, we’d love to hear from you. Contact us at firstname.lastname@example.org and make sure to listen to every Thursday to the Decision Vision podcast.
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Intro: [00:00:02] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional, full-service, accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.
Mike Blake: [00:00:22] Welcome to Decision Vision, a podcast giving you, the listener, a clear vision to make great decisions. In each episode, we discuss the process of decision-making on a different topic from the business owners’ or executives’ perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.
Mike Blake: [00:00:43] My name is Mike Blake, and I’m your host for today’s program. I’m the managing partner of the Strategic Valuation and Advisory Services practice for Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia. The SVAS practice specializes in providing fact-based strategic and risk management advice to clients that are buying, selling, or growing the value of companies and intellectual property. Brady Ware is sponsoring this podcast, which is being recorded in Atlanta for social distancing protocols.
Mike Blake: [00:01:17] If you would like to engage with me on social media with my Chart of the Day and other content, I’m on LinkedIn as myself and @unblakeable on Facebook, Twitter, Clubhouse, and Instagram. I also recently launched a new LinkedIn group called A Group That Doesn’t Suck or Unblakeable’s Group That Doesn’t Suck. So, please join that as well if you like to engage. If you like this podcast, please subscribe on your favorite podcast aggregator, and please consider leaving a review of the podcast as well.
Mike Blake: [00:01:47] Today is going to be a different kind of show. I almost always have a guest on the show, but the timeliness and nature of the topic really don’t permit that in a way that is practical or frankly that I’m personally comfortable with. And that is, should I stop doing business with Russia and Belarus?
Mike Blake: [00:02:13] All of you know that war has broken out between Ukraine and Russia roughly almost exactly a week ago, maybe it is exactly a week ago, starting with the invasion of Russian military forces into Ukraine and the subsequent bombardment and siege of several major population centers and military installations. The consensus among western analysts is that Ukraine has put up a very spirited defense and has likely surprised Russia with the tenacity and efficacy of its defense inflicting much greater losses than they had anticipated. And I think I agree with that. I think that that war would have been – I think the Russians – the Russian high command, at least, the military leaders thought that the war would be over by now. Maybe, no war even, whatsoever. But I’m not a military strategist. I’m not even very good at risks, so I’m not qualified to discuss that.
Mike Blake: [00:03:17] But I am qualified to discuss this general topic because we do now have a choice. And, of course, unprecedented economic and political sanctions have been levied on Russia and its partner in this, the Republic of Belarus, which is a republic that is wedged in between the western frontier of Russia and the eastern border of Poland. And those sanctions are ongoing, and they may yet be tightening. There may be more things that are to come.
Mike Blake: [00:03:58] And, it does pose a challenge for American businesses, and forget it for the moment about – forget for the moment about the political ramifications. Well, you can’t forget about them, can you? Because this is the most – this is the highest that our tensions have been with Russia or the Soviet Union since the Cuban Missile Crisis. And I don’t think that they’re there yet. I don’t think we’re at that level yet, but we are closing that gap fairly rapidly, especially with President Putin announcing that he was raising the alertness of the so-called nuclear deterrent of the Russian Federation.
Mike Blake: [00:04:41] Now, by way of background, you know, why am I talking about this? Why do I feel like I’m qualified to talk about this? Well, you know, as it turns out, I spent the early part of my career in Russia, and in fact, my first visit over there was to the Soviet Union in 1987. I had an unusually rare, just unusual, and very rare opportunity to actually study Russian in a public high school. It turns out that the French teacher there was also a Russian emigre who lived in the, at that time was a very big Russian Jewish community in Brookline, Massachusetts, and then commuted to our school up in Thomasville, Massachusetts.
Mike Blake: [00:05:26] And so, I had the unique opportunity in the late ’80s to actually start learning Russian in high school. And as time went on, of course, the Berlin Wall fell, the Soviet Union went away, and it was a fascinating time to be in college. It’s really, frankly, a joyous time to be in college because every day, you know, you’d wake up – for me anyway I’d try to get the Boston Globe or if I were in school, I’d get the latest, the newest copy of The New York Times. This is before, really, news on the internet was a thing. And read about what was the latest thing going on, which country was throwing off communism successfully.
