When British oil giant BP announced in February 2003 that it was sinking $6.75 billion into a joint venture in Russia, it heralded a new era of Western investment in a country still struggling to get on its feet following the Soviet Union's collapse.
With its massive natural resources and a large population eager for everything from candy bars to luxury cars after decades of deprivation, Russia became an enticing new market for foreign companies when it opened its doors for business in the 1990s, in the wake of the collapse of communism.
But economic instability and a weak rule of law kept many of those companies out during that first decade -- and the Russian government's default on $40 billion in debt in 1998 prompted some foreign firms, most notably banks, to close up shop.
BP's surprise deal to buy half of independent oil producer TNK was the largest foreign investment in Russia to date. It attracted global attention to Russia and -- along with the rising price of oil -- helped kick-start a multiyear foreign investment boom in Russia in various sectors, including consumer goods and banking.
A prominent beneficiary of the big oil deal was President Vladimir Putin, who was reaping the rewards of the rising oil prices that handed him crucial political capital as Russian economic growth surged during his first two terms, in 2000-08. Putin had implemented some key reforms, including improving the Tax Code, and was winning accolades from the business community.
Now, nearly 20 years later, BP's decision to quit Russia over Putin's unprovoked invasion of Ukraine marks the start of what may be a major exodus of foreign companies from the country, analysts say.
With several companies already rushing for the exits, a broader move to abandon a toxic Russia would deepen its decoupling from Western economies, which began in earnest last week with major sanctions against the country's financial sector -- and would worsen what is now expected to be a sharp economic contraction this year.
Sensing danger, Russia has moved to slow the exodus by imposing capital constraints. On March 1, Prime Minister Mikhail Mishustin announced a temporary ban on foreigners selling assets, claiming Western companies were being pushed out by "political pressure," not economic factors. He did not provide evidence, and it was unclear how effective the bid to bar the door might be.
BP announced on February 27 that it would be selling its 19.75 percent stake in Rosneft, the state-owned company run by close Putin associate Igor Sechin, citing Russia's "act of aggression" against Ukraine.
BP acquired most of the stake when Rosneft took over TNK-BP in 2013, paying the British company a combination of cash and shares for its 50 percent stake.
Russia's invasion "has caused us to fundamentally rethink BP's position with Rosneft. I am convinced that the decisions we have taken as a board are not only the right thing to do, but are also in the long-term interests of BP," CEO Bernard Looney said in a statement.
BP was the largest Western oil company in terms of proven reserves in 2020, thanks in large part to its stake in Rosneft. Royal Dutch Shell, the fifth-largest among Western firms, announced the following day that it, too, would exit all its projects in Russia, including a major liquefied-natural-gas plant with Kremlin-controlled gas giant Gazprom.
Nigel Gould-Davies, a Russia analyst who served at the British Embassy in Moscow in the 2000s, called the oil giants' decisions a "remarkable" development, noting that their Russian investments had long been profitable. "It shows how serious BP and Shell think this crisis is politically and financially," he said.
U.S. giant ExxonMobil and France's TotalEnergies have not announced their departure, but TotalEnergies said on March 1 that it will no longer provide capital for new projects in Russia.
ExxonMobil owns a 30 percent stake in a natural-gas project in Russia's Far East with several partners, including Rosneft. TotalEnergies owns a nearly 20 percent stake in Novatek, Russia's second-largest gas producer, and stakes in several projects.
Jeffery Sonnenfeld, a professor at the Yale School of Management and an expert on corporate governance, says he expects other Western companies, including those outside the energy industry, to exit Russia or shut production and distribution. "Others will get on board, it's just a question of who moves first," said Sonnenfeld, who is advising companies with exposure to Russia about halting those ventures or pulling out altogether.
He says Russia is not a major market for most companies, so in many cases it won't have a material impact on their earnings.
Chris Weafer, the founder of Macro Advisory, which consults foreign companies on Russia, says a lot depends on Putin's next steps.
Russian forces continue to attack Ukraine in what Putin has increasingly indicated is an effort to overthrow the Western-leaning, democratically elected government and install a puppet regime.
If there is a serious escalation in the war and more sanctions are imposed by Western governments, many foreign companies may exit or reduce their exposure, Weafer says. The sanctions, in any case, are making it much harder for Western companies to do business in Russia. "Most boards of companies working in Russia will be at least considering the question -- should they be following BP and Shell," he said.
Despite periods of instability, Russia has been a lucrative market for many foreign companies over the past two decades, with profit margins above average. However, that will not stop them from leaving, Weafer says. "More often than not, the company's reputation risk is a lot more important than financial gains," he said.
Hollywood studios Disney, Warner Bros., and Sony Pictures Entertainment said they would pause theatrical releases of upcoming films in Russia to protest its invasion of Ukraine.
Dell Technologies said that it was freezing computer sales to Russia, and Delta Air Lines suspended its ticket-buying partnership with Russian airline Aeroflot.
U.S. automaker General Motors and Germany's Daimler Truck suspended some business in Russia.
The United States and allies have suspended semiconductor-chip exports to Russia as part of its sanctions package. Chips are essential for the production of cars.
Sonnenfeld says the reaction by foreign companies from various countries and across sectors to Russia's invasion has been impressive so far. He says fashion and consumer-goods companies have historically advanced social-change issues, but this time it is coming from energy, finance, and professional services.
Consumer-goods companies with large operations in Russia include Pepsi, Danone, Nestle, Phillip Morris, and McDonalds, whose opening of a restaurant in Moscow in 1990, the year before the U.S.S.R. collapsed, was seen as a milestone on the the road to capitalism.
Weafer says it would be a blow for the Russian economy if there were a major exodus of foreign firms, adding that Russia doesn't need the money as much as the expertise, including technology and best practices.
If companies start to quit Russia en masse, "it'll be a very long time before the economy can recover from it," he said.