The departure of Western brands from Russia isolates Putin

By Lauren Debter

Want a new iPhone 11? A pair of Nike Air Max Dawns? An Ikea Kivik sofa? For the 144 million people in Russia, the above goods are included in a list – which is getting longer and longer – of imported products that have ceased to be available in Russian territory overnight.

Many Western companies have immediately severed trade ties with Russia, leaving a country that has been a source of growth for the past two decades but now runs the risk of the companies running smoothly and their reputation for the war in Ukraine.

“You just do not want your brand to be associated with this image in any way,” said Adam Tooze, director of the European Institute at Columbia University. “Do you want to leave this place?”

The exit of Western companies marks a period of increased isolation of Russia, which had easy access to imported goods since the end of the Cold War and then, when multinational companies entered the Russian market willing to serve a growing middle class. In 1990, McDonald’s was one of the first Western brands to open a store in Russia, with hundreds of Russians waiting in line to try American delicacies on opening day. Since then, it has opened more than 800 stores, even in the far east of the country near Japan, while looking to Russia and Ukraine for 9% of its total sales.

Dozens of other companies have followed suit, and today, most major brands have some sort of presence in the country, such as Starbucks, Marriott and Louis Vuitton.

However, the war pushed a number of brands to follow the exit path. Nike has announced that it is suspending online sales of its products in Russia because it cannot “currently guarantee their delivery to customers”. Canada Goose attributed its decision to suspend operations “in the difficult operating environment and the ongoing sanctions against Russia”. Ikea also temporarily closed 17 stores in Russia, citing “serious disruptions in the supply chain and trade.”

Asos stated that “in the light of the ongoing hostilities, [αποφάσισε] “It is neither practical nor prudent to continue to do business in Russia.” The fashion retailer accounted for 4% of its total sales in Russia and Ukraine last year.

TJX, the parent company of TJ Maxx and Marshalls, has said it will sell its stake in Familia, a 400-store-based retail company in Russia, and withdraw two executives from the board “as a sign of support for the Ukrainian people.” TJX paid $ 225 million to buy its stake in Familia in 2019.

Apple CEO Tim Cook wrote in a letter to the company’s employees that “moments require unity”, explaining Apple’s decision to stop selling products in Russia. H&M, Dell, BMW and Ford have also suspended operations in the country.

“What we are seeing is unprecedented,” said Stephanie Petrella, an analyst at Greenmantle, a macroeconomic and geopolitical consulting firm. “These brands are simply leaving Russia.”

Companies have to deal with a complex network of sanctions, including the significant extension of the rule on the direct movement of foreign goods, aimed at restricting Russia’s access to goods designed with US software or technology. This could require US companies to apply for a special license before exporting products such as smartphones, computers and aircraft components.

Given the complexity and evolving nature of sanctions, experts say companies may choose to over-comply in an effort to mitigate risks. “A lot of times you see companies that could technically have a license say that this is all a legal ‘headache’ and retire,” said Ben Coates, a history professor at Wake Forest University.

The logistical challenges are also frightening. For example, there may be no way to transport natural objects to Russia. Maersk and other shipping giants no longer reach Russian ports. UPS and FedEx do not carry packages on their doorsteps. Another obstacle: the acceptance of payments and the transfer of profits, given the sanctions against Russian banks. Violation of sanctions, even by mistake, can lead to very large fines.

The risk to a company’s reputation is also on the scales. “How can McDonald’s serve Big Macs in Moscow when Ukrainians are being bombed by the Kremlin? That’s not a good picture,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Finance. McDonald’s did not answer questions about whether it would continue to operate in Russia.

Public opinion is solid in its support for Ukraine, which is putting pressure on companies to sever ties with Russia in retaliation. The Ukrainian government has asked companies such as PlayStation and Xbox to withdraw from the Russian market.

“People are looking for ways to hurt Russia,” Hufbauer said.

At stake for companies is the loss of billions from their revenues. Russia may prove to be an unattractive place for trade, as sanctions also hit consumers’ wallets. Wealthy Russians may limit their spending on luxury goods, while the middle class is likely to resort to cheaper domestic brands, according to its wages.

“It does not matter if one can afford to buy an iPhone, but has lost his job and does not have the money to buy it,” said Petrella. “If the Russian population gradually becomes impoverished, then they will not be able to buy imported products.”

“Russia’s economic growth has been stagnant in recent years, in part due to sanctions imposed on it for the annexation of Crimea in 2014. Thus, companies are ‘losing a medium-sized and mediocre income market,'” Tooze said. It is not a market guide for their global business. Unlike China – or even countries like Vietnam – there is no prospect of “being here” in 10 or 20 years when the economy grows. “The Russian market is not a proposal you can not refuse.”