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How big is the risk of a Russian divestment?

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Traffic sign: Caution, danger of skidding

Traffic sign: Caution, danger of skidding

Important points

  • Companies have invested billions of dollars in Russia for years.

  • The invasion of Ukraine has prompted many to stop investing in Russia, no matter what the cost.

  • A significant risk remains for companies that still do business with countries that have questionable human rights records.

Pressure is growing for companies to take a stand against Russia’s war against Ukraine by cutting ties with the country at all costs.

Some companies have already acted proactively, such as the oil giants, which were among the first to pull out. bp for example, it is selling its nearly 20 percent stake in Russia’s state oil company Rosneftwhich will result in a massive $25 billion load. shell withdraws from all Russian agreements and partnerships, including those with the Russian state oil giant gazpromwhich could result in impairments of up to $3 billion.

This seems like an appropriate response given the Russian government’s dependence on oil, but many consumer goods companies are also taking a stand and going bankrupt or selling their stakes in Russian companies.

The question is: if withdrawing from Russia is the right thing to do, why stay there? Investors should consider the broader implications of a divestiture if the call for a principled stance extends beyond this conflict.

Put a wrench in the works

The list of companies cutting ties with Russia continues to grow. Yale University maintains a running list of the top corporate responses to the invasion. At last count, more than 200 companies have pulled out of Russia.

Disney (SEM:855686 -1.05%), Nike and TJX Companies are withdrawing from the country, Netflix announced its departure, and TikTok does not allow new posts.

Other companies like alphabets YouTube does not allow Russian-backed providers to monetize their channels; roku, snap and Spotify stop selling ads in Russia; and car companies like ford and Stellantis they are suspending their joint ventures or cutting off supplies to the country.

However, some companies continue to do business in Russia. Twitter (NYSE:BRK-A) -1.60% , for example, removes ads associated with the Kremlin, but also keeps its service operational (unless blocked by the government) as it is seen as a means of providing information to the Russian population. .

The cost of doing business

Many companies are also taking this two-pronged approach to doing business in Russia: stopping new supplies or investments, but continuing to sell essential products. Yogurt maker Danone, for example, says it has a “responsibility” to continue operating in Russia even if it is not making any new investments.

Significant public pressure and threats of boycotts were brought to bear on other companies that initially refused to back down. According to Yale PepsiCo, Kellogg’s, McDonald’s (WKN:856958-1.95%) and starbucks (NASDAQ:AAPL) is one of the companies that has been in business, but all have committed to closing in the last 24 hours.

Pepsi will stop selling soft drinks, but will continue to supply staple foods. Kellogg will also stop shipments, but the British Telegraph reports that the company has three factories in Russia that will continue to operate.

Coke (NYSE:BRK-B) told the Russian news agency TASS that it will not withdraw from Russia because it bears “full responsibility” to its partners, society and thousands of our employees there. However, the course has apparently changed in the meantime and he now says that he is “finishing his business in Russia”.

To be sure, there were financial reasons for the reluctance of some consumer companies. Having spent billions or tens of billions of dollars over the years to establish a presence in the country, it would be a huge loss for them to cut all ties now.

These are the repercussions that a number of companies would feel if they pulled out of Russia.

business

russia business

Caterpillar

$4 billion (8% of sales)

kimberly clark

$600 million (3% of sales)

mcdonalds

$2.3 billion, (9% of sales)

Mondelez International

$1 billion (3.5% of sales)

Nestle

$1.7 billion (2.3% of sales)

Data source: Yale University; SEC reports of companies.

How far does that go?

They are not insignificant sums, but for many they are insignificant compared to what they generate in other countries that, in the best of cases, can charitably be described as lagging behind in human rights.

This begs the question: If companies are being pressured to sever ties with Russia, why not China, which has been accused of genocide against ethnic Uyghurs and is reportedly considering a similar invasion of Taiwan?

For many companies, China is the hub of their growth. McDonald’s has 4,395 restaurants in China, more than any other international market and 11% of the fast food chain’s global sales. Shutting down operations in China would be devastating compared to shutting down Russia’s 847 sites.

Starbucks also operates 31% of its 17,100 stores in China and admits the country is critical to its growth and profitability. The same is true for Disney, which owns two theme parks in China and is considering how best to position its films to do well in China, even though Asia-Pacific as a whole accounts for just 10% of sales. from Disney.

the final bill

Because many of these companies have championed social justice in the West, they are now expected to take a broader view of world events. War is probably the most devastating evil that can befall a people, costing lives and ruining the economy, but after Russia invaded Ukraine, deciding how far to go with virtue might be the hardest task for corporations.

If they fail to get involved elsewhere, the accounts could add up and, for investors, the exposure of companies in countries with questionable human rights records may increase the risk of owning them to unacceptable levels.

The article What is the risk of a Russian divestment? first appeared in The Motley Fool Germany.

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This article represents the author’s opinion, which may differ from the “official” recommendation position of a premium Motley Fool advisory service. Questioning an investment thesis, including our own, helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. This article was written by Rich Duprey and was published on Fool.com on 03/10/2022. It has been translated so that our German readers can join the discussion.

The Motley Fool owns stock and recommends Alphabet (A-shares), Netflix, Nike, Roku, Spotify Technology, Starbucks, Twitter, and Walt Disney. The Motley Fool recommends Alphabet (C-shares), Nestlé and The TJX Companies and recommends the following options: $145 long calls in January 2024 at Walt Disney, $100 short calls in April 2022 at Starbucks, and $155 short calls in January 2024 at Walt Disney.

Motley Fool Germany 2022

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