Western brands flee Russia in unravelling of ‘capitalistic diplomacy’

In late 1990, a former British cabinet minister reflecting on the end of the Cold War picked an image of consumer goods companies' inroads into the former Soviet Union to illustrate the transformations seen in what he called the "annus mirabilis".

There had been longer queues outside the new McDonald's in Moscow's Pushkin Square than at Lenin's tomb, Denis Healey marvelled in the Financial Times.

Russians' embrace of western fast food, soft drinks and jeans brands soon came to symbolise the triumph of "capitalistic diplomacy", Yale School of Management professor Jeffrey Sonnenfeld observed this week, noting that the US Department of State had encouraged American companies to open in Moscow.

"Political scientists used to argue that no two countries with a McDonald's would fight each other," he recalled. Even after Yugoslavia's bloody break-up contradicted that theory and tensions built between the west and Vladimir Putin's regime, brands such as McDonald's, Pepsi and Levi Strauss remained committed to Russia.

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Putin's invasion of Ukraine has changed that, prompting an exodus of western companies from Russia that is as sudden as their entry more than three decades ago.

ExxonMobil, BP and Shell are hurrying to offload Russian investments; Apple, Google and Facebook have curtailed their services in the country; Walt Disney and Live Nation have scrapped film launches and rock tours; and clothing brands such as H&M and Nike have followed carmakers including Volkswagen, Toyota and Mercedes-Benz in suspending deliveries or operations.

End of an era

For Vladislav Zubok, a professor of Russian history at the London School of Economics, the corporate retreat marks the end of the era whose beginnings he witnessed while passing Moscow's first McDonald's on his way to work each day.

“It was a new smell, a new sensation - fast service, everything was clean. Moscow was incredibly colourless [under the Soviet system] and you suddenly had a small island of light, colour and efficiency in the midst of the collapsing Soviet economy,” he recalled.

The withdrawal of Western companies “will be calamitous”, he predicted, although he said the “cultural decline” that will follow will not be as great as the cultural changes that foreign companies brought 30 years ago.

This week Russian consumers were showing both their continued appetite for western brands and their recognition that these may soon be out of reach. “People have been still buying, and buying like it’s going to end tomorrow,” a Moscow-based sales assistant at re:Store, Apple’s official distributor, said on Monday before the US tech group’s announcement that it would stop supplies to Russia.

The distributor’s decision to close its stores and website came after drastic price increases that accompanied the rouble’s collapse coincided with consumers’ fears of a shortage of Apple’s devices, which a fifth of Muscovites use, according to Beeline Analytics.

"I've been saving and saving for a MacBook," Larisa, a 30-year-old paediatrician, said on Wednesday. "I guess now I won't have it. And we will all switch electronics to Xiaomi [AND]we'll all be driving Ladas," she added, referring to the Chinese electronics company and the Russian carmaker.

Xiaomi is Russia's second-largest supplier of smartphones after South Korea's Samsung, according to GS Group. Samsung's app store stopped working in Russia on Wednesday, according to media reports, and with South Korea joining the US, EU and UK in imposing sanctions on Russia, Xiaomi looks poised to claim more of the market.

Deliveries

The west’s largest logistics groups have slammed the brakes on international deliveries to Russia, contributing to western companies’ decisions to suspend local operations.

Germany's DHL and Swiss freight broker Kuehne + Nagel on Wednesday followed UPS, FedEx and DPD in halting all shipments into Russia apart from foods and medicines.

Even then, the container shipping line Maersk warned on Wednesday that perishable goods could arrive damaged because of lengthy customs checks to identify sanctioned shipments.

As imports of products from clothing to Harley-Davidson motorcycles dry up, Russians also fear that extreme foreign exchange swings will make western brands that are still available unaffordable.

Alcohol imports stopped for several days after the euro rose to 90 roubles, a critical level for wine importers, according to Maxim Kashirin, the head of Simple Group, one of the country's largest alcohol distributors. Since then, the company has raised prices by 15 per cent and warned they could go higher.

