The ongoing war in Ukraine has sparked a massive exodus of Western brands, as well as the creative agencies that pitch them from Russia. Consumer products from McDonald’s to IKEA, professional services like Accenture and Deloitte, and even energy firms like Shell and Equinor have announced their departure from the world’s 11th largest economy as Western sanctions and the resulting plunging value of the Russian rouble makes doing business there increasingly difficult.
Amid the growing calls among Western governments and the general public for further punishment against Russia for continuing the war against Ukraine, the remaining Western firms in the country are facing PR disasters back home for halting their local operations, even as the Russian government threatens to take over any physical assets of foreign firms that leave.
As Western firms rush for the exit door, there is growing speculation that Chinese firms will fill the vacuum and provide new foreign brand alternatives for Russians in need of services and products that Western firms previously provided. Notably, many Chinese firms have decided to stay in the country, despite increasing risks that they will fall afoul of Western sanctions for continuing their local operations.
Some Chinese firms are staying because of their already large business presence in the country before the Russo-Ukrainian War. Chinese firms account for more than 45% of all smartphones sold in Russia before the war, with Xiaomi by itself accounting for more than 30%. As non-Chinese rivals like Apple and Samsung leave the country, the dominance of Chinese smartphone makers will only increase despite the decreasing purchasing power of Russian consumers. In the non-smartphone sector, Chinese lifestyle goods retailer Miniso and e-commerce portal Alibaba have maintained their niche as Russian consumers face fewer choices in the market.
Russia is China’s 14th largest trading partner, accounting for only 2% of its total trade, less than 1/9 of what China trades with the US or the European Union.
Other Chinese firms are seeing Western sanctions against Russia as an opportunity to hunt for bargains that fatten their margins. In the energy sector, for example, Chinese state-owned firms can provide a lifeline for Russian counterparts that can no longer sell their output to Western energy markets, with new deals that can provide the Russian government with new sources of revenue to continue the war in Ukraine and the domestic economy running despite Western sanctions. Russia, being a major exporter, can also help provide China with a surplus of reasonably priced grains as China lifts controls on Russian imports.
However, it remains difficult for Chinese firms, as a whole, to do a cost-benefit analysis of continuing their business in Russia. On one hand, the Russian market is simply not that important for Chinese firms selling goods and services around the world. Russia is China’s 14th largest trading partner, accounting for only 2% of its total trade, less than 1/9 of what China trades with the US or the European Union.
For Chinese brands to risk getting hit with sanctions from the West by continuing to operate in Russia may not make sense from a purely revenue-generating standpoint.
Yet, on the other hand, Chinese brands have already suffered plenty of reputational damage in Western markets before the Russo-Ukrainian War that future revenues from Western markets may not be always be guaranteed.
Chinese brands will need to continue evaluating and reevaluating their presence in Russia as the war in Ukraine continues and the economic situation in Russia changes.
Chinese brands from Huawei to DJI have suffered sanctions in Western markets for allegedly assisting the Chinese state with human rights abuses against Uyghurs in Xinjiang, selling products to Iran and North Korea, and conducting espionage activities outside China. These sanctions mean that many Chinese firms may not see much revenue being generated in Western markets whether or not they decide to fold their business operations in Russia.
Either way, Chinese brands will need to continue evaluating and reevaluating their presence in Russia as the war in Ukraine continues and the economic situation in Russia changes. If they continue to operate in Russia, their brand image will be damaged in the eyes of Western consumers even as their revenue in Russia plunge alongside the purchasing power of Russian consumers.
However, if they leave the country, it may only further dent their ability to diversify away from the Chinese domestic market and create a global consumer base loyal to their brands. Many Chinese brands are at the crossroads of international development as they contemplate how to react to increasing Western sanctions against Russia.
Featured image: Christian Lue via Unsplash