Mike Blake: [00:06:07] And I even remember the first, like, real big-time rock concert I went to was to see Billy Joel on Long Island with my girlfriend at that time on the Storm Front Tour in 1990, I think it was 1990. And it was 1980 – it was December 1989, I guess. And that was the time – and Billy Joel comes out and he says, “How about Romania?” And we hadn’t heard about what had happened to Romania yet. Again, we didn’t have smartphones or anything like. We didn’t have cell phones unless you’re like a really big deal. You didn’t even have a car phone back then. So we had to wait until the concert was over. That’s when we learned that Nicolae Ceausescu, who was the dictator of Romania, had been overthrown and, very much like Mussolini, had been basically captured on the lam and captured by his own people and shot.
Mike Blake: [00:06:59] And, of course, history unfolded that the Eastern European and Russian sphere decided that communism was untenable. They threw off their chains and with varying degrees of success became liberalized democracies with some brand of what we consider as reasonably recognizable capitalism. And I remember that time, you know, the notion that there’d be an independent Ukraine was completely foreign. The notion of being independent Lithuania, Latvia, all that stuff, was completely foreign.
Mike Blake: [00:07:40] But it was against that backdrop that I was in college, so I did study Russian. I didn’t have a major at the time, but I was very fortunate in my college days to get a fantastic education. I basically said to the Russian Department head there, I said, “Look, I’m not interested in literature. I want to prepare – I want to be prepared to go over there and actually talk to people and do impactful things.” And so, to their immense credit, they did an independent study whose sole mission was to help me develop a real-world facility for the language. That later enabled me to be a student at the Mendeleev Institute in Moscow for a summer in 1992, living in Minsk, Belarus, working on a defense conversion and privatization project, economic transformation project from 1993 to 1995, and then doing something very similar in Ukraine from 95 to 97. And also, while I was doing that, I had a chance to learn the Ukrainian language both in-country as well as I was a graduate student at Georgetown.
Mike Blake: [00:08:53] To this day, I still have or have had up, until a week ago, I still do have Russian-speaking clients, have many Russian-speaking friends. I have Ukrainian clients, Ukrainian-speaking clients and friends. And at a very high level, this is very sad for me because it’s almost like watching a devastating family dispute and not being able to do anything about it. But, here we are. And, you know, I can communicate in any either of those languages. I consider myself bilingual in English and Russian. My Ukrainian is not nearly as good, but it’s good enough to understand what’s going on on the ground there without filtration through the American press or, frankly, through a translator.
Mike Blake: [00:09:47] And so, that’s a big preamble to that. If you want a perspective on what’s happening over there from a business perspective, I think I’m reasonably qualified. There are people who are more qualified, but the challenge is that many of them who are more qualified still have associates, friends, family in Russia and Belarus that might be targeted for retribution, retaliation. I didn’t even ask them to do this program on the off chance that they would say yes because I don’t want to put them – I don’t want to even put the possibility in front of them of putting their friends and family and their other commercial interests in danger.
Mike Blake: [00:10:27] So, while I’ll be the first to admit that there’s better out there and for purposes of this show, for better or worse, I’m the best you got. But I’ll do my best to make this adequate. And I hope that given my background, give you some perspective on not just my knowledge. But if you feel like there are inherent biases, and there are, like I’m the first guy to say, you know, it’s rare in international relations that there’s a clear wrong and a clear right. You rarely have that sense of moral clarity. There is here. There is no – there is no right side. There is no moral justification for what Russia is doing. Could Ukraine have maybe made some different decisions to make? Maybe they could have. I’m not sure. On the other hand, what’s going on, I think, simply proves every day why Ukraine thought it was important to be part of NATO. Russia is proving that every single day. And I’m not even sure they realize that.
Mike Blake: [00:11:36] So, I’m going to preface this here with a very important distinction that there is a massive difference between the Russian government and the Russian people. And the same goes for Belarus. My sense is – and we’ve seen this. We’ve seen that many people have risked their lives and livelihoods to take to the streets and protest in Russia against that government where they do not have the right to free assembly. They do not practically have the right to freedom of speech. They’re taking enormous personal risk, and there’s really unlimited power of the state to exact retribution. And I believe that they are the tip of the iceberg. I think for every one person you see that that is protesting, I think there are 10 or 20 sympathizers. I believe that. I just – but the powers of expression in Russia are very limited, and the levers by which power has changed would be changed are very limited, which is why Russia has historically had very messy powers of transition that date all the way back Ivan the Terrible.
Mike Blake: [00:12:56] But that having been said, the government is not unimportant. The government is directing the military action. The government has tremendous power over daily life and commercial life in Russia and Belarus. And, you know, there are some hard decisions to be made and I can appreciate that they’re hard to be made.
