Cold War on Business: The Putin Paradox Spoiler Main image in the article. Source of the article: Cold War on Business: The Putin Paradox - Fortune There is also a video at the source. Date: 2014-10-08 Author: VIVIENNE WALT. Excerpt from her website: "VIVIENNE WALT is an award-winning foreign correspondent, who has written for TIME Magazine since 2003. Sheâ€™s reported from some 30 countries across the world. . . . " The more the West tries to punish Russiaâ€™s president, the more popular he gets. A visit to Moscow reveals no signs that heâ€™ll relentâ€”or make things easier for U.S. business. Fly into Moscow on Russiaâ€™s national carrier, Aeroflot, and you will be treated to a dose of nostalgia. The flight attendants are decked out in Soviet red, their jackets and hats emblazoned with the hammer and sickle of the Communist Party, which ruled this country with an iron fist during much of the past century. Donâ€™t be fooled by the airlineâ€™s vintage branding. The road from the airport into the city makes it clear that those days are long gone. Dozens of billboards line the highway, pushing not party slogans but modern-day dreams to Russiaâ€™s 143 million people: chic global fashion brands, European luxury cars, and much more. Welcome. Youâ€™ve landed 23 years after communismâ€™s collapseâ€”in a country that is once again engaged in a game of chicken with the West. This time around, Russian President Vladimir Putin and his American and European counterparts do not appear to have their fingers poised over their nuclear buttons. Yet the enmity that has riven the two sides is real. It has imperiled multibillion-dollar deals and could ravage business relationships for years to come, as well as pummel the earnings of countless U.S. businesses, from oil producers to investment banks. Commentary: Indeed. It will hurt both the sides, but will benefit one side to learn to be completely dependent on itself, and no one else, not even PRC. The escalating tension this year is depressing. It started with Russiaâ€™s seizure of Crimea from Ukraine in March, and it has been followed by a cascading series of punches and counterpunches: U.S. sanctions on Kremlin officials, Putinâ€™s support for Ukraine separatists, more penalties against Russia, and then counter-sanctions as Russia banned the U.S., the European Union, Norway, Australia, and Canada from selling billions of dollarsâ€™ worth of fruits, vegetables, fish, and meats to Russia. The downing of the Malaysia Airlines jet over eastern Ukraine, struck apparently in error by rebels using Putin-supplied rockets, killed 298 people and prompted yet another round of sanctions. These restricted credit to some of Russiaâ€™s state-owned conglomerates and banks, which, in turn, hampered multiple deals, such as Exxon Mobilâ€™s Arctic exploration with state-run Rosneft. As the winter closes in, Russians are left to wonder just how steep the price of this conflict will be to their post-Soviet comforts. Will Western leaders, despite their tough talk, quietly ease sanctions, especially since the U.S. has dragged into action a reluctant Europe, 30% of whose gas comes from Russia? Eventually, many Russians believe, the fissures between the U.S. and the EUâ€™s 28 countries will make sanctions impossible to maintain. They could be right. Commentary: The sheer arrogance and the counterfeit and pompous moral hubris of certain western leaders has only one cure - a massive economic shock. Yet there is another scenario, which, many observers believe, is just as likely: that Putin, with about $465 billion in foreign cash and gold in Russiaâ€™s Central Bank, could try to ride out sanctions, perhaps for years, and emerge even stronger (his approval ratings are above 80%) as the Man Who Faced Down the West. â€œPutin thinks that neither the U.S. nor the EU is prepared for a hot war in Europe,â€ according to Stanislav Belkovsky, a political consultant in Moscow. By contrast, he says, Putin conveys a sense that he is not afraid of conflict. â€œFor all the problems in the economy,â€ he says, â€œPutin has the scent of victory.