2022 Theme: Ukraine - Coke & A Big Mac No Longer Possible, Have We Thought Sanctions Through?

Sanctioning Russia and especially Russians may feel good and may even be (morally) the "right" thing to do but is it wise strategically? Or even economically?

As companies flee Russia and we watch the destruction of two countries, not one we have been wondering whether we are watching a classic collective action problem in action.

Or just a regrettable strategic misstep.


Practically speaking, this week was another terrible one. A vicious, senseless war in Ukraine on the one hand and the isolation and impoverishment of Russia's economy deepening on the other.

Coca-Cola pulled out. So did Adidas, Starbucks, Unilever and many, many others.

Along with Coke, last week we had flagged McDonald's as one of the few names still hanging on. We also said - directly against our company's self interest and existential purpose! - that there wasn't much point in removing them from your financial portfolio because they would all be heading for the exit pretty soon.

Anyway, McDonalds left this past Monday. And on Thursday, the first big US banks, Goldman Sachs and JP Morgan, also announced plans to exit.

There may be no longer much point in picking on the Golden Arches but looking at the burger chain is nonetheless a good illustration of the scale of Russia's sudden and scary economic predicament.

First off, for McDonald's, this wasn't a small decision:

  • They were not a minor employer. There are 850 McDonald's franchises in Russia. And they employed over 62,000 Russians.

  • Also notable is the fact that these stores brought in 3% of McDonald's operating income but a rather hefty 9% of its revenue.

  • And these largely McDonald's-owned assets. The restaurants are nearly entirely (84%) owned and operated by McDonald's not franchisees.

Away from the details of McDonald's particular case the main conclusions here are the following:

  • There are only a handful of Western multinationals still operating in the country. Pepsi (no soda, just baby formula but also chips which are somehow a "staple"), Mondelez International, Deere & Co. make up the remaining familiar names.

  • The proprietary Pebble list of large US public companies still doing business in Russia has fallen from over 250 at the outset of the war to under 50 last week and is now well beneath 20. Another list has over 330 global companies and counting having left Russia, possibly for good.

  • The pressure will only grow on these holdouts as the headlines and outrage pile up. What CEO will want to publicly defend operating in Russia when they have to answer questions about cluster munitions, thermobaric weapons and headlines like "Maternity Hit By Unguided Missile"?? The answer will very likely be zero.

But once every single large Western multinational has left and we can all safely pat ourselves on the back with having "punished Russia" then the long term consequences of these sanctions will start to become clear.

We haven't just isolated Russia. Or punished it. We have, almost overnight, crippled its economy. And, in doing so, we have wrenchingly ended its decades of interdependence with Western economies, societies and politics.

We wonder how much thought has been given about the costs of these decisions? Or even the most basic consequences?

Yes, we might be raising the pressure on Russia's venal elite to a terrible degree. They could rise up and topple Putin. Or perhaps stop the war.

But just as easily, we might be making it simpler for Putin to successfully push the propaganda angle of a noble Russia being besieged by the evil West. This could, awfully, prolong the conflict because it seems like there are no alternatives.

We are also spreading greater misery in Russia among those least responsible. McDonald's is paying its employees for now but for how long will that last?

Two final thoughts:

  • The first is a question: will any of this save Ukraine?

Are we doing this for them or are we doing this to make ourselves feel better about not doing much of anything while we watch Kyiv and Mariupol and Dnipro be bombed?

The impact of this campaign is extremely uncertain - short or long term. And how certain are we that our actions will have the desired outcome?

Perhaps to put it differently, Putin may not have thought through his invasion. Have we thought through our punishment?

  • The second is more prosaic: we have made Russian products almost universally untouchable for Western buyers.

This is pretty important.

Russia may not be a large economy or an important one. Its GDP is less than the market cap of Apple or Amazon or Microsoft. And its GDP per capita on a purchasing power parity level is around 57th in the world beneath economic standouts like Romania, Greece, Latvia and Malaysia. But, as we have covered before, it does produce quite a bit, especially when it comes to raw materials.

We wrote on this at some length when it comes to energy and grain. And we will - regrettably - likely have the opportunity to do so again.

This self-sanctioning over Russian commodities is also unusual.

An embargo from the demand side of the equation is very atypical. That makes the consequences particularly difficult to predict.

And already Russia is starting to institute its own reverse sanctions. So far these have avoided the most critical materials but they have "temporarily" suspended fertilizer exports which sent shudders through global food markets. Such a move will only accelerate and deepen the very scary incoming crunch on food prices and, far more importantly, absolute levels of food production.

Thus, the atrocious war in Ukraine may have launched a new geopolitical order, as we have noted. But it has also collectively launched, in real time, a complete re-ordering of global supply chains for many key strategic raw commodities - energy, fertilizer, metals, rare earths and grains caught square in the middle.

In our zeal to exact revenge and look like we are doing "something" we are creating a classic collective action problem. Each company or executive may be acting rationally on their own but collectively it could lead to a significant and unforced error.

The economic punishments may indeed fit the horrific crimes of this invasion (do they?) but we should be ensuring that these decisions help, and not hurt, Ukraine rather than simply signal our clumsy solidarity with the besieged.

In the end, we suspect that we will end up being very surprised by the consequences of our own actions. The history of strong economic blockades are long on large amounts of economic pain but very short when it comes to evidence of political pressure achieving the desired outcomes.

"Maximum pressure" hasn't historically resulted in "maximum compliance."

Quite the opposite in fact....


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