Mike Blake: [00:13:20] Beyond the sanctions, Apple and Microsoft have said they’re going to stop selling products and will stop updating their software. That’s something I wish they had done at the very start. I wish that that had been an economic sanction, but they’re late to the party, but they’re at the party and I think that that’s an underrated sanction. That’s going to be very noticeable throughout all strata of society.
Mike Blake: [00:13:50] General Motors is no longer going to sell cars or spare parts there. Other western automakers may well be following suit. I just – I don’t know. I haven’t seen all of that. And Boeing is also going to stop providing spare parts and repair services. And I suspect Airbus will very soon do the same, which is going to largely ground the civilian air fleet of Russia and Belarus, particularly Russia. Belarus still mostly uses Russian – vintage Russian-built aircraft [inaudible] and all that sort of thing.
Mike Blake: [00:14:25] So now, all that’s happening. But most of the listeners here are with Boeing. They’re not with Coca-Cola, McDonald’s. They’re not with the Big Four. They’re small businesses just like mine that are trying to make a go of things. And in the case of your business, you may very well be dependent, highly dependent upon resources from Russia and Belarus in some way. And there are real decisions that have to be made, and I hope that I can help you at least lay out what those decisions are.
Mike Blake: [00:15:05] So, let’s start with some very basic questions then move to the more nuanced. The first question is, is it legal for you to do business with Russia? And that’s something that you need to speak to an attorney with if it’s not extremely obvious. If you’re a small business, you cannot afford to fight charges of breaking economic sanctions. And, frankly, there’s so much ill will towards Russia at this point nationwide. Maybe, it’s one of the few things our country is unified on right now. That you don’t even want your company to be perceived as trying to break those sanctions.
Mike Blake: [00:15:52] So, that’s number one. Can you even legally do it? And if you can’t, there’s really nothing else to discuss. You can stop listening to the podcast, go off and do something else and make contingency plans if you haven’t already.
Mike Blake: [00:16:06] The second is, is your business with Russia existential? And that starts to get difficult. There are some materials that are very hard to get from any place other than Russia, such as palladium and platinum, which are rare earth elements that are very important in electronics, automobiles because they’re at the heart of catalytic converters, and other delicate but widely used devices in our society. There are other sources of them. Canada has some. South Africa has some. There are other sources, but Russia has been a big source of them. It helps when you’re the largest country in the world by landmass and you occupy 13 time zones. You’re going to have some rare Earth metals.
Mike Blake: [00:17:01] Many companies have been looking to Russia and Belarus for software engineering for years and have received great results in doing so. Can you switch? Can you easily switch? And, you know, I wouldn’t necessarily switch to Ukraine right now because I don’t know if they’re going to have power. I don’t know if they’re going to have internet. You know, if you want to support Ukraine, I don’t think that doing business with them is the way to do it. There are a number of charities out there that are supporting Ukraine in various forms, not the least of which is the Red Cross. You know, that would be a way to go. Don’t – I don’t know that I would necessarily counsel doing it as a show of solidarity. There are more efficient ways to do that. But the question you have to ask is, is it existential? And then, you know, and if it isn’t, if there are alternatives available, you probably want to take a hard look at them for the reasons that I discussed earlier and also because it’s now just more challenging to do business with Russia.
Mike Blake: [00:18:10] You know the first question is, how do you pay them? We’ve effectively severed the banking system, the Russian banking system, from the global banking system. So, even if Russia wants to do work for you, how are you going to pay them, right? It may consist of you taking a flight to Helsinki, a car to the Russian border, and meeting somebody there to hand a bag of cash to. I’ve seen that. I saw that done in the early days, post-Soviet Union, when I was in Belarus, in particular, because the banking system was neither sophisticated nor trustworthy. It was not unusual. It was unusual but it was not unheard of to encounter people or see people that were traveling with tens of thousands of dollars in a bag so they could settle payments between Belarus or Russia and a western country.
Mike Blake: [00:19:11] Back in the old days, there was a lot of barter trade going on. Pepsi beat Coke to the Russian market because they figured out a way to basically trade Pepsi for vodka. And I think maybe [inaudible] dollars. I don’t recall exactly. But that’s how they got there – that’s how they were able to convert their product into business and to cash there. You can’t even do that anymore ironically because most of the vodka brands, the Russian-sounding vodka brands, are actually distilled in the United States or in the west. Like Smirnoff, I think, is a Swiss brand of vodka now.