“I’d be worried about the shortage of food items, and even if not, then about food getting extremely expensive,” said Olga, a PR specialist from Moscow. “My dog eats Belgian dog food and I have not been able to buy it for days.”

Russia is not one of the largest markets for most western brands. It represents just under 2 per cent of global sales for Nestlé, for example, whose sales of Nescafé began in the country in 1992. But for some companies, Russia was seen as a promising source of emerging market growth.

Western sanctions have killed such hopes. Their full financial impact remains unclear, but a weaker rouble and interest rates at 20 per cent will "give a big margin squeeze" in an already volatile market, said Bruno Monteyne, analyst at Bernstein.

Advisers say several multinationals are also concerned about setting precedents through their actions in Russia that may concern governments or consumers elsewhere.

Transparency

Nathan Freitas, founder of the Guardian Project, a software group that supports activists and others in high-risk situations, suggested Apple did the right thing by halting iPhone sales but not disabling Russian iPhones' access to the App Store as the Ukrainian government had requested.

“This is a new kind of war, when soldiers are posting TikToks from the battlefront and Google Maps is being used to identify where the tanks are. But you don’t want these things that were designed to serve people to be turned into weapons” by governments, he said. “I don’t think Apple needs to be a leader here. They should just take cautious, transparent steps.”

Joshua Brockwell, a director at Azzad Asset Management who is behind a shareholder resolution calling for transparency in Apple's foreign operations, warned that asking the tech giant to target iPhone owners could precipitate the "splinternet" phenomenon of web content being siloed by country.

Blocking access to the App Store “would, in effect, be punishing the average citizen for actions taken by [THEIR]government”, he added. “If you applied that standard to many other countries and governments around the world you could have complete chaos.”

Other companies were weighing the reputational risks of continuing to operate in Putin's Russia against the danger of setting a precedent that could compel them to halt sales in China's far larger market if Beijing were to invade Taiwan.

"If this were China, it would of course be very different," said one senior adviser to VW, which pulled sales from Russia last week.

Russians are now asking which western companies will be next to leave, with several naming Coca-Cola, PepsiCo and McDonald's among those they would miss most. The three companies did not comment when asked what their plans were for the Russian market, however.

CEO activism

Niklas Schaffmeister, managing partner at the brand and strategy consultancy GlobeOne in Cologne, noted the "CEO activism" trend in which executives have become more vocal on contentious issues, but said that food and consumer goods brands may be concerned that pulling out would "punish the Russian people" more than the country's authorities.

Some industry members said such mass-market brands had far more local employees and consumers counting on them than companies that had suspended operations.

However, Yale's Sonnenfeld said the reticence of some of the brands that were most representative of Russia's opening to the west in the 1990s was "an incredible change in the pattern". Consumer brands have typically led other industries in speaking out after human rights abuses in Xinjiang or racial equity protests, he noted.

“I’m astounded... I don’t know what they’re thinking,” Sonnenfeld said. “All I know is there’s turmoil within boards.”

There are other risks: some high-profile brands have faced furore over their responses to Russia’s invasion.

Ikea chief executive Jesper Brodin faced a backlash on social media after initially emphasising the need to "embrace togetherness and collaboration" in the region. He soon updated his LinkedIn post to add: "We don't have all the answers and we are working around the clock to assess how we together can best continue to support and help those in need."

Even for those multinationals that conclude they should stay in Russia, there may be flashbacks to the experience of the brands that were first into the market 30 years ago.

A shell-shocked economy and plunging currency in the early 1990s prompted the FT to write of the post-Soviet country’s most famous western entrant: “McDonald’s is going to make a mountain of rather useless roubles.”

Reporting by Andrew Edgecliffe-Johnson in New York, Nastassia Astrasheuskaya in Moscow, Judith Evans, Ian Johnston, Harry Dempsey and Peter Campbell in London, Leila Abboud in Paris, Patrick McGee in San Francisco and Joe Miller in Frankfurt

- Copyright The Financial Times Limited 2022