What Crimea has to do with coffee

Break-ups can be hard at the best of times, and are often never completely resolved. Early this year, the world was reminded – once again – that the dissolution of the Soviet Union was anything but a clean break. Crimea, a peninsula that juts out into the Black Sea, started making headlines in February when Russian forces began taking control of the state it had gifted to the Ukraine in the 1950s. A referendum to join Russia reported that more than 95 per cent of Crimeans voted in favour, figures that most Western governments are not buying. In mid-March, Russia formally annexed Crimea, a move the United Nations has declared as illegal. For the business world, this level of political instability is never a good thing. As the world’s largest market for soluble coffee, and a target for growth among many coffee chains, coffee businesses will need to keep a close eye on these developments. As this magazine went to print, the Russian government was considering a provocative law that roughly translates to: “Confiscation of property, assets and accounts of European and US companies operating in Russia”. The law is Russia’s response to the second package of sanctions approved by the US Congress. Some analysts consider them the toughest sanctions imposed by the US on Russia since the Cold War era. According to an official statement, issued by the Russian Parliament, the new law would allow Russia’s President and his government to “protect the sovereignty of the country” by confiscating the property and assets of foreign countries operating in the Russian market. According to the Russian Council of Federation and the Russian Parliament, this law could potentially be adopted by the end of May. Andrew Klishas, Head of the Committee on Constitutional Legislation of the Russian Council of Federation, tells GCR Magazine that the new law will fully comply with international legislation. It will be designed on the renowned Cyprian law, which provided the country’s government the right to seize the accounts of depositors and investors, including foreign, as part of measures aimed at avoiding a default of the country. While it’s difficult to say which foreign assets may be confiscated, theoretically the Russian government will have a right to seize all kinds of assets of foreign companies operating in Russia. The current tensions between Western governments and Russia could negatively affect US and EU businesses operating in Russia. Foreign coffee companies are currently well represented here, including Nestlé, Kraft Foods, McDonald’s, McCafé and more. The first repercussions on Russian coffee business have already started, with the closing of McDonald’s stores in Crimea. McDonald’s made the move, saying it was a business rather than a political decision. Some Russian officials, however, are arguing that the move was political, and that the company shut down its operations because it didn’t want to work with Russian Crimea. Officials are now arguing that the company should close its entire Russian business, including all of its McCafé locations, and leave the country. Official comments shared with GCR Magazine by Vladimir Zhirinovsky, Head of the Liberal Democratic Party of Russia, a far-right political party in Russia and one of the largest in the Russian Parliament, reflect this attitude. “McDonald’s closed its outlets in the Crimea. This is a wrong position and in such a situation the company should close its fast food restaurants and coffee chains throughout the whole country,” saysZhirinovsky. “We have already instructed members of our party to organise pickets near each outlet of the company, demanding [them] to leave Russia.” An official representative of McDonald’s Russia tells GCR Magazine that the current attacks on its Russian business are absolutely senseless, and have nothing to do with existing legislative norms. They say that the company is confident that its McCafé coffee chains and restaurants will not be closed, as there is a high demand by local residents. The spokesperson confirms that McDonald’s is aware of the initiative, but plans to continue with its expansion plans. Last year McDonald’s opened 10 new stores in Russia, increasing the total number of its Russian outlets to 60. Vera Ivanovskaya, a Senior Development Manager at McCafé Russia, says this year the figure should increase significantly. An official representative of Starbucks Russia tells GCR Magazine the company does not expect any serious problems in its Russian operations, however this will depend on further development of the political situation. The Russian opposition has already criticised the possible new law, saying it’s a senseless political initiative. The First Deputy Chairman of the Committee on Budget and Taxes, Oksana Dmitrieva, says the decision to confiscate may be only taken by the country’s President and in the presence of solid grounds. In addition to affecting coffee chains, the latest moves by Russian authorities could negatively affect the country’s leading soluble coffee manufacturers, including market leaders Nestlé and Mondelez International. Both companies have recently invested heavily in Russia, seeing major market potential among the 143 million people living in Russia. Nestlé Russia’s Kuban factory is currently the company’s largest in Europe and one of the largest in the world. The factory is located in Timashevsk and specialises in the production of soluble, freeze-dried coffee under the Nescafé Gold brand. Nestlé recently spent almost a quarter of a billion dollars on the factory. Irene Rosenfeld, CEO Mondelez International, recently told the Russian press that the country is the second largest market for the company among BRIC nations after Brazil. Mondelez International’s annual revenue in Russia is estimated at around US$1 billion and continues to grow. A significant part of the company’s production at Russian plants is exported abroad. Both companies officially commented to GCR Magazine that while they are aware of the potential law, they are hoping their operations will go on unaffected. Only time will tell if they will be safe. Many Russian analysts are saying that the consequences from the imposition of sanctions could be more severe than what companies expect. Nikolai Nikitin, a Senior Analyst with the Russian Association of Coffee Producers, says that while Russian authorities will probably not seize the assets of Western companies, they might create unfavourable conditions that could make it hard for them to work with their local partners. The government could significantly increase imports duties on products, raw materials and equipment, making it harder for these coffee giants to make their mark in Russia.