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Location Decisions in Russia for Western Brands

The withdrawal of many Western businesses from Russia following its invasion of the Ukraine in February of 2022 has led to a new generation of Russian oligarchs purchasing these abandoned assets.

The ability of these new entrepreneurs to be successful in this endeavor remains to be seen.  Operating the businesses that have been left behind poses significant challenges. The Kremlin will likely work hard to make sure that these businesses don’t go under.

Video Spotlight:  

This post is based on the Foreign Policy article, Russia’s clueless oligarchs, by Elisabeth Braw, September 29, 2022; the Business Insider article, KFC is about to disappear in Russia as its new owners rebrand all 1,000 stores as ‘Rostic’s’, report says, by Jyoti Mann, October 30, 2022; and the YouTube videos in the Spotlight. Image source: Sorbis/Shutterstock

Discussion Questions:

1.  What location planning options did Western businesses have when Russia invaded Ukraine and began waging war?

Guidance: The three location planning options that most of the Western businesses had were to keep their Russian holdings and continue to run them, turn over control to a Russian company, or cease operations.

Because of the ethical implications of helping fuel the economy of a country that started a war on independent Ukraine, many Western businesses, including McDonald’s, Starbucks, T.J. Maxx, and Sephora, chose options two or three and quickly pulled out, often selling off their assets at bargain prices.  They didn’t want to risk negative backlash from Western consumers if they had stayed.

However, pulling out can be complicated and may result in legal consequences for many of those involved.

While some businesses, perhaps those less visible in the Western consumer’s eye, chose option one and are still operating in Russia, many are expected to pull out by February of 2023.  That’s because their insurance policies, typically written for one year, will expire, and it is unlikely they would be able to renew their policies.

2. What are the ethical implications of selling one’s business assets to Russian oligarchs when exiting the country?

Guidance: When McDonald’s left Russia, it sold 700 of its restaurants to a little known Russian businessman who already owned a franchise of 25 restaurants in Siberia.  McDonald’s lost large sums of money in the transaction and left behind trained and knowledgeable employees, physical facilities, equipment, and perhaps some inventory of supplies.

When Starbucks sold its Russian stores, they were purchased by a Russian restauranteur and a Russian rap artist.  Often those who have the chance to buy these abandoned businesses are among the pro-Putin elite, with the rap artist known for a song entitled, “My best friend is Vladimir Putin.”

To whatever extent these new businesses shelter the Russian people from the intended effect of Western sanctions and enrich the pro-Putin Russian elite, they may work at cross-purposes with the larger goal of withdrawing from Russia.

The new oligarchs hope to prove that they can provide goods and services that are just as good as what was offered in the past.  Whether or not they will be able to get the supply chains in place and maintain Western standards of quality and safety remains to be seen.

3. What difficulties may face those who purchase Western businesses and run them in a “copycat” fashion to make similar goods and services available to Russian consumers?

Guidance: Unlike the takeover of Russian state-owned enterprises when the Soviet Union collapsed in 1990, the new oligarchs face serious new challenges.

In 1990, the new entrepreneurs had access to Western financial markets, technology, and supply chains.  As time progressed, Western countries increasingly viewed Russia as a “safe” place to invest, pouring more and more resources into the country.

Today, Western countries have cut off access to capital, technology, and supply chains, among other sanctions, to try to show solidarity and support to Ukraine.  The newly acquired, copycat Russian businesses may have difficulty finding materials, parts, and ingredients to fill their supply chains.

In addition, restrictions have been put on their ability to entirely copy the exiting companies.  For instance, Govor cannot use the name “Big Mac” or the iconic company logo.  The new owners of Starbucks claim that their stores are “entirely different” in a recent news feature.  However, they are called “Stars Coffee” and the logo looks nearly identical to the Starbucks logo, save that the crown has been replaced by a Russian headdress.

A new crisis is unfolding as many businesses are losing their workforce and some of their skill and knowledge base.  Many Russian men of military age have either been conscripted or have fled to neighboring countries before they can be drafted.  According to news reports, this loss of workers is beginning to be felt in some business sectors and has begun to finally make the war, which many Russians still do not acknowledge to be a war, unpopular.

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