â€ Which Global Companies Face Risk in Russia The Westâ€™s deteriorating relations with Russia threaten to close off a rich market for consumer goods. Add an anemic projected economic growth of 0.5% next year, due to the weak rube, and Ukraine-related sanctions, and Russian consumers may be pulling back on everything from Pepsi to Hugo Boss suits. here are some brands with major exposure. â€”Phil Wahba 1. PepsiCo Russia is PepsiCoâ€™s second-largest market after the U.S. with 2013 sales of $4.9 billion. Decades ago, Pepsi was the first Western branded consumer product made there. But sales are starting to falter, and in July, PepsiCo acknowledged the increasingly â€œchallengingâ€ environment there. 2. Danone Russia is the biggest market for the French dairy company, which bought Russiaâ€™s Unimilk in 2010. having 24 plants in Russia reduces the impact of sanctions, but the slumping economy is hurting sales. 3. Carlsberg The Danish brewer reduced its forecast this summer: It now expects sales in Russia, where it is the biggest brewerâ€”the company says it commands 39% of the countryâ€™s beer market and operated 10 breweriesâ€”to full 6% to 7%. 4. McDonaldâ€™s Authorities have closed eight McDonaldâ€™s restaurants, pending inspections, so far. Russia contributes less than 5% of total company operating profit, but it has been one of McDonaldâ€™s few reliable European markets. the company has doubled its Russian outlets over the past five years. 5. Hugo Boss The German clothier has been dropping the franchise model in Russia in favor of company-owned stores, including a new flagship in a trendy Moscow mall. Sales have slowed in Prague and Budapest because fewer Russians are traveling. Putin has been turning the screws tighter on Western businesses. Food inspectors began raiding dozens of McDonaldâ€™s Russian outlets in the summer and shut down several of them for minor infractions. The order included the iconic McDonaldâ€™s on Moscowâ€™s Pushkin Square, which crowds thronged when it opened in 1990 as the first American fast-food joint in Communist Russia. In late September, Russiaâ€™s Parliament voted to restrict foreign ownership of local media to 20%, a move that could affect U.S. companies such as Disney, which has a Russian TV channel, and force the sale of the independent Russian financial paper Vedomosti, which is part owned by News Corp.â€™s Dow Jones and Pearson. Days later, Putin and Iranian President Hassan Rouhani stated that they would no longer settle their bilateral trade in dollars. The next day, Russian officials announced they were halting the Future Leaders Exchange Program, in which American and Russian teenagers spend a year in each otherâ€™s countries. The government insisted the decision was made because a gay Russian student had applied for asylum in the U.S., but to many it suggested just another chill with the American government. Hearing the news, my interpreter, who was 7 when communism ended, slammed her fist in disappointment. â€œNo!â€ she said, close to tears. â€œI really wanted my son to work on his English and go to America on the program.â€ Indeed, the prospect of isolation from the West troubles young Muscovites accustomed to their wired, global lifestyle. Starbucksâ€™ 38 Moscow cafÃ©s are filled with such urbanites, tapping away on their iPads. Thereâ€™s no chance that Soviet-style isolation will return, but older Russians see echoes of it in todayâ€™s crisis. â€œIt is strange how close we are to a new Cold War,â€ says banking and media tycoon Alexander Lebedev (Britainâ€™s Independent and Evening Standard newspapers are among his vast holdings), who was a KGB spy in the 1980s during the real Cold War. Sitting in his top-floor office suite overlooking Moscowâ€™s gleaming skyscrapers, Lebedev says he believes economic pressure will not persuade Putin to change his policies. â€œSays Deere CEO Samuel Allen, just back from Moscow: â€œRussians, even young Russiansâ€”80% of them think Putin is right. I thought that the highly educated person would have a different perspective, but most people view the issue as righting a wrongâ€”the wrong being that Khrushchev should have never given Crimea away.