The Great Unwinding
The Mass Exodus of Western Companies from Russia
You had to be there. On Jan 31 1990, 8000 Muscovites stood in line for hours for the opening of the first McDonald’s in Russia, on Moscow’s Pushkin Square, for their first taste of American-style hamburgers and French fries, served by smiling waitresses (a radical departure from the usual dour take-it-or leave-it style of Soviet service), complete with ketchup and pickles. By the end of the first day, 30 000 customers had been served. The Golden Arches had arrived, and along with them, the golden era of Western business in Russia.
Over the following two decades, over five thousand Western companies of all nationalities poured into Russia, setting up shops, factories, joint ventures, subsidiaries, franchises, retail chains—every conceivable business model, offering every conceivable product and service. They employed as many as 2 million people. And over the following two decades, they literally changed the face of Russia, as Western brands took over the downtowns and living rooms and leisure worlds of Russians, and bought stakes in key industries. Moscow and Saint Petersburg were transformed, but so were those of Russia’s lesser cities, including previously closed military-industrial centers such as Chelyabinsk, and others previously known only by their secret code names. Western brands and businesses were suddenly everywhere.
But in February 2022, with the Russian invasion of Ukraine, the tide abruptly reversed. In the past three months over a thousand Western companies have closed their Russian operations and departed, or have vowed to do so, once they have completed their existing contracts, sold off their assets, and provided for their Russian employees. The remaining companies are under growing pressure to leave, because of sanctions and public opinion from outside Russia.
Once again, McDonald’s was the iconic flagship. By this time McDonald’s had been in Russia for thirty-two years, and owned over 800 restaurants with 62 000 employees. Within a few weeks of the Russian invasion, McDonald’s had sold its entire network to a Russian entrepreneur, a Siberian billionaire who had previously made his fortune in the coal business, but was a McDonald’s franchisee. Few have been able to exit so cleanly. Renault has sold its two Russian plants for two rubles. Citibank, the largest lender in Russia, is still looking for a buyer for its retail banking network. Google’s Russian subsidiary is about to file for bankruptcy. Many financial players, in the words of one Western banker, are forced to “dance with the devil” to get the best terms they can. It is a fire sale on the scale of the century.
For the moment all is chaos. Western and Russian sources are reporting conflicting numbers, and one suspects that the companies themselves may be telling both sides what they want to hear: to the Western media “I’m leaving!” and to the Russians, “I’m staying!” But the exodus is real, and in this newsletter, I would like you to join me in taking a look ahead. What have been the lessons of the thirty-year odyssey of the Western companies in Russia? What will be the long-term impact of their departure? And will they ever return?
What did the Western companies bring to Russia?
When the first Western companies arrived in the early 1990s, Russia was practically in ruins. The Soviet-era consumer and services sectors, anemic to begin with, had collapsed. The food distribution system disintegrated. Grocery shelves were empty. Collective farms disbanded. In industry, whole factories lay idle, especially in the closed military-industrial cities, where military orders had ceased. The oil industry had fallen apart. The civilian nuclear industry had been plundered. What remained of the Soviet economy was a shambles.
There were vast opportunities to invest in restoring production, especially of exportable commodities. The first thing the Western companies brought was money. The World Bank estimates that between 1992 and 2020 the net inflow of Western capital into Russia totaled over $660 billion. To be sure, only a portion of this sum was brought in and managed by the Western companies themselves; there was a parallel flow of foreign capital invested into Russian entities. Nevertheless, the direct capital input of the Western companies in Russia was crucial.
But the biggest opportunity for Western businesses was that after six decades of the Soviet system, entire sectors of a modern economy were missing. The creation of a market economy based on money and contracts required a whole new range of professions, from lawyers and advertisers and real-estate agents to bankers and accountants. An open economy needed experts in international trade and finance. Businesses based on profits required a radical mental rewiring and new market-oriented skills. There was no lack of talented and well-educated Russians, but the Soviet system had had little use for those specialties.
Western companies brought missing ingredients essential to the post-Soviet market economy-- new business models, new skills, new financial products like mortgages and credit cards, efficient management, and commercial problem-solving. The key to all of these was people. The Western companies brought in thousands of experienced specialists in fields that were new to Russia, both in “soft” skills—lawyers, advertisers, accountants, economists, investment bankers—but also more technical “hard” ones, such as automotive engineering and oilfield services. The ranks of these experts soon multiplied, as the Western companies set up training programs for their Russian employees. Within less than a decade, a “cadre” of home-grown Russians had appeared in dozens of fields that had never existed before. (In this respect, the Russian experience was very different from that of China under Deng Hsiao-ping, when many thousands of Chinese left China to study and take jobs in the West. By comparison, fewer Russians did.)
But it was in the consumer sector that the hands-on contribution of Western personnel on the ground was crucial. Western companies arrived like a flood in the desert of the Russian consumer world, especially once global oil prices began rising at the end of the 1990s, bringing a bonanza of oil-export revenues and raising Russians’ disposable incomes to unprecedented heights. Western companies sold home furnishings (Ikea), groceries (Achan), high fashion (Cartier), cosmetics and beauty products (Estee Lauder) digital phones (Nokia), and then smartphones (Apple). Most of these products were imported, although some companies (notably McDonald’s, for its trademark fries) set up their own domestic supply chains, employing Russian contractors. To serve these companies’ Russian operations, Western law firms, accountancies, advisories, and banks, proliferated, especially in Moscow. They were soon joined by IT companies and Internet service providers. In these cases, too, their key contribution was people, who brought expertise and experience in modern business law and finance.
