Western Businesses in Russia, Watchful and Wary

Western Businesses in Russia, Watchful and Wary


PARIS — Shortly after pro-Russian troops infiltrated Crimea last weekend, the phone in Alexis Rodzianko’s Moscow office started ringing. He is president of the American Chamber of Commerce in Russia, and local managers for some of the world’s biggest brands were calling to discuss the safety of their operations and the risks that might arise if the West were to impose sanctions.

A few miles away, at the Association of European Businesses, the main trade group for European multinationals, a similar scene unfolded. They all had an overarching concern: How hard might their Russian operations be hit if the turmoil kept escalating?

“Foreign companies have seen many ups and downs in their relationship with Russia, and we hope this is just another one of them,” Mr. Rodzianko said. “But this situation is full of uncertainties.”

Western multinationals with big investments in Russia have faced other crises over the years. But the standoff between Russia and the West is posing a range of new challenges that threaten to undermine Western companies’ business in Russia.

American companies including PepsiCo, McDonald’s and John Deere are active in Russia, of course. But for many Western European businesses, that market is even more crucial.

In Paris, officials at the French carmaker Renault have been in constant contact with their Russia-based executives to assess the rapidly shifting climate in the country, where Renault has a pivotal joint venture. Directors at Porsche in Stuttgart, Germany, are analyzing political frictions. At the giant beer brewer Carlsberg, managers in Copenhagen are providing additional security for assets and employees in Russia and Ukraine, the company’s biggest markets.

“Russia is important for European and American companies,” said Chris Weafer, co-founder of Moscow-based Macro Advisory, a consulting firm. “With events escalating and bringing Russia into greater conflict with Western governments, there could be serious consequences.”

One of the biggest concerns is that international sanctions may hit Russia’s large but increasingly sluggish economy and prod Moscow to retaliate against Western interests.

“This is a situation in which those applying the sanctions will get hurt as much as the side being sanctioned,” Mr. Rodzianko said.

The European Union’s economy is tightly intertwined with Russia’s. Europe does about $460 billion in business there, much of it in the energy sector, making it Moscow’s largest trading partner. And more than half of Russia’s foreign investment comes from European multinationals and financial institutions.

The United States is not even among Russia’s top 10 trading partners, exchanging around $40 billion worth of exports and imports each year. And yet, Russia remains a crucial market for American retail, construction and energy companies, as well as some of the biggest United States banks.

On Thursday, the United States and its allies imposed visa bans on individuals deemed responsible for undermining Ukrainian sovereignty, and threatened further sanctions if Russia did not de-escalate tensions. The Kremlin warned of countermeasures, including possibly seizing American property in Russia.

On Friday night, the Russian government issued a statement saying that its foreign minister, Sergey V. Lavrov, had spoken by telephone with Secretary of State John Kerry and warned that “hasty and ill-considered steps” to impose sanctions on Russian officials would harm relations. The statement warned that sanctions “would inevitably backfire on the United States itself.”

Earlier in the week Russian lawmakers also considered a proposed law allowing for the confiscation of property, assets and accounts of Western companies. Other Russian officials advocated dropping the dollar as a reserve currency and refusing to pay off Russian loans to American banks.

So far, the Russian threats have been only that. But the tenor of the statements has made Western multinationals jittery.

European businesses “have no interests in any deterioration of the current international situation linked to Ukraine,” Frank Schauff, the chief executive of the Association of European Businesses in Russia, said on Friday. “We call upon all parties to engage in a constructive dialogue, which will secure stability, welfare and economic growth on the European Continent.”

European Union leaders are not eager to pick an economics fight. A document photographed in the hands of a British official near 10 Downing Street this week and shown by the BBC read in part, “The U.K. should not support for now trade sanctions or close London’s financial center to Russians.”

Chancellor Angela Merkel of Germany, whose economy has deep ties to Russia, has also been reluctant to rush into sanctions.

The visa bans announced so far will not hit Russia financially. But any trade curbs could be painful. After years of growth propelled by oil and natural gas, the Russian economy is already slumping toward a recession. The ruble has been increasingly volatile against the dollar and the euro, and dipped to record lows against those currencies after the Russians moved into Crimea.

Jérôme Stoll, head of sales at Renault, said in a recent interview that the company’s top management was pondering what to do if a devalued ruble caused inflation to rise and undercut the buying power of Russian consumers.

Renault executives are discussing “how we can cope with the situation in case we have to raise our prices,” Mr. Stoll said.

But the situation is still too fluid to gauge the impact, he said. “When you have such a big financial crisis,” he said, “you don’t know how the situation will move.” Asked whether Renault had expressed its concern to the Russian government, he replied, “It’s not our duty.”

American companies are also nervously watching Russia. Those companies include Ford Motor, which operates three assembly plants in Russia and recently formed a joint venture there.

The John Deere Company, one of the world’s biggest makers of farm equipment, has two factories and an operations office in Russia. “We have taken steps to ensure the safety of our employees and have restricted travel in the region,” said Ken Golden, director of global public relations for Deere. Mr. Golden would not specify what those steps were.

While Russia represents less than 5 percent of Deere’s total equipment sales, the company recently cited Russia as being key to its future growth. “We urge political leaders to solve this issue without violence and in accord with international agreements,” Mr. Golden said.

Russia is Pepsi’s largest market outside the United States, contributing nearly $5 billion in annual revenue, about 7 percent of the company’s total. McDonald’s also has a sizable presence. The fast-food giant, which was the official restaurant of the recent Olympic Games in Sochi, has 413 Russian restaurants generating $2.5 billion a year, or around 9 percent of the company’s total revenue, according to an analysis by Deutsche Bank Securities.

“Russia is a high-growth market, and it’s important to them,” said Jason West, a research analyst for Deutsche Bank. “We don’t know how bad things are going to get yet, but it could really hurt growth prospects.”

Nor are Russian companies immune to the turmoil. State-owned banks that could be the target of further Western sanctions were pounded this week on Russia’s stock exchange. Shares in Gazprom, the behemoth Russian gas producer that sends gas through Ukraine to European markets, have also slumped.

Despite the uncertainty, American and European companies are hunkering down. None yet seem ready to heed Mr. Kerry’s admonition to “start thinking twice about whether they want to do business with a country that behaves like this.”

It is not that simple, according to Mr. Rodzianko of the American Chamber.

“Nobody is particularly happy with the fact that the business climate is suffering, but you don’t come in here, build a plant, and pull out tomorrow,” he said. “We have to stick to our knitting, and deal with the setbacks until the climate improves.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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