By Barna Gáspár, Associate Director, Corporate Ratings

However, the fast-changing circumstances of the crisis related to Russia’s invasion of Ukraine make it hard to judge the longer-term impact on the sector from the Russian economic crisis, disrupted supply chains and spill-over effects on consumer confidence and household spending in Europe and the rest of the world.

Russia has nominally attractive market for consumer goods considering its large population of 144 million, hence the appeal for western companies even in the days of the USSR. However, for investment-grade western consumer goods groups for which the country has long been a target market, Russia remains responsible only for a small percentage of global sales, ensuring the direct credit implications of the current crisis remain manageable – at least for now.

One reason is that the Russian market hasn’t lived up to its potential. According to latest OECD data, household spending in Russia is slightly less that Germany’s and moderately higher than in France, Italy and the UK even though it has roughly around double the population. In addition, income in Russia is unevenly distributed. Since the early 1990s, the net national wealth shared by the country’s 10% most wealthy has risen 70%, leaving their average annual income (purchasing power parity) at EUR 104, 600 compared with just EUR 7,700 for the bottom 50%, according to the World Inequality Report 2022.

A fast-growing list of foreign durable consumer goods companies, including luxury goods suppliers, have frozen activities in Russia, from closing shops to halting deliveries under growing political pressure to do so. For non-durable consumer goods suppliers, there has been no largescale exit so far. International companies with mainly local production and sometimes owning local brands are still operating, such as McDonald’s, Coca-Cola Co. and Nestlé SA.

For suppliers of non-discretionary consumer goods, the risks are relatively mild, related more to the political pressure to exit the Russian market, supply-chain challenges should they remain, and the prospect of a dramatic slump in consumer confidence and household spending in Russia as the value of the rouble has collapsed as sanctions bite. 

For now, it is mass-market branded goods suppliers – Apple Inc., Adidas AG, H&M AB, IKEA, Nike Inc. Puma SE among others – which have led the way in suspending operations, sponsoring or commercial ties in Russia due to brand and governance (ESG) considerations. French luxury goods firms have also followed suit. Hermès International has closed its three Moscow stores (see table).

European consumer goods firms hang up on Russia (selected companies)

Russia’s contribution to overall revenue of non-durable goods suppliers is typically in mid-to-low single digits for diversified food and drinks groups such as Danone SA, Nestlé SA, Unilever PLC.

The percentage is higher for specialist supplier such as a brewer like Denmark’s Carlsberg A/S at around 15%.  Even in Carlsberg’s case, the nature of brewing ensures that the asset base is local: supply chain, production aimed at local consumers. Margins are also lower. We estimate that around 10% of group EBITDA at risk, entirely manageable as the cash flow and balance sheet for the group is strong, and management can adjust share-buybacks to make up for potential lost earnings.

France’s Danone is in a similar position. The company operates Russia’s largest dairy business with locally based assets, including local leading brand Prostokvashino. Danone has closed one of its two dairy production plants in Ukraine and is freezing new investment. The likes of Carlsberg and Danone with significant business on the ground in the two countries are exposed to the risk of modest asset impairment.

The more significant potential, long-term risk for the consumer goods sector is that the war in Ukraine ends up undermining consumer confidence and consumer spending in the rest of Europe through greater political uncertainty, higher inflation and slower GDP growth.

Eugenio Piliego, Director, and Henrik Blymke, Managing Director, contributed to this commentary.