â€ That may be. But the effects of nearly a year of conflict and sanctions are evident. After years of high growth, Russia, the worldâ€™s biggest oil producer, is expected to stagnate next year, with 0.5% growth, according to the IMF. The ruble plummeted to 40 to the dollar in October, about 20% lower than one year earlier. Its free fall has sent Russians scrambling to move money abroad; an estimated $120 billion could leave Russia this year. Commentary: Those Dollars essentially get reduced to what they are, pieces of paper, especially so when the west is itching for sanctions. There are myriad signs of resistance to Western commerce. French cheeses, Spanish ham, and other delicacies have vanished from supermarket shelves or are now disguised as Turkish or Belarusian, with higher sticker prices. The American-style Chicago Prime steak house near Pushkin Square no longer serves lobster, and its Black Angus steaks now come from a ranch in central Russia rather than Kansas. The Russia-U.S. standoff is beginning to be felt by American business. In late September, Ford said it could lose about $300 million worth of Russian business this year. Hundreds of deals are frozen as companies attempt to figure out how to comply with new laws. George Kogan, a Russian-born American investment adviser in Moscow, says that years of â€œfantasticâ€ deals, including numerous IPOs, have run dry: â€œU.S. hedge funds are all saying, â€˜We donâ€™t invest in Russia.â€™â€ In Moscow, he says, â€œpeople who are handing out jobs and contracts would prefer not to deal with Westerners.â€ Alexis Rodzianko, president of the American Chamber of Commerce in Russia, says U.S. investment firms are â€œcooling their heels.â€ Most big U.S. corporations operating in Moscow are loath to discuss the sensitivities of U.S.-Russian relations. Many declined Fortuneâ€™s requests for an interview. A rare CEO who was willing to speak is Samuel Allen of agricultural equipment giant Deere, back in the U.S. after a trip to Russia. Allen says the sanctions are â€œcertainly having an impact on our business. Some of our customers have had trouble getting financing, and things have slowed down quite a bit.â€ Allen says he was struck by the support for Putin. â€œIn our Moscow office,â€ he says, â€œwe have 300 people. Russians, even young Russiansâ€”80% of them think Putin is right. I thought the highly educated person would have a different perspective, but most people view the issue as righting a wrongâ€”the wrong being that [Soviet leader Nikita] Khrushchev should never have given Crimea awayâ€ in 1954. Commentary: This should hardly come as a surprise to you, Mr. Allen. These people are, by your own admission, highly educated. What else on earth did you expect? For their part, Russian officials insist they can weather the storm. One government official says that top leaders met last spring to consider the worst possible scenarios and concluded they should build new alliances with China, Persian Gulf states, and others, and begin creating their own products in order to end their dependence on the West. One month later Putin signed a $400 billion deal with China to pipe natural gas to that country for the next 30 years. The plan sounds optimistic. â€œIf there were an ability to create proper import substitution, it would have been built long ago,â€ says Andrei Movchan, a co-chairman of Third Rome, an investment group in Moscow. â€œThey failed 100% on that, because they donâ€™t allow private enterprise to flourish.â€ Russian tech execs met in Moscow in early October to discuss how to build up their industry, which has lagged for years, as the country imported whatever it needed, largely from the U.S. (where many Russians now work in Silicon Valley). â€œOil spoiled us,â€ says the official. Now Russia needs to innovate, and the record of countries trying to wean themselves from natural resources dependence is, to put it mildly, not good. Commentary: This realization, that oil spoilt them, in itself is a worth an applause. This should serve as a blessing in disguise to completed remove dependency on the west. As bad as things get, thereâ€™s one place in Moscow that reminds Russians that things could be a whole lot worse: the cityâ€™s Cold War Museum, which opened a few years ago in a converted bunker. More than 200 feet underground, Soviet officers once monitored the nuclear-bomb control center, braced to launch the missiles that could destroy U.S. targets. Showing a group of locals around the bunker late one night, museum guide Irina Chereponko says the museum â€œtries to teach the new generation not to repeat the mistakes of the past.â€ So far, she says, she remains stymied about what to say about Russiaâ€™s current conflict with the West. â€œIt will take time to have that perspective about things now,â€ she says. â€œMaybe in 30 or 40 years.â€ This story is from the October 27, 2014 issue of Fortune.