Corporate Profits Caught in Russia’s Crossfire
The crisis in Ukraine, where pro-Russian forces are taking over the eastern part of the country, seems very far away. However, the U.S. did $9.14 billion worth of trade with Russia in the first three months of this year alone. We did $620 million worth of trade with Ukraine at the same time. This conflict will hit some American companies where it hurts: Their profits.
And you may want to scan your portfolio to see if you’re vulnerable.
The U.S. and its European allies may slap tougher sanctions on Russia. The Russian economy will probably weaken, and international investors are already exiting. The IMF cut its growth forecast for Russia’s GDP to just 0.2% from 1.3%.
Sanctions may include freezing the assets of Russian companies in energy, mining and finance. If that happens, Russia could, and probably would, retaliate.
For his part, Russian president Vladimir Putin warns he’s already rethinking letting Western companies operate in Russia’s economy. That includes energy projects.
There’s a thing in war called “collateral damage.” That’s damage in addition to the intended target. Collateral damage is often used to refer to civilian deaths and the destruction of civilian property.
I think one kind of collateral damage in this conflict could be the profits of select Western companies.
Fast Food Companies
McDonald’s Corporation(NYSE:MCD) operates more than 400 restaurants in Russia. The ruble is weakening, and that’s hurting the company’s margins in Russia by 2 percentage points. And a widening conflict will drag down the company’s overall margins in Europe.
Also keep your eye on PepsiCo, Inc.(NYSE:PEP). It has nine of the top 50 packaged food and soft drink brands in Russia. Pepsi’s first quarter revenues in Russia jumped by 10%. And the $5 billion in revenues it reaped in Russia in 2012 accounted for 7.4% of the company’s total net revenue.
Coca-Cola (NYSE: KO) seems to have less exposure to Russia than Pepsi. But