ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
ERROR
Main Error Mesage Here
More detailed message would go here to provide context for the user and how to proceed
search
Close Nav

Rushing for the Exits—for Now

back to top
eye on the news

Rushing for the Exits—for Now

Will American companies’ fervor for the Russian boycott last? March 14, 2022
Politics and law
Economy, finance, and budgets

Since Russia’s unprovoked invasion of Ukraine two and a half weeks ago, more than 330 companies have announced that they are suspending or terminating their operations in Russia, according to a list compiled by Yale University professor Jeffrey Sonnenfeld. While Russia’s aggression was certain to provoke some reduction of trade, the unprecedented scale and speed of the boycott has surprised even the most seasoned analysts. Boycotters include many with significant financial stakes in Russia, and some were pioneers of Western investment in Soviet Russia and corporate emblems of the end of the Cold War.

PepsiCo, for instance, began selling soda in Russia in 1971 and opened its first production plant in 1974, leveraging the deal to secure exclusive rights to import Stolichnaya Vodka. To reward the business executive who had so doggedly pursued access to the Soviet market for decades, Vladimir Putin himself awarded PepsiCo’s former CEO Donald Kendall the Russian Order of Friendship in 2004.

McDonald’s is another corporate symbol of perestroika and the Soviet Union’s opening to American commerce. “In the thirty-plus years that McDonald’s has operated in Russia, we’ve become an essential part of the 850 communities in which we operate,” said Chris Kempczinski, president and CEO of McDonald’s, which in 1990 began selling its “Big Mak” to thousands of Soviet citizens waiting in line for hours in Moscow’s Pushkin Square to get a taste of American fast food and the American dream.

Yet early last week, both PepsiCo and McDonald’s temporarily called it quits in Russia. On Tuesday, McDonald’s, whose Russian operations account for 9 percent of its operating revenue, said that, while it would continue paying its 62,000 Russian employees’ salaries, it was temporarily closing its 850 restaurants there. Later that day, PepsiCo announced that it was suspending all soda sales to Russia, including 7-Up. Coca-Cola, too, joined the stampede.

Why have so many American and foreign firms joined the boycott so quickly? According to the companies, they are motivated by humanitarian concerns over the disaster unfolding in Ukraine. “Our values mean we cannot ignore the needless human suffering unfolding in Ukraine,” Kempczinski said in McDonald’s announcement. But Sonnenfeld, who considers the boycott a “genuine” effort that will require some companies, especially oil and gas producers, to “leave a lot on the table,” asserts that public pressure and fear of consumer backlash have also played a role. With each passing day, American companies, as well as other global firms, particularly in retail, have faced growing threats of consumer boycotts and protests from shareholders. Executives have been motivated “not just by patriotism, humanitarian concern, and a desire for world peace,” Sonnenfeld said, but by a desire to avoid “reputational damage” for doing business in Vladimir Putin’s Russia. So a company’s decision to boycott Russia “does a lot for the brand.” “It’s a smart move,” he said, reflecting the companies’ “enlightened self-interest.”

Since the escalating sanctions imposed by the U.S. and its allies’ make it “incredibly difficult” for companies to do business in Russia, said Paul du Quenoy, an American publisher and former professor at the American University of Beirut, many companies have joined the boycott as a form of “virtue-signaling out of necessity.”

At the same time, however, announcing that their suspensions are “temporary,” many companies are taking steps to hedge their bets and avoid alienating Russians or the Kremlin. While PepsiCo, for instance, is suspending its soda sales, the company said it would continue producing milk, dairy products, baby formula, and other food as a “humanitarian effort” to enable tens of thousands of manufacturing and farm workers to keep their jobs. Starbucks, too, said its licensing partner in Russia would provide “support” to its nearly 2,000 Russian employees.

In its announcement in Russian to its workers, or “Dear friends,” McDonald’s said that it was temporarily closing its stores “due to the current situation,” carefully avoiding any reference to Putin’s “war” or Russia’s “invasion.” Inditex, the world’s largest fashion retailer and owner of H&M and Zara, cited the “tragic developments” in Ukraine to explain why it is temporarily stopping sales at its more than 500 retail stores in Russia. Nike offered only the explanation that it can no longer guarantee the delivery of goods to its Russian customers.

Analysts say that some companies may find it easier and less costly than others to cut ties to Russia. While General Motors, for instance, sells 6 million cars a year around the world, it sells only 3,000 cars a year in Russia. McDonald’s, as the Washington Post recently reported, is uniquely positioned to suspend operations, since unlike many other fast-food chains, which operate through franchises, McDonald’s owns 84 percent of its Russian restaurants. It’s far cheaper and easier for Disney to refuse to release a film in Russia than it is, say, for Shell or BP to abandon long-standing, multibillion-dollar oil and gas projects. Yet BP was among the first companies to exit Russia, abandoning its joint venture with the Russian state oil giant Rosneft, a decision that cost the energy giant an estimated $25 billion. Shell was another early boycotter, leaving a joint venture with Russia’s gas company, Gazprom.

Several analysts, however, say that some companies, including those in the oil and gas sector, concluded even before Putin’s invasion of Ukraine that operating in Russia was becoming increasingly difficult and less profitable. “Many companies were already looking hard for a way out,” said one oil company executive who asked not to be identified by name. “The invasion gave them the perfect excuse.”

Sonnenfeld is pleased that so many companies from virtually all economic sectors were at least temporarily curtailing operations in Russia, whatever their motivations. In Big Tech, Apple, Google, and Facebook have announced their exit, as have Disney and Live Nation. Leading credit card companies Visa, Mastercard, and American Express have joined the boycott. Major car companies—Volkswagen, Toyota, and Mercedes-Benz—have suspended Russian operations. Maersk, the world’s largest shipping company, has curtailed its operations. The European Union has imposed a flight ban for “Russian-owned, Russian-registered or Russian-controlled aircraft.” Sonnenfeld expressed disappointment in one major hold-out: pharmaceutical companies. So far, no major drug or medical-device producer has announced plans to close its manufacturing plants or curtail sales inside Russia. “They’ve all echoed the same tortured logic about how international humanitarian law requires them to keep supply chains open because Russians need access to medicine and medical equipment. That’s a complete lie,” he said. “Companies cannot be forced to produce anything for anyone. These companies should not be there.”

Sonnenfeld argues that the economic boycott of Russia is crucial to ousting Putin. By inflicting severe economic pain on Russians, he says, Putin’s totalitarian aura, the perception that he is always in control of all facets of Russian life, will be undermined. “Putin will be shown to be impotent,” he says, “and that will make him politically vulnerable.”

Despite the vast, speedy exit of American-based and global companies from Russia, some analysts worry that the effectiveness of such severe economic measures could diminish over time. Economists, in fact, are divided about the long-term impact of disinvestment, sanctions, and economic boycotts. While many human rights activists maintain that such economic pressure on South Africa helped end that country’s racist system of apartheid in 1994, others say that the campaign’s economic effect waned over the years. This might well be the case in Russia, where two factors could reduce their long-term impact. First, like South Africa, Russia could develop its own manufacturing capacity and banking and credit alternatives. And, as Russia expert Masha Gessen recently said following a visit to Moscow, Putin’s suppression of an independent Russian media, coupled with his steady disinformation about why he invaded Ukraine and the economic persecution of Russia by the American-led sanctions and boycott, may well convince Russians that the cause of their economic misery is not him, but the West.

Photo by AFP via Getty Images

Up Next
eye on the news

Protecting New York

Born in the ashes of 9/11, the NYPD’s counterterrorism program remains the envy of the world.
Judith Miller September 10, 2021
New York
Public safety
Saved!
Close