Mike Blake: [00:19:47] So, all these people are swearing off Russian vodka, I mean, that’s great. I think frankly other countries make better vodka than the Russians do. But it really – it probably actually is not making any difference one way or the other in terms of the Russian economy because most of that’s probably never hitting the Russian economy unless this is like a royalty fee or something.
Mike Blake: [00:20:12] You know, the next question is, how reliable are communication links going to be? It’s a drop-dead certainty that the Belarusian KGB, yes, they kept that name, or the FSB, the Russian version of the FBI or the Federal Security Bureau, is going to be eavesdropping and intercepting private communications, anything they can. They’re looking to – they’re looking to rat out potential traders in their minds. They’re looking to find security vulnerabilities and exploit them. They’re looking for any place that may be a source of hard currency and take it, and we’ll get to that consideration in a moment. But at any point, those communication links could be cut off either through an act of cyber warfare from the Ukrainians or an outright policy decision that cuts communication links or due to a Russian desire to either implement surveillance or to cut those communications off unilaterally.
Mike Blake: [00:21:32] The next consideration is, do the Russians still want to do business with you? I’m sure there are some Russians somewhere that think that invading Ukraine is a great idea that they buy into the Putin narrative, that Ukraine never should have been an independent country in the first place, et cetera, et cetera, et cetera. And as such, they’re going to be unhappy with the fact that we are supporting a country and sending them weapons that are inflicting massive casualties on the Russian Armed Forces and inflicting, already inflicting damage on vehicles that will take them multiple years to rebuild. And so, you have to kind of read the room. The Russians, the Belarusians, if they’re patriotic, in quotes, in that way. You have to take their temperature. They may or may not want to do business with you right now.
Mike Blake: [00:22:31] And if you’re doing business with Ukrainians at the same time, you have Ukrainians on your staff, those are going to be things that you’re going to have to confront and work out. As you might imagine, Ukrainians have a very dim sense of humor about this entire thing. And the Ukrainian diaspora in North America, as I’ve experienced it, has a reputation for being faithful to their home country and being very suspicious of Russian domination in any event. So, you need to be sympathetic. You need to be sympathetic to those sensibilities.
Mike Blake: [00:23:11] And then, now that Big Tech is pulling out, how do you keep your data secure? You know, the weekly updates that prevent or plug vulnerabilities and firewalls and so forth, those are going away. And any vulnerabilities that are found will start to be exploited and they may be exploited by Ukrainian cyberattackers. They may be exploited by other cybercriminals.
Mike Blake: [00:23:41] How are you going to ensure security of data? I’m not sure what the alternative is to do that. That may be something that you want to talk to your I.T. services provider about. I don’t think that’s going to be an easy question to answer.
Mike Blake: [00:24:00] I think you have to consider physical risk to personnel. I think the longer this goes on, the larger the probability of widespread social instability, whatever that means. It could be protests. It could be riots. It could be things that we can’t even think of.
Mike Blake: [00:24:30] And do you want your people in the middle of that? Do they want to be in the middle of that? And so, you need to think about that. Is it smart to have people in harm’s way? Is it worth it? Can you get them to stay? And beyond that, I think there’s a very real risk of persecution by the government. At some point, the Russians are going to be fed up with the fact that they can’t easily reach us except with a nuclear weapon. I don’t think there’s any way they’re going to conventionally confront NATO after seeing what they’ve seen over the last week. It’d be suicide.
Mike Blake: [00:25:13] But I would not put it past the Belarusian and Russian governments to start identifying western personnel as spies, as agent provocateurs, as potential saboteurs, as something undesirable to the Russian government, and make their lives uncomfortable, possibly jail them. And, you know, you have – and again, just as with the local population. There may not be much recourse. Basically, once the Russians get a hold of you, you’re there as long as they want you there. And right now, our State Department is going to have zero influence on getting somebody released. Again, there may be squads of sort of white right-wing thugs that are looking for foreign scapegoats that could put people in danger.
Mike Blake: [00:26:25] So, you know, we need to think about that. And alongside of that, we need to think very carefully about the risk of expropriation. It’s highly likely that Russia is going to default on external debt. I’d be very surprised that they didn’t. You know, we’re basically cutting off their ability to repay debt. Why would they make a special effort to repay it? Can they make their relations with us any worse by not paying their debt? I don’t think that they can. They can in other ways, but not in that particular way.
Mike Blake: [00:26:59] As I had predicted, their currency has gone from being semi-convertible to non-convertible again. They already have controls on sending currency, hard currency, dollars, euros, et cetera, outside the country. And if these sanctions go on long enough and relations get bad enough, the conversation inside of Russia is going to be, “Well, you know, what if we just seize the GM factory? What if we just seize the McDonald’s and hand it off to one of the oligarchs to run? Or, the Coca-Cola plant or Boeing repair facilities. Whatever it is that that’s over there, what if we just seize it? What if we just seize real estate?” What does a western company going to do? And the answer is most likely nothing. If that’s happening, your personnel are just trying to get out with their lives. That’s one of those deals. You know, you have a suitcase packed. Hopefully, you have an extraction plan at this point, and off you go. But that’s a very real – that’s a real, a very real concern. And I think there’s barely any recourse at this point that’s realistic.
Mike Blake: [00:28:19] To the extent that you’ve had insurance on your assets or people over there, you know, your insurance may no longer apply. You need to check your writers. I certainly think it would be hard to renew an insurance policy there. I don’t even know as you know this is just not on the actuarial table. How would you – how would you measure, manage, and price risk? So if insurance is important to the business that you’re doing there, I think that needs to be factored on whether or not it’s feasible to continue doing business with Russia and Belarus.
Mike Blake: [00:28:55] And then, finally, a very fundamental question going from the more finesse questions to of a more brute force question, can the Russians actually buy anything at this point? The ruble has collapsed. Stock market prices on the shadow markets are collapsing. And the ability of the country to generate income is basically limited to oil. And I suspect within another week or so, we’re going to see a generalized embargo on Russian oil and gas exports.
Mike Blake: [00:29:34] It’s not clear what their capacity is going to be to generate the economic energy whereby the Russians can be a customer, even if you overcome all of this. How are the Russians going to pay for anything that isn’t simply designed to keep themselves alive and in the case of the Russian government keep their military going? And so, I think that’s a very hard conversation you have to – or hard assessment that you have to make. The hope is that the Russian government will change in some fashion or change their policy or change the people and make the policy so that these sanctions will be quickly lifted.
Mike Blake: [00:30:20] But I don’t think that they will. I think, unfortunately, we have seen this is truly a second Cold War with the Russians. I think that most of these sanctions are here to stay for the foreseeable future, and I think it’s important to think about the long game. I’d be very surprised this is a 90-day or 180-day issue because the damage they’re doing to Ukraine in some cases is permanent in terms of lives, lives lost, but is going to take required decades to fully repair, and that’s even if they just stop today.
Mike Blake: [00:31:00] So, you know, think long term, and I’m not sure what the Russian’s ability to buy things will be except for the oligarchs and I’m sure, in spite of the sanctions, have billions of dollars socked away someplace if nothing else in gold. They’re not dumb. They knew these sanctions were coming. They’ve taken measures. But that’s okay. I don’t think the oligarch sanctions are going to be what moves the needle here anyway.
Mike Blake: [00:31:30] So that said, that’s what I’ve got in terms of laying out the decision on whether or not you should continue to do business with Russia and Ukraine. First of all, can you? And really, just, a lot of it boils down to whether or not you can. Can you do so legally? Can you do so? Do you have to? Is it realistically feasible to do so? And then, what risks in terms of the physical safety of your personnel and assets are you taking by continuing that practice?
Mike Blake: [00:32:05] And, I’m sorry if you find yourself in the situation of having to make that choice. I’m certainly very saddened about the conflict in general because I see places that contributed to the early part of my life that are at war and are being destroyed in real-time in front of my eyes. And I’d very much like it to stop. But they don’t care what I think.
Mike Blake: [00:32:37] So, that’s it. And with that, I’m going to wrap it up for today’s program, and I’d like to thank you for joining us.
Mike Blake: [00:32:43] We’ll be exploring a new topic each week, so please tune in so that when you’re faced with your next big business decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving a review with your favorite podcast aggregator. It helps people find us that we can help them.
Mike Blake: [00:33:01] If you’d like to engage with me on social media with my Chart of the Day and other content, I’m on LinkedIn as myself and @unblakeable on Facebook, Twitter, Clubhouse, and Instagram. Also, check out my new LinkedIn group called Unblakeable’s Group That Doesn’t Suck. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision podcast.