Business exodus from Russia has limited impact on Japanese economy

Companies across the globe have been fleeing Russia as the country faces increasing sanctions due to its ongoing invasion of Ukraine, raising concerns over the ramifications the crisis may have on the global economy.

Major Japanese manufacturers have added their names to the ever growing list of businesses halting operations in Russia, but economists note that the direct negative impact on Japanese firms is likely to be limited even though resource supply chain woes could cause long-lasting headaches.

“The ratio of business that Japanese firms do in Russia (to their whole overseas operations) remains quite small,” said Manabu Shimoyashiro, senior director of the Overseas Research Department in the Japan External Trade Organization. Since Russia is “not a major market” for them, the firms’ withdrawal “is not expected to greatly affect” Japan’s economy.

A total 347 Japanese firms were operating in Russia as of February, of which 45% were carmakers and other manufacturers, according to credit research company Teikoku Databank Ltd.

Among major automakers, Toyota suspended its plant in St. Petersburg earlier this month due to supply chain disruptions and ordered its Japanese staff back home.

Nissan Motor Co. and Mitsubishi Motors Corp., which both have local factories in Russia, also evacuated staff, joining some 330 global companies that have so far withdrawn from Russia in protest, according to Yale School of Management.

“Manufacturers are finding it increasingly difficult to continue operating in Russia as the Ukraine crisis inches toward a point of no return,” said Koichi Fujishiro, a senior economist at the Dai-ichi Life Research Institute.

“However, withdrawing from Russia itself is not expected to lead to downward revisions of earnings, with the focus instead on the impact of elevated crude oil prices,” he added.

Indeed, before recently stopping shipments of vehicles to Russia, Honda Motor Co. had long planned to cease exports to the country in fiscal 2022 due to a continued slump in sales.

The exodus has found support from Keidanren, Japan’s largest business lobby. Masakazu Tokura, who heads the group, said during a news conference on March 7 that it was unjustifiable to work enthusiastically with a country that has “forcefully disrupted international affairs.”

Japan joined other nations in freezing assets and excluding seven Russian banks from the international payment network SWIFT to disrupt trade and monetary transfers.

But “sanctions are a double-edged sword — those that implement them will also suffer damage in some way or another,” Fujishiro said.

Crude oil prices have been soaring to highs unseen for over 10 years as countries move to ban oil imports from Russia, a major producer. On the Tokyo Commodity Exchange on March 7, Middle East crude oil futures briefly hit ¥78,820 per kiloliter, their highest level since late August in 2008.

Precious metals have also been on an upward trend in recent weeks, with materials such as palladium, which is used as a catalytic converter in cars, and copper hitting record highs.

“A semiconductor shortage has already been weighing on automakers, but output may be hindered further if the current situation leads to a supply chain collapse for metals such as platinum and palladium,” Fujishiro said.

As the crisis deepens, some organizations foresee a massive contraction in Russia’s economic growth, with the Institute of International Finance saying that the country may log a double-digit decline this year.

Britain’s National Institute of Economic and Social Research said in a report earlier this month that global gross domestic product could shrink by 1%, or $1 trillion, by 2023, while inflation may climb up to 3 percentage points this year.

If the Russian economy contracts by 10%, its impact on Japan’s GDP is expected to be a relatively small downward pressure of about 0.15 percentage point, according to Shinichi Nishioka, senior researcher at the Japan Research Institute.

“Companies run a reputational risk” rather than an economic one in continuing to operate in Russia, Shimoyashiro said.

Some have also pointed out the potential need for government assistance in the event of a drawn-out crisis.

The Japan Association of Corporate Executives CEO Kengo Sakurada said during a news conference on March 1 that the government will have to aid companies that may be directly impacted if the crisis becomes drawn out, noting that it would be a matter of “endurance” until restrictions were lifted.