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14 March 2022

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Some of the largest western consumer brands have pulled out of Russia this week, with McDonald’s being the first to make its move. It announced on Tuesday that it will temporarily close all 850 stores while also suspending other operations. Starbucks and PepsiCo closely followed, with Starbucks’ local licensee committing to pause operations in its 130 caf├ęs immediately and PepsiCo suspending its production and sale of its drinks brands while maintaining essential foods sales. Unilever took a similar stance to PepsiCo in which it has paused all imports and exports to and from Russia along with stopping all advertising in the country. The firm has emphasised the importance, however, of continuing to supply essential food and hygiene products that are made in Russia. KFC and Pizza Hut franchisor Yum Brands will also suspend operations of more than 1,000 restaurants that it has in Russia. These companies are uniting in their drawback from the country to express their wish to protect employees in Russia while simultaneously signalling concern for Ukrainian colleagues and their censure of the conflict.

Despite McDonald’s being a Chicago-based company, it owns 84% of the stores that it has in Russia and, therefore, is at risk of taking a big financial hit as a result of the closures. When the first McDonald’s opened in Moscow at the start of 1990, it was seen as one of the markers of the end of the Soviet Union with its commercialisation creating a queue of more than 30,000 people to get their hands on the Big Mac. The decision to pull out of Russia has been very challenging for the company with fears that it will negatively impact its Russian colleagues and partners, with further concern that it will cause globalisation and capitalism in Russia to backtrack. McDonald’s Chief Executive Chris Kempczinki noted that, for 66 years, the company has operated with the belief that “communities are made better when there’s a McDonald’s nearby”, however, companies are now acting on Russia’s decision to invade Ukraine by imposing their own measures.

In 2021, Russia and Ukraine together accounted for approximately 9% of McDonald’s revenue, yet as it owns most restaurants there, this contributed to less than 3% of its operating income making them less profitable than its franchised operations. The company has said that it will continue to monitor the humanitarian situation although it is impossible to predict when they will be able to reopen restaurants. In the meantime, the company will continue to pay full salaries to both its Russian and Ukrainian employees, and they have additionally donated US$5m to an assistance fund for Ukrainian employees as well as supporting International Red Cross relief efforts.

In attempt to cut its dependence on Russian fuel, Lord Adair Turner, chair of the Energy Transitions Commission, has proposed that British drivers should limit their speed to 55mph on motorways and turn down their heating. In recent months, the UK and its European neighbours have been clambering to bolster their domestic energy supplies by saving energy and increasing storage. This comes with the extraordinary volatility in oil and gas markets as fears that the Kremlin will retaliate against western sanctions by cutting off gas supplies are growing.

Figures from the Department for Business, Energy and Industrial Strategy show that Russian oil imports make up roughly 8% of UK demand and account for around 4% of gas supply. The supply-side issue is worse, however, as the UK sources around 40% of its gas from Russia flowing via pipelines from across Europe. Business Secretary Kwasi Kwarteng and his department have hopes that the UK can end dependency on Russian gas completely as they explore other options. Until then, consumer willingness to reduce energy consumption has potential to have an immediate impact. In the oil crisis of 1974, the government cut the speed limit on some roads and doubled the speeding fine to cut fuel consumption; some have indicated that they believe that this should be reintroduced, however, others believe that individuals should be able to continue driving without these restrictions. The most fuel-efficient speed falls between 45 and 55mph while the national speed limit on UK motorways is 70mph, suggesting that there is scope for change.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
Market Round-Up
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