Sanctions

Could McDonald's Be the Latest Victim of Russian Retaliation?


A Moscow McDonald's in 2013

Photograph by Andrey Rudakov/Bloomberg

A Moscow McDonald's in 2013

McDonald’s may be the most visible face of U.S. capitalism in Russia, with 438 restaurants spanning the country, from Moscow to eastern Siberia. Still, it looked set to ride out Russia’s new ban on Western agricultural imports, since all the ingredients it serves Russian customers are locally sourced.

Today, though, Russia’s national consumer-safety regulator ordered the closure of at least four McDonald’s outlets, including its flagship Pushkin Square location, for alleged violations of sanitary rules. The watchdog agency didn’t mention President Vladimir Putin’s battle of sanctions with the U.S. and European Union in ordering the closures, but Russian authorities have wielded consumer-protection enforcement in other political controversies, as when they shut down a candy factory owned by Ukraine’s President Petro Poroshenko. McDonald’s (MCD) says it is studying the regulator’s claims.

In the meantime, it’s already clear that the EU, Russia’s biggest trading partner, is going to feel real pain from the sanction showdown. From Polish apple growers to Dutch cheese makers, EU food exporters could lose some €6.7 billion ($9 billion) in sales after Putin banned most Western agricultural imports in retaliation for EU and U.S. sanctions, analysts at Dutch bank ING (ING)say in a report today. The figure, which includes losses by companies that supply agricultural producers, far exceeds the $167 million in aid the EU has offered to fruit and vegetable growers to offset the Russian ban.

The analysts predict the ban could lead to the loss of 130,000 jobs across the 28-nation bloc, led by Poland with 23,000 jobs lost. By contrast, the U.S. is forecast to lose only 12,000 jobs, with an estimated $1.7 billion in lost sales to Russia. U.S. producers have largely shrugged off the Russian retaliation.

The Europeans, though, are already scrambling to respond. In Poland, which in recent years has shipped half its apple crop to Russia, citizens are being urged to “stand up to Putin, eat apples, and drink cider,” in the words of a campaign lanched by the newspaper Puls Biznesu to boost domestic consumption of the fruit. Celebrities and politicians are posting apple-munching selfies on Facebook (FB) and Twitter (TWTR), while cider producers are trying to lure more customers in a country that traditionally has preferred beer and vodka.

In the Netherlands, which until recently supplied more dairy goods to Russia than any other country, cheese makers are trying to ride out the ban by turning milk into powdered milk, rather than Gouda or Edam. If the conflict drags on, though, the Dutch could lose market share to producers in Switzerland, which hasn’t joined the EU in imposing sanctions on Russia.

The Baltic nations of Lithuania, Latvia, and Estonia are among those hardest hit by the sanction fight. Food exports to Russia account for 2 percent to almost 4 percent of their national economies. Lithuania and Estonia have already reported that Russian border guards are turning back shipments of meat and dairy products. In Latvia, the government says that four companies hit by sanctions have asked to delay making tax payments.

The risk to Europe’s economy goes far beyond food. Germany today reported that exports to Russia plunged 15.5 percent during the first half of this year, before the agricultural ban was imposed on Aug. 7. Russian demand for key German exports, such as machinery, cars, and auto parts, has fallen sharply as the Russian economy has slowed. With recent U.S. and European sanctions against Russian financial institutions squeezing the availability of credit, the situation is likely to worsen.

And while Europe so far hasn’t suffered any disruption of its Russian natural gas supplies, the risk of a possible shutoff is driving gas prices up sharply—something the EU can ill afford at a time of sluggish growth in its biggest economies.

Ukraine has warned that it might retaliate against Russia by cutting off the westward flow of gas through its pipelines. Wholesale gas prices across the EU are expected to rise 11 percent during the next quarter, according to analysts at Société Générale (GLE:FP) in Paris. Putin “doesn’t seem to be in a hurry to end the conflict, nor does Ukraine,” Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen, tells Bloomberg News. “We could easily see this confrontation drag on into the winter.”

Matlack is a Paris correspondent for Bloomberg Businessweek.

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Companies Mentioned

  • MCD
    (McDonald's Corp)
    • $93.83 USD
    • -0.39
    • -0.42%
  • ING
    (ING Groep NV)
    • $13.39 USD
    • -0.03
    • -0.22%
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