When the Soviet Union collapsed in 1991, corporations rushed behind the Iron Curtain to plant their flag on Russian soil. Icons of capitalism, from Apple to McDonald’s to Adidas, continued to build profitable businesses in the years that followed as consumers clamored for a slice of Western lifestyle. In just a few days, these long-standing bonds were severed.
After Vladimir Putin ordered an invasion of Ukraine on February 24, a massive corporate exodus took hold, starting with BP Plc and accelerating rapidly as dozens of global brands followed. The chaotic outcome has companies wondering if they will ever return, how they will pay the workers and assets left behind and if they could recover the value of their abandoned businesses in a country that has almost overnight become the most sanctioned nation in the world. .
The closure of the Golden Arches in Russia, announced on March 8, is emblematic of the country’s downfall in the same way that the entry of the fast-food chain decades earlier had cemented the nation’s reputation as a place of promise. Hundreds of Muscovites had lined up around the first McDonald’s when it opened on January 31, 1990. Now images of Russians hoarding the latest Big Macs and selling high-priced Happy Meals have taken over social media. The future of the 850 stores McDonald’s has closed and the 62,000 local employees the company said it will continue to pay is unclear.
With the legal status of the assets in doubt – Russia has said it may nationalize companies left behind – it could take years for companies to return, if they ever do. Preparing for a second act in Russia carries enormous risks, from the duration of sanctions, to the logistical and financial challenges of rebuilding an operation, to consumer backlash – both from Russians who might feel abandoned by cherished brands and by those who don’t. want to be complicit in financing Putin’s war machine.
Andrew Forrest, the chairman of iron ore producer Fortescue Metals Group, put it bluntly, saying “if you’re making a dollar in Russia right now, I’d call it blood money.”
Some companies have sought to challenge this perception. French dairy giant Danone SA, which employs nearly 9,000 workers in Russia, has defended its operations in the country, arguing that Russian parents have every right to buy products such as infant formula like people elsewhere.
But many companies saw the writing on the wall and rushed in, often at considerable cost. BP has announced it will sell its stake in Kremlin-backed oil giant Rosneft, which is expected to lose $25 billion in the process. Goldman Sachs Group Inc. has become the first Wall Street bank to end operations in the country after moving some of its staff from Moscow to Dubai. Carlsberg AS, Russia’s biggest brewer, said it was examining all options for its seven production facilities which employ 8,400 people.
In the short term, companies that have closed idle stores or factories but are keeping workers employed will face the challenge of paying them. They no longer generate significant local sales and the sanctions can make it difficult or impossible to transfer money from abroad. For McDonald’s, continuing to pay workers in Russia, along with rental fees and supply chain expenses, will cost around $50 million a month. That equates to 5 to 6 cents per share per month, CFO Kevin Ozan estimated.
According to the statistics agency Rosstat, about 6.5% of the Russian workforce is employed by organizations owned by foreigners or jointly owned by Russians and foreigners. Foreign companies employing at least 150,000 people in the country have announced a suspension of operations, store closures, an investment moratorium or other measures since the attack, according to calculations by Bloomberg. The actual number affected may be much higher, given that not all companies have disclosed these milestones or employment numbers.
Adidas, with 7,000 employees in Russia and neighboring states, transferred funds to Russia as tensions with Ukraine escalated. Executives did not say how long the reserves could last, but expressed optimism that operations would resume later this year.
“I hope the situation will normalize,” CEO Kasper Rorsted said. “When this situation normalizes, neither you nor I will know.”
Companies have taken a variety of approaches, often depending on their country of origin. Asian companies have generally been slower to respond, although at the end of this week companies like Fast Retailing Co., the Japanese owner of the Uniqlo clothing chain, and Japan Tobacco Inc. also joined in. others to close their Russian operations or suspend their investments. the.
Some closed entities, such as French DIY retailer Leroy Merlin with 45,000 workers in Russia, remained open.
Others want to show their commitment to the local workforce and continue to provide a vital service for ordinary consumers. Ride-sharing app BlaBlaCar, which has around 30 million users in Russia, said it would have to lay off its 100 Russian employees overnight if it had to pack its bags, which is why it will stay put for the moment. Still, the company will stop all new investments in the country.
Publicly listed companies are more likely to act as they want to avoid being shunned by financial markets due to reputational risk, said George Voloshin, director of venture advisory firm Aperio Intelligence.
“Privately, CEOs have probably said to themselves that they would prefer to stay if possible, but given the pressure on them and on brands in general, it is difficult to do so,” Voloshin said.
According to Maria Shagina, a visiting senior researcher at the Finnish Institute of International Affairs, who has studied Western sanctions against Russia, it can take several years for companies to return to markets that were previously subject to sanctions. In the case of Russia, this vacuum can end up creating pressure from below, as people lack access to their favorite brands and face unemployment in a failing economy.
The Russian effect on companies’ bottom line varied widely, depending on the industry and time spent establishing a presence. But the withdrawal completes a shift that was already underway as the political mood darkened in the years following Putin’s annexation of Crimea in 2014.
Prior to the attack on Ukraine, business operations in Russia were more decoupled from government relations between the country and the West, as evidenced by many companies that continued to operate in the country after the annexation of Crimea in 2014, said Lou Naumovski, a former Canadian diplomat and businessman with 40 years of experience in relations between Western companies, Russia and the Soviet Union.
This time, the question is whether the Kremlin’s actions have “irreparably poisoned the business climate”, he said.
Russia has largely remained an economy that feeds on its vast natural resources, from oil to titanium, rather than becoming a market for local technology, engineering or consumer goods, reinforcing its dependence on foreign brands. At the same time, the need for Russian oil and gas, in particular, has placed a considerable financial burden on businesses and consumers abroad.
German industrial giant BASF SE needs gas-fired power to support its sprawling operations in Ludwigshafen, the world’s largest integrated chemical complex which is connected to Russian gas fields via the pipeline system and has no significant storage. This led to a frantic race in the days following the invasion to find alternative electricity providers.
Some companies that feel a duty of care to Russian workers who are paying the price for Putin’s decisions may choose to wait out the public fury and look for an opportunity to reset. At this point, however, it is inconceivable that a major Western company would begin to return before the end of the war.
But with the terms of any truce looking unclear and Putin possibly stepping up his military campaign even further, Russia’s image as a place to do business is set to take a lasting blow.
“The crippling effect will be long-lasting,” said Shagina, the researcher. “It will take a long time to whitewash Russia’s image.”
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