Big Names Pulling Out of the Russian Market and Its Global Economic Impact
As Ukraine continues to suffer from the invasion of Vladimir Putin, Russia's economy has backslid from not only unprecedented sanctions but also the mass exodus of many global corporate staples. Mcdonald's, Coca-Cola, PepsiCo, and now Starbucks, along with many others, have been making the decision to reduce or completely halt their business in Russia.
More than ever, corporations have been under scrutiny from investors and consumers to do the right thing, and many CEOs agree that continuing business in Russia is not that. After shuttering 100 Starbucks coffee shops in Russia, Starbucks CEO, Kevin Johnson, said “we continue to make decisions that are true to our mission and values and communicate with transparency." For McDonald's, the right thing was the decision to end its three decades-long Russian presence and closing its 850 McDonald’s locations.
Store closures go way beyond food and beverage though. L'Oreal and Estee Lauder, two rivaling retail and cosmetic companies, have also halted sales in Russia. Large fashion retailers, H&M and Zara have decided to suspend sales in Russia. Apple, the most valuable company in the world, has stopped product sales, shut its stores down, and banned Apple Pay and Apple Maps in Russia. And the list continues to grow including announcements from Visa, Mastercard, American Express, Paypal, Netflix, and Disney - all in the last month.
When discussing this, it's important to realize what is really at stake here, not only for the Russian economy, but also for the organizations making these decisions, and the impact it will have on the global market. With the 11th largest economy in the world and a GDP of $1.48 trillion in 2020, exiting Russia is not as simple as closing a small, struggling store.
So, what happens when a company halts sales and operations in one of the world's biggest economies?
It's not a decision that corporations or consumers take lightly, for many reasons, including all of the implications it has for the 5 drivers of the company. These include a decline in revenue and asset utilization, a hit to profitability, and the plummeting of the financial strength of each company. When a company up and leaves its business - it's not just leaving the facility, but also any investments it has made in that location including equipment (asset impairment). Russia is then left with the opportunity to take over ownership of any of these assets. Mcdonald's for instance left its 850 stores and lost 1.2 billion dollars while exiting the country. Volvo, the luxury car company, said: "it was setting aside about $423 million to make up for losses it anticipated in the first quarter because of Russian exposure." So when these companies are making the tough decision to cut ties with Russia and end these business relationships, they are losing millions or even billions of dollars.
And the impact is not just a temporary, one-time hit. It also hurts the organization's opportunity to ever enter that market again. Once they've rescinded those assets and agreements, is there ever a way of going back? Generally, the risk is too big and companies are unwilling to take it.
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