Western brands flee Russia in dismantling ‘capitalist diplomacy’

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In late 1990, a former British minister reflecting on the end of the Cold War chose an image of the incursions of consumer goods companies into the former Soviet Union to illustrate the transformations seen in what he called the “annus mirabilis”.

There had been longer queues in front of the new McDonald’s in Pushkin Square in Moscow than in front of Lenin’s tomb, marveled Denis Healey in the Financial Times.

Russians’ embrace of Western brands of fast food, soft drinks and jeans has quickly become symbolic of the triumph of “capitalist diplomacy”, Yale School of Management professor Jeffrey Sonnenfeld observed this week, noting that the US State Department had encouraged American businesses to open in Moscow.

“Political scientists used to say that no two countries with a McDonald’s would fight each other,” he recalls. Even after the bloody breakup of Yugoslavia contradicted this theory and the tensions built between the West and Vladimir Putin’s regime, brands such as McDonald’s, Pepsi and Levi Strauss remained committed to Russia.

Putin’s invasion of Ukraine was a game-changer, prompting an exodus of Western businesses from Russia as sudden as their entry more than three decades ago.

ExxonMobil, BP and Shell rush to unload Russian investments; Apple, Google and Facebook have reduced their services in the country; Walt Disney and Live Nation ditched movie launches and rock tours; and clothing brands such as H&M and Nike have followed automakers such as Volkswagen, Toyota and Mercedes-Benz in suspending deliveries or operations.

For Vladislav ZubokA professor of Russian history at the London School of Economics, the corporate retreat marks the end of the era he witnessed as he passed Moscow’s first McDonald’s on his way to work each day.

“It was a new smell, a new feeling — fast service, everything was clean. Moscow was incredibly colorless [under the Soviet system] and you suddenly had a little island of light, color and efficiency in the midst of the collapse of the Soviet economy,” he recalls.

The withdrawal of Western companies “will be calamitous”, he predicted, although he said the ensuing “cultural decline” will not be as significant as the cultural changes that foreign companies have brought there. is 30 years old.

A screenshot of a 1998 Pizza Hut ad featuring Mikhail Gorbachev © YouTube

“We will all drive Ladas”

This week, Russian consumers showed both their continued appetite for Western brands and their recognition that these may soon be out of reach. “People keep 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 ahead of the US technology group’s announcement of stopping deliveries to Russia.

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

“I saved up and saved for a MacBook,” Larisa, a 30-year-old pediatrician, said Wednesday. “I guess now I won’t have it. And we’re all going to switch from electronics to Xiaomi [and] we will all drive Ladas,” she added, referring to the Chinese electronics company and the Russian automaker.

Xiaomi is Russia’s second-largest smartphone vendor 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 seems on the point of claiming a larger share of the market.

Discontinued shipments

The largest Western logistics groups have curbed international deliveries to Russia, contributing to decisions by Western companies to suspend local operations.

On Wednesday, German DHL and Swiss freight broker Kuehne+Nagel followed UPS, FedEx and DPD in halting all shipments to Russia except food and medicine.

Even then, container shipping company Maersk warned on Wednesday that perishable goods could arrive damaged due to lengthy customs checks to identify sanctioned shipments.

As imports of products ranging from clothing to Harley-Davidson motorcycles dry up, Russians are also concerned that extreme fluctuations in exchange rates will make Western brands still available unaffordable.

Alcohol imports came to a halt for several days after the euro hit 90 rubles, a critical level for wine importers, according to Maxim Kashirin, the head of Simple Group, one of the largest liquor distributors in the country. Since then, the company has raised prices by 15% and warned that they could rise.

“I would be worried about the shortage of food, and even if it is not, about food becoming extremely expensive,” said Olga, a public relations specialist in Moscow. “My dog ​​eats Belgian dog food and I haven’t been able to buy any for days.”

Russia is not one of the biggest markets for most Western brands. That’s just under 2% of global sales for Nestlé, for example, whose Nescafé sales began in the country in 1992. But for some companies, Russia was seen as a promising source of emerging market growth.

Western sanctions killed such hopes. Their full financial impact remains uncertain, but a weaker ruble and 20% interest rates “will lead to severe margin compression” in an already volatile market, said Bernstein analyst Bruno Monteyne.

“China would be different”

Advisers say several multinationals are also worried about setting precedents by their actions in Russia that could worry governments or consumers elsewhere.

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

“This is a new kind of warfare, where soldiers post TikToks from the battlefront and Google Maps is used to identify where the tanks are. But you don’t want these things that were designed to serve people are weaponized” by governments, he said. “I don’t think Apple needs to be a leader here. They should just be taking careful and transparent action.

Joshua Brockwell, director of Azzad Asset Management which 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 compartmentalizing web content by country.

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

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

“If it was China, of course it would be very different,” said a senior adviser to VW, which pulled sales from Russia last week.

Consider local employees

Russians are now asking which Western companies will be next to go, with several citing Coca-Cola, PepsiCo and McDonald’s among those they would miss the most. However, the three companies did not comment when asked about their plans for the Russian market.

Niklas Schaffmeister, managing partner of strategy and brand consultancy GlobeOne in Cologne, noted the trend of “CEO activism” in which executives have become more vocal on contentious issues, but said product brands food and consumer goods might fear that withdrawing would “punish the Russian people” more than the country’s authorities.

Some industry members said these mainstream brands had far more local employees and consumers relying on them than companies that had suspended operations.

However, Yale’s Sonnenfeld said the reluctance of some of the brands most representative of Russia’s opening to the west in the 1990s was “an incredible shift in pattern”. Mainstream brands have typically led other industries to speak out after human rights abuses in Xinjiang or racial equity protests, he noted.

” I am amazed. . . I don’t know what they think,” Sonnenfeld said. “All I know is that there is unrest within the councils.”

There are other risks: some top brands have been furious over their responses to the Russian invasion.

Ikea chief executive Jesper Brodin has faced a backlash on social media after initially stressing the need to “embrace unity and collaboration” in the region. He quickly updated his LinkedIn post to add, “We don’t have all the answers and are working around the clock to assess how together we can continue to support and help those in need.”

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

An economy in shock and a plummeting 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

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