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PepsiCo, Gazprom Face Sales Threat in Ukraine Crisis

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 and force companies to work to contain the damage.

Chevron Corp. (CVX) heightened security for employees involved in searching Ukraine’s shale fields for gas. The eastern European nation’s ambitions to become a shale-gas exporter by 2020 could be dashed as the conflict escalates, while Russia faces the prospect of 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 Chatham House, a think tank in London. “It doesn’t look like we’re going to see positive news for some time” in the region.

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U.S. President Barack Obama suspended preparations March 1 for a June summit of the G-8 countries in Sochi, where the Olympics ended a week ago. While the U.S. may also halt talks to improve commercial ties with Russia, serious sanctions are unlikely because Europe would have much to lose if that trade flow were interrupted, according to Ian Bremmer, president of Eurasia Group, a political-risk consultant in New York.

Photographer: Andriy Mosienko/AP Photo

Chevron Europe Exploration and Production CEO Derek Dupree Magness, left, shakes hands with Ukrainian Minister of Energy and Coal Industry Eduard Stavitsky, after signing an agreement on the division of hydrocarbons in Kiev, Ukraine, Tuesday, Nov. 5, 2013. Close

Chevron Europe Exploration and Production CEO Derek Dupree Magness, left, shakes hands... Read More

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Photographer: Andriy Mosienko/AP Photo

Chevron Europe Exploration and Production CEO Derek Dupree Magness, left, shakes hands with Ukrainian Minister of Energy and Coal Industry Eduard Stavitsky, after signing an agreement on the division of hydrocarbons in Kiev, Ukraine, Tuesday, Nov. 5, 2013.

No Isolation

A chill in U.S.-Russian ties could create new uncertainty for Russian companies and foreign firms tapping a market with 140 million consumers and rich natural resources. The interdependency is a turnabout from the nation’s former isolation from the world economy during the Soviet era.

Any company “supplying consumer goods to the Russian market, given that the ruble is falling, is likely to be hit,” Eugene Nivorozhkin, professor of economics and finance at University College London’s School of Slavonic & Eastern European Studies, said in a phone interview.

Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA) 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. Boeing Co. (BA) delivered seven jets to Russian buyers in 2013, a year when U.S. exports of planes, aircraft engines and parts to the country topped $1.94 billion, Census Bureau data show.

A Snapshot of Ukraine's Past and Future

McDonald’s Corp. (MCD) has more than 350 restaurants in Russia and about 80 in Ukraine. PepsiCo Inc. (PEP) 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.

Photographer: Andrey Rudakov/Bloomberg

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. Close

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Photographer: Andrey Rudakov/Bloomberg

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.

No Dinner

“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.

Boeing fell 0.5 percent to $128.22 at the close in New York and Purchase, New York-based PepsiCo slid 0.7 percent to $79.52 as benchmark U.S. indexes slumped. Russia’s Micex index plunged 11 percent, the most since November 2008, and stocks on major European bourses tumbled.

Denmark’s Carlsberg A/S (CARLB), the biggest brewer in Russia, slid 5.3 percent in Copenhagen. Stada Arzneimittel AG, Germany’s biggest generic-drug maker, which makes about a fifth of its sales in Russia, dropped 5 percent in Frankfurt. Stada said its business so far hasn’t been affected by the tensions. Carlsberg didn’t respond to requests for comment.

Currencies Fluctuate

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.

Russian companies supply much of Europe’s energy. OAO Gazprom (GAZP) 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 (ROSN) 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 it was operating normally while otherwise declining to comment on volumes sent to Europe.

Gas Reserves

Ukraine has about 39 trillion cubic feet of proven gas reserves, according to the U.S. Energy Department. While that’s enough to supply the country for two decades, more than half of Ukraine’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 the San Ramon, California-based company took security measures to protect employees and their families in Ukraine. He declined to give details.

Russia risks losing its membership in the G-8, while the U.S. is considering imposing sanctions, according to U.S. Secretary of State John Kerry, who was flying to Kiev today to offer support to Ukraine’s leaders.

Few Options

For the U.S., the best option would be to “see what you can do to slow down, if not stop, Russian expansionist efforts” and work with the European Union and International Monetary Fund to help restore stability in Ukraine, Thomas Pickering, a former ambassador to Russia during President Bill Clinton’s administration, said in a phone interview.

While the U.S. normalized trade relations with Russia shortly after the latter nation joined the World Trade Organization in 2012, the U.S. can’t take action at the Geneva-based trade arbiter as a way to strike back at Putin’s government, according to Pickering.

“You can’t use trade and the WTO as a political weapon,” he said. The WTO is supposed to take the politics out of trade, he said.

Airlines in Russia and other countries that once belonged to the Soviet Union are emerging as an important aerospace market. Boeing, the world’s largest planemaker, has garnered 127 orders from the country since the late 1990s, according to the company website.

Plane Purchases

Boeing’s 2013 industry outlook estimated that the countries in the Commonwealth of Independent States, including Russia, Ukraine and Belarus, will buy 1,170 aircraft worth $140 billion over the next 20 years. Boeing’s seven deliveries to Russian carriers last year had a list value of $2.1 billion.

“We are watching developments closely to determine what impact, if any, there may be