Feb 28, 2022 - Economy

Russia sends companies scrambling to reverse globalization

Illustration of a ruble coin being held between tweezers and being examined by a diamond loupe.

Illustration: Aïda Amer/Axios

The rapid transformation of Russia into geopolitical pariah is forcing global companies to scramble to reassess their investments, supply chains and other connections to the Russian economy.

Why it matters: Russia has become increasingly economically isolated in a matter of days since its invasion of Ukraine. Now, the country's shunting into a global economic corner threatens to spoil financial commitments that corporate executives previously thought were on sound footing.

  • Companies as wide ranging as Boeing, McDonald’s, BP and Citigroup are at risk of suffering disruption or losses due to their exposure to Russia.

The big picture: Russia’s sudden status as an economic anathema has triggered a form of reverse globalization — with Western countries including the U.S. taking steps to excise Russia from the global financial system.

  • Shipping giant Maersk warned it may cut Russia off from shipments.
  • Citigroup reported Monday that has about $9.8 billion in exposure to Russia, including loans, government debt and cash on deposit.
  • Shell announced Monday it will end its alliance with Russian energy giant Gazprom, while BP announced it’s offloading its 19.75% stake in Russian oil giant Rosneft.

What they’re saying: “This military action represents a fundamental change,” BP chair Helge Lund said in a statement. “It has led the BP board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue.”

Between the lines: Major manufacturers are rushing to assess the impact of the war on their already stressed supply chains, as Russia supplies key elements like palladium and titanium.

  • Boeing gets about one-third of its titanium from Russian sources, though the company has stockpiled the material during the pandemic, according to a person familiar with the matter.
  • The auto industry is getting jittery over the potential impacts, including on the supply of materials used to produce semiconductors, which are already exceedingly hard to get.
  • “Russia is not a large manufacturer, but it dominates the supply of certain key commodities including metals like palladium and gases such as xenon,” Capital Economics economist Jennifer McKeown wrote Monday.

Yes, but: Russia is still not being blocked from exporting oil and gas, the country’s core source of international revenue. Nor has Russian President Vladimir Putin yet taken steps to disrupt the flow of energy.

  • Cutting off or sanctioning Russian oil and gas would lead to a further escalation in global energy prices — with a particularly stark impact on Europe, which relies heavily on Russian gas.

The bottom line: Companies with investments in Russia may be forced to stomach losses, but the biggest impact would come if leaders target energy.

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