November 29, 2022

Donalds Hobby

World Finance Reviews

Western accountants and consultants face pressure to abandon Russia

Western consultants and accountants have poured into Russia for three decades, capitalising on booming international trade triggered by the collapse of the Soviet Union.

Professional services groups sought to sidestep geopolitical tensions as they built global empires but the invasion of Ukraine is forcing them to weigh up whether continuing to do business in Russia remains morally, commercially or politically viable.

“I don’t see how you can stand on stage and say that it’s acceptable to carry on doing business in Russia,” said the UK head of a large international accounting firm. “I can’t see an outcome that would allow that.”

People in the industry said this week that accounting and consulting groups were not yet discussing exiting Russia because this was “premature” while they rushed to comply with international sanctions and tried to help staff in Ukraine.

But on Tuesday evening, Grant Thornton became the first large professional services firm to go beyond rhetoric and cut ties with FBK, its 500-person Russian member firm which audits state oil company Gazprom, citing “the conflict in Ukraine”.

The Moscow offices of consultants McKinsey, Boston Consulting Group and Bain & Company employ about 1,000 people in total. All three said they would refuse to work for government entities in Russia but none has shut its operations in the country or stopped working for state-owned companies.

Grant Thornton had sales of $21.7mn in Russia last year compared with $6.6bn globally © SFL Travel/Alamy

The Big Four accountants — Deloitte, EY, KPMG and PwC — employ more than 13,000 people in Russia, roughly 1.1 per cent of their global total, through alliances with domestic firms. They condemned the war but gave few details on how the conflict would affect which clients they worked with.

Offices in Russia contribute only a small percentage of global revenues for most large professional services groups — Grant Thornton had sales of $21.7mn in the country last year compared with $6.6bn globally — but they are strategically important as they enable advisers to offer a “one-stop shop” service to multinational clients.

Exiting the country would cause problems, leaving “a big gap” in firms’ ability to audit the Russian subsidiaries and assets of multinationals, said a senior UK auditor. Large accounting groups had not generally withdrawn from states during geopolitical crises, he added.

Unlike groups such as BP and Shell, which have moved to divest holdings in Russian oil companies Rosneft and Gazprom, advisers have so far remained committed to their Russian offices.

Consultants and accountants will be legally required to cut ties with Russian clients targeted by western sanctions, but are under pressure from their staff, alumni and campaigners to go further.

It would have a “huge impact” if international firms stopped serving state-controlled Russian companies, said Vladimir Ashurkov, executive director of the Anti-Corruption Foundation, set up by Alexei Navalny, an opposition activist jailed by Russia’s president Vladimir Putin. “[M]y experience in international finance has taught me not to expect moral-based decisions by professional services firms,” he added.

In a rare case of a partner publicly deviating from a firm’s official line, the head of McKinsey’s 40-consultant Ukraine office, Oleksandr Kravchenko, said on Saturday that businesses should close their operations in Russia and stop working for any company in which the Kremlin has even a 1 per cent stake.

Andrei Caramitru, a former senior partner at McKinsey, told its global managing partner Bob Sternfels he should be “ashamed” for not closing the firm’s Moscow office, which serves 21 of Russia’s 30 biggest companies.

“It’s blood money, on your hands, staining you with each day that you keep it open,” he said in a LinkedIn post directed at Sternfels, who he said knew their clients’ “relationships with the Kremlin”. McKinsey declined to comment.

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Backlash fears

Consulting and accounting bosses were afraid of speaking out against Moscow in case staff faced retaliation by the Russian government or protesters, said people involved in internal discussions at the firms.

“We don’t care about $50mn or whatever in Russia,” said a person at one Big Four firm. But, “you don’t want staff beaten up or thrown in jail for falling foul of a Kremlin situation”.

A backlash could also damage their business interests, not only in Russia but globally — the Big Four reported combined revenues of $167bn last year. At least one of the Big Four disconnected its Ukraine offices from its international IT platform last week because of fears its global network was vulnerable to a cyber attack, said a person with knowledge of the matter.

Big clients

Quietly refusing to work for Russia’s state-owned companies also runs the risk of being barred from the country, said people at professional services firms. This work is “part and parcel of doing business in Russia”, said one.

While Grant Thornton’s disowned Russian affiliate audits the Gazprom group, PwC audits its German subsidiary. EY signs off the accounts of Rosneft, whose largest shareholder is the Russian state. PwC audits Sberbank, Russia’s largest bank, which has been sanctioned by the US. In recent weeks, EY won a tender to take over the audit in the future, said people familiar with the matter.

PwC and EY declined to comment on individual clients. EY said it was “evaluating existing and new mandates in light of new sanctions”.

New conflicts

Advisers also face a web of new international conflicts. Western governments are likely to call on them to help run their sanctions regimes but accepting such contracts would invite retaliation from Moscow, said a global executive at a Big Four accountant.

In a cold war scenario, his firm would have to consider whether to shrink its Russian operations or restrict its offices there to serving domestic clients, he said. “I don’t think anything is off the table,” he added, when asked if his firm might exit the country entirely.

Professional services firms remaining in Russia would potentially be unable to withdraw profits for years due to sanctions, said Jason Hungerford, a London-based partner at law firm Mayer Brown.

“The tanks aren’t turning around tomorrow, or next month, or next year. We’re in for the long haul here,” he said.

Network trouble

McKinsey, BCG and Bain operate as global partnerships with a single leadership structure but accounting firms are more complex. They are organised as federated networks of standalone national firms, owned by the partners in each country and with limited profit-sharing internationally.

Western sanctions would generally not ban their Russian entities from working for sanctioned companies. However, foreign staff could not serve clients that had been placed under sanctions, cutting against the integrated service marketed by the groups.

Sanctions could also make it difficult for Russian offices to use shared international resources such as IT systems, finance, conflict checking and marketing staff.

If Russia becomes increasingly economically and politically isolated, international advisers and other businesses could exit the country.

Removing a firm from a global network is usually a slow process. But accountants might attempt to present such moves as “graceful redesigns” with Russian member firms cutting formal ties from the global accounting groups rather than waiting to be kicked out, said the same UK head of an accounting firm.

It was possible that international accounting groups could still attempt to refer work to their Russian former colleagues afterwards, he added.

It might be that such a “graceful” solution can be found. But having paraded their credentials as leaders on ethics during the pandemic — and as their clients rush to suspend business in Russia — the self-appointed trailblazers could end up looking like laggards.

Additional reporting by Arash Massoudi