The penetration of Western companies was never as deep or as transformative in Russian industry, in what one might call the “hard” sectors as opposed to the “soft” ones like consumer goods and services. One reason for this is the industrial terrain was already occupied by legacy Russian companies, which were not prepared to grant the Western companies the same degree of latitude and control that they enjoyed in the “soft” sectors, where the newcomers frequently started from a blank slate and initially faced no competition. In some sectors, such as metals and machine-building, there were fierce battles for dominance, and the Westerners were held to peripheral roles.
The oil industry was an exception, partly because it was a critical source of export revenues, and partly because it was in serious trouble. Oilworkers from Alberta created the first joint ventures in northwest Russia and helped to improve inefficient Soviet oil-drilling practices. Shortly afterward, engineers from Schlumberger brought revolutionary oilfield techniques, such as fracking and horizontal drilling, to the West Siberian oilfields, and production ballooned. At the other end of the country, in Sakhalin, ExxonMobil’s engineers pioneered long-reach wells in shallow offshore fields. The Western role in the gas industry, though never as large as in oil, nevertheless opened a whole new chapter in Russian gas, with the development of LNG. Shell produced Russia’s first LNG from offshore wells on Sakhalin, and sold LNG contracts—an innovation--all over the Pacific basin. France’s TotalEnergies and cryogenics specialists Linde and Technip partnered with a private-sector startup named Novatek to develop LNG in north Russia. A new wind blew through the Russian oil and gas sector, bringing a turnaround in production and exports.
Western companies also played an innovative role in transportation, with European companies leading the way. Renault spearheaded the development of a new Lada passenger car for the Russian mass market. Siemens partnered with a Russian railroad group to pioneer develop next-generation trains at a major new plant in Yekaterinburg; its Moscow to Saint-Petersburg high-speed train, the “Sapsan” (“Peregrine Falcon”), became the star of the renovated Russian rail system.
The high point of the role of Western companies in Russia was probably reached around 2010. But at that point, two things started to happen. First, Russian businessmen and entrepreneurs began moving into the niches that the Western companies had initially had to themselves. Across a wide spectrum of consumer goods and services, Russian entrepreneurs demonstrated that they had mastered all the necessary skills and meant to give the Westerners a run for their money.
Second, in the industrial sector, the state moved to regain control of assets regarded as “strategic” that had drifted into private hands in the 1990s, and consolidated them in vast state-owned conglomerates, such as Rosneft, Rosatom, and above all Rostec, which absorbed hundreds of legacy Soviet-era companies across defense, space, metallurgy, and many other fields. As state control increased, there was mounting official resistance to dependence on foreign skills and technologies; “import displacement” became the slogan of the day. Western companies came under growing pressure to transfer proprietary technology to Russian companies, in some cases to meet military contracts. In the background, Russian-Western relations deteriorated. Following the Russian occupation of Crimea, the flow of Western investment declined, and some Western companies began to look for the exits. Arguably, the heyday of the Western companies had peaked, although those with established positions mostly continued to hold their own. Then came the invasion.
Will the Western Companies Ever Return to Russia?
Could there ever be a “return to normal,” in which Western companies move back to Russia on something like the same scale as before? Understandably, many of them are trying to leave the door open. Renault, for example, has negotiated a six-year option that would enable it to regain its Russian assets. The Russian government, too, has moved cautiously, damping down overheated rhetoric from some Duma deputies and blocking their attempts to pass a tough law mandating confiscation of Western assets.
But a massive “return to normal” will not happen, for three reasons. First, the immediate cause of the unwinding, the war in Ukraine, is not likely to be settled soon. Indeed, the cannonade of sanctions, embargoes, and cutoffs is still intensifying, with no end presently in sight. Second, the “Great Unwinding” has been deeply traumatic to Western investors and policy-makers, not to mention the companies themselves. The mass exodus of Western business marks the end of the hopes and beliefs that had prevailed for thirty years—that investment and trade would promote good relations in a globalizing and peaceful economy. The spirit of Wandel durch Handel (“Change through Trade”), the German phrase that symbolized that confident optimism, now lies in ruins. Finally, and not least, the unique opportunities of the ex-Soviet 1990s no longer exist. Even if Western companies wished to return, they would find their previous niches filled with Russian rivals--many of them trained by the Western companies themselves. In industry, an additional obstacle is the growing official resistance to dependence on foreign technology, compared to the openness of the post-Soviet period.
In sum, the massive influx of Western companies into Russia between 1990 and 2022 was a one-time historical event, the result of the post-Soviet void in many fields, the unprecedented opening of the newly-marketized Russian economy to international trade and investment, and the atmosphere of optimism in East-West relations that still prevailed until the end of the 2010s. The near-missionary enthusiasm with which a generation of Western businesses came to Russia will not be repeated. On June 12—today--the historic Pushkin Square ex-McDonald’s restaurant will reopen under its new name and logo. The reign of the “Golden Arches” will be well and truly over.
But what is not over is the era of the Western sanctions. The Western companies will be gone, but the Western sanctions will remain. That will be the subject of my next post. Please stay tuned!
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Thane Gustafson is the author and co-author of eight books on Russian affairs, including most recently Wheel of Fortune: the Battle for Oil and Power in Russia (2012), The Bridge: Natural Gas in a Redivided Europe (2020), and Klimat: Russia in the Age of Climate Change (2021), all three with Harvard University Press.