Franklin, Andrews, Kramer & Edelstein

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A New Iron Curtain Is Falling
The isolation of the Russian economy is striking in its speed and scope.

International pariah
Each day brings more economic punishments for Russia after its invasion of Ukraine. The sudden isolation of the Russian economy is striking in its speed and scope.

Yesterday, President Biden banned U.S. imports of Russian oil; Britain said it would phase out Russian oil imports by year end; and the E.U. pledged to shun Russian energy “well before 2030.” Shell, Europe’s largest oil company, said yesterday that it would stop buying Russian crude, after facing criticism for buying a tanker’s worth days earlier. Such unilateral corporate moves have compounded governments’ actions, cleaving Russia from the global economy, with uncertain and unpredictable consequences.

“Defending freedom is going to cost,” Biden said in announcing the import ban. Russia accounts for about 10 percent of the world’s oil supply, so any disruptions are likely to push up prices. Crude oil, which at around $125 a barrel is double its prepandemic level, could rise as high as $175, according to Goldman Sachs. The U.S. national average price of gasoline sits at $4.25 per gallon, a record. That is contributing to inflation and eating into consumers’ budgets, which could slow the U.S. economy (and hit countries that rely on Russian energy even harder).

The effect of the embargoes and sanctions are clearer for the Russian economy, which S&P estimates will shrink by nearly 9 percent this year. Fitch said Russia is at risk of “imminent” default after cutting the country’s credit rating deeper into junk territory. President Vladimir Putin has ordered restrictions on Russian exports of unspecified raw materials, which will further limit the country’s trade revenues.

Replacing Russian oil won’t be easy, as the U.S. and other buyers chase limited supplies. Saudi Arabia, the United Arab Emirates and Kuwait could add 2.5 million barrels, but all are all members of OPEC Plus, an alliance of oil-producing nations that includes Russia. Venezuela and Iran could contribute about 1.5 million barrels a day, but that would require lifting American sanctions. U.S. producers could also ramp up production, but it would take investment and time.

American brands quitting Russia has more than symbolic significance. After years of cultivating the Russian market, Coca-Cola, McDonald’s and PepsiCo were among the companies yesterday that announced a pause to their operations there. Since Soviet times, these firms came to symbolize the opening of Moscow to the West. Starbucks also said it would close all of its locations and Yum Brands said some of its KFC and Pizza Hut locations would suspend operations.

Although these companies’ Russian operations account for single-digit percentages of group profits, their absence will be felt: McDonald’s, for example, employs 62,000 people in Russia. (The company said it would continue to pay salaries.) “It appears that much of the Russian populace knows little about the attack on Ukraine,” Louis Wells of Harvard Business School told DealBook. “If McDonald’s and Coca-Cola disappear along with Ikea and other foreign brands, people have to ask why.”

The pressure on companies to act is growing, from investors, employees and social media campaigns. The list of company actions compiled by Jeffrey Sonnenfeld of the Yale School of Management, updated daily, is a focus for a variety of stakeholders, and a major point of discussion in the boardrooms of companies highlighted because they have yet to disclose their Russia plans.

https://www.nytimes.com/2022/03/09/business/dealbook/russia-ukraine-isolated.html