Corporations Pull Back On Russia Due to The Invasion of Ukraine

For decades, many foreign-policy specialists have believed that economic globalization promotes peace around the world. As more companies reach countries beyond their own borders, war with other nations becomes less attractive to governments. Thomas Friedman, a New York Times columnist, famously stated that global capitalism’s supposed armistice-inducing effect makes countries less likely to engage militarily with one another if they both have a McDonald’s.

The ongoing Russian invasion of Ukraine might require Friedman to reconsider his so-called Golden Arches Theory of Conflict Prevention. Multinational corporations are actually caught in the middle of Russian President Vladimir Putin’s unprovoked act d aggression.

The Big Mac shopper is now participating in the Russian commercial backlash. McDonald’s joined other restaurant chains, including Burger King and Starbucks, in closing down their Russian operations. Chris Kempczinski, CEO of McDonald’s, cited the “needless human suffering” in Ukraine as the reason for his boycott.

According to a Yale School of Management tracker, hundreds of Russian companies had either ceased operations or withdrawn from Russia by March 16. This list includes iconic brands from everything, including apparel, pharmaceuticals, and technology. WarnerMedia pulled “The Batman”, its blockbuster movie, from Russian cinemas.

Subway, Papa John’s, and Domino’s are among the brands that have condemned Russia’s aggression. They are now trying to counter any resistance from their franchisees in Russia. The majority of Russian McDonald’s restaurants are owned by McDonald’s, so the company can close the stores without creating any friction. However, Papa John’s in Russia has closed its corporate functions, so that the country’s store owners can continue making pizzas.

According to the Securities and Exchange Commission, the pizza company stated that it could face a one-time, noncash hit of up $15.2 million. This was primarily due to loans related to its Russian franchisee. However, 2021 royalties from its Russian operation represented less than 1% of total revenue and 1% of operating income.

Papa John’s is a good example of the reputational risk associated with franchisors operating in international markets. Subway faces a similar problem with its many independently-owned Russian stores. According to the Yale corporate tracker, Subway is being described as “defying requests for exit or reduction in activities.” The sandwich chain claims that it will donate profits from Russian-based businesses to Ukrainian relief efforts rather than securing them. Subway also stated that it is working with European franchisees in order to provide meals to refugees who were displaced by the invasion.

Russia wants corporations operating within its borders to think they are more trouble than franchisees. Moscow threatens to retaliate by confiscating assets and arresting executives who criticize the government. Putin has signed legislation that allows Russian airlines to seize foreign aircraft owned by lessors who have left the country. Russia also indicated that patent enforcement will cease for companies from countries not in agreement with Russia. (Or, at least, it seems that very little enforcement was done in the first instance.

Recent disclosures indicate that the Kremlin’s talk may be showing up on companies’ radar screens. In a 10-K filing, Omega Therapeutics Inc. stated that it is at risk from governments in countries where it nationalizes private enterprises. Omega specifically mentioned Russia’s invasion in Ukraine as an example of a situation that could threaten its international operations. Kamada Ltd., a biopharmaceutical firm, stated in a Form-20-F filing that Russia’s sanctions and Moscow’s subsequent blowback could hinder its ability to deliver its products to Russia and collect sales payments.

Russia’s retaliatory threats were predictable so it is unlikely that these companies will reconsider their decision to leave. They might not be back for a while.

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