Friday 1 March 2024

Markets reward multinationals for deglobalising Russia

By Gov Makhubela

On March 08 McDonald’s announced that it is closing some of its restaurants in Russia, in a move to kickstart its exit. The story of the United States-based multinational exiting from Russia was repeated across many companies since 24 February 2022. Thus far more than 1000 firms exited the Russian market according to Yale School of Management research. Such an exodus was not what President Vladimir Putin had in mind when he took over in 1999. His intentions were to integrate the Russian economy into the global economy 

In his first Presidency, Putin went out on a public relations charm offensive in the US. This earned him an astonishing appraisal from former President George W Bush, who commented that he looked into the man’s eyes and saw his soul. He then concluded that the “…man was completely committed to his country and the best interest of the country”. Today Russia is a member of the G20, World Trade Organisation (WTO), and other multilateral 

However, the Kremlin has been uneasy about unrestrained US use of force in Afghanistan, and Iraq and its suspected hand in undermining Russia’s influence. Whilst celebrating the 2014 Olympic Games in Sochi, anti-Russian protests in neighbouring Ukraine were tarnishing Russia’s image. The presence of US State Department, Assistant Secretary Victoria Nuland, triggered accusations that the US was undermining Russia’s interests. 
“Mr. Obama and others, they decided that America can do whatever they like, to spread democracy, as they call it. How many diplomats from the United States were at that time in Kiev?” said Andrei Klimov, a senator in Russia. The crash of the Malaysia Flight 17, which the West blamed on the Kremlin, and the Crimea saga, strengthen the West resolve to impose sanctions. In 2015 Russia felt the effects of these actions as the economy fell into a recession. Although the Russian economy recovered briefly from 2016 to 2018 it contracted in 2019 and fell into yet another recession in 2020 this time due to the COVID-19-induced negative demand shocks. 

The economy would have recovered on the back of pent-up global demand, which led to the oil price recovery in 2021. According to Rosstat, the federal statistics services of Russia, the economy grew by 3.5% year-on-year in the first quarter of 2021. Despite the positive results, forecasters revised their optimistic outlook. Reuters expects the first-quarter GDP results to be the last with sound growth. The International Monetary Fund (IMF) revised its 2.8% growth projections and expects the Russian economy to contract by 8.5% in 2022. However, locally-based Russian forecasts are optimistic because they believe that oil price recovery and import substitution will continue to drive growth.   

Meanwhile, the markets rewarded corporates for withdrawing from Russia. McDonald’s share price rebounded two days after it announced that it was exiting from Russia on 08 March following a 10% price decline between February 25 and March 10. By April 7 its share price had rallied back to its February 22 level. The Economist reported that even though most companies lost billions of dollars in divestment, they were rewarded. “On average the shares of firms that withdrew completely went up by 3.6% between February 23rd  and April 19th; those…that continued, as usual, lost 6.8%”. The market considered the long-term prospects of corporations that chose to leave Russia, a moral high ground decision, added the Economist.

To absorb the effects of its isolation, Russian authorities face the task of decoupling its economy from the West by strengthening its industry to replace the output gap left by exiting firms. Yale School of Management found that revenue generated by multinational companies in Russia “is equivalent to approximately 45% of Russia’s gross domestic product (GDP)”. To succeed in decoupling their economy they will have to adopt a long-term strategy of investing in state-of-the-art technology and ensuring labour productivity. However, in the short-to-medium term, they must find new sources of investments from other world regions. Thus far, investments from the East and other world regions have not exited the Russian market except for a few. Out of 51 Chinese companies operating in Russia, only one company reduced its current operations and five suspended their operations keeping options open for a return. Only one South African company, Naspers, opted to suspend its operations from Russia.


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