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PepsiCo to Gazprom Face Sales Threat in Ukraine Crisis
By David Rocks and Joe Carroll
March 3, 2014
Russia’s military intervention in Ukraine threatens to derail energy exploration in a region that holds a quarter of the world’s natural gas reserves, weigh on currencies from the Baltic to the Mediterranean, and force American, western European and Russian companies to work to contain the damage.
The conflict has prompted Chevron Corp. to heighten security for employees involved in searching Ukraine’s shale fields for gas. The eastern European nation’s ambitions to become an exporter of shale gas by 2020 could be dashed as the conflict escalates, while Russia faces the prospect of economic sanctions that may curb gas sales that account for 20 percent of its export revenue.
“If you’re a major western company looking at the Russian market for investment, you might not want to put your eggs in that basket right now,” said John Lough, a Russia specialist at the Chatham House, a think tank in London. “It doesn’t look like we’re going to see positive news for some time” from the region.
U.S. President Barack Obama on March 1 suspended preparations for a June summit of the G-8 countries in Sochi, where the Olympics wrapped up a week ago. While the U.S. may also suspend talks to improve commercial ties with Russia, serious sanctions are unlikely as the Europeans would have much to lose if trade with Russia were interrupted, according to Ian Bremmer, president of The Eurasia Group, a political-risk consulting company in New York.
“An action-reaction cycle could spiral,” which might spur NATO to send ships into the Black Sea, Bremmer said in an e-mail. “Shots won’t be fired, but markets will get fired up.”
Caviar Chips
Unlike in Soviet days, when Russia and its 140 million consumers were largely isolated from the world economy, domestic and foreign companies alike have much at stake.
Exxon Mobil Corp. and Royal Dutch Shell Plc pump oil and natural gas from Russia’s rich fields. Engineering giant Siemens AG reported sales of 2.2 billion euros ($3 billion) in Russia last fiscal year and plans to build 1,200 rail cars there by 2020. McDonald’s Corp. has more than 350 restaurants in Russia and about 80 in Ukraine. PepsiCo Inc. last year reported Russia revenue of $4.9 billion, from products such as soda, yogurt and potato chips in flavors such as crab and caviar.
“If you’re a citizen in the Crimea and you see tanks rolling around,” said Kenneth Shea, a Skillman, New Jersey-based analyst for Bloomberg Industries, “you’re probably not going to go out to the center of town and go to dinner.” PepsiCo and McDonald’s didn’t respond to requests for comment. Siemens, Exxon and Shell declined to comment.
Furnaces, Factories
Russian companies, meanwhile, supply much of Europe’s energy. OAO Gazprom says it provides about 30 percent of the natural gas that powers electricity generators, furnaces and factories across the region, and Europe buys about a third of the 4.2 million barrels of crude OAO Rosneft pumps daily. Any sanctions that curtail or cut off those exports would have financial consequences for the government of Vladimir Putin.
Gazprom declined to comment. Rosneft, which owns 150 gas stations in Ukraine, said they’re operating normally but declined to comment on volumes sent to Europe.
As trading began across Europe Monday, companies with exposure to Russia and Ukraine saw their shares decline. Gazprom fell by almost 17 percent and Rosneft was off 8.6 percent in Moscow.
Denmark’s Carlsberg A/S, the biggest brewer in Russia, was off 6.9 percent in Copenhagen. The company didn’t respond to requests for comment. Stada Arzneimittel AG, Germany’s biggest generic-drug maker, which makes about a fifth of its sales in Russia, fell more than 8 percent in Frankfurt. Stada said its business so far hasn’t been affected by the tensions.
Currency Hit
Ukraine’s hryvnia lost about 12 percent of its value against the euro in the two weeks ending Feb. 28 as the pro-Russian government in Kiev unraveled amid violent street protests. Russia as well as nearby countries such as Poland, the Czech Republic, Hungary, and Turkey could also see their currencies suffer, said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington and a former adviser to the Russian and Ukrainian governments.
The U.S. and its European allies haven’t taken concrete steps in response to the weekend’s events, when thousands of Russian troops occupied the Crimean peninsula –- home to a majority Russian-speaking population as well as Russian military operations –- and Ukraine put its armed forces on full combat alert and mobilized its reserves.
G-8 Membership
Russia risks losing its membership in the G-8, while the U.S. is considering imposing sanctions, U.S. Secretary of State John Kerry said yesterday. On Monday, Kerry was en route to Kiev to offer support to Ukraine’s leaders.
Ukraine has about 39 trillion cubic feet of proven gas reserves, according to the U.S. Energy Department -- enough to supply the country for two decades. Still, more than half the country’s gas comes from Russia because domestic drilling has lagged behind consumption growth.
Chevron, which has a $400 million exploration agreement for Ukraine’s Oleska shale formation, “is closely monitoring the situation,” spokesman Kurt Glaubitz said in an e-mail. Glaubitz said security measures had been taken to protect employees and their families in Ukraine, though he declined to give details.
Metals, another big export industry, could also get hit by the crisis, according to Morgan Stanley analyst Dmitriy Kolomytsyn. A shut-off of Ukrainian steel sales to Russia, though, might benefit Russian steelmakers.
Shops Shuttered
“Russian metal companies would only be hurt in the event of real military action leading to sanctions, banning them from exporting to Europe and the U.S.,” Kolomytsyn said. “But it’s too early to say if such an outcome is possible, as there are no grounds for sanctions yet.”
Russian mobile phone company Mobile TeleSystems, one of the leading providers in Ukraine, shut several shops in Kiev as the unrest was peaking. It suffered no damage, spokeswoman Elena Kokhanovskaya said last week. Russian banks and Gazprom could also be vulnerable if the crisis escalates, said Micro-Advisory, a consulting group that studies the region.
Recent and planned Russian stock offerings are also possible victims of rising tensions. Lenta Ltd., Russia’s No. 2 hypermarket chain, fell as much as 11 percent in London today, its second day of trading following an initial public offering.
Children’s goods retailer Detsky Mir Group had planned to sell shares as early as April, people familiar with the matter said last week, while German retailer Metro AG has said it will sell shares in its Russian cash & carry business in the first half. Detsky Mir declined to comment. Metro, whose shares declined as much as 7.9 percent in Frankfurt today, says it’s making good progress with the IPO preparations.
“This includes a continuous assessment of the situation in Ukraine,” a Metro spokesman said. “While we won’t comment on the political situation, we hope a peaceful development can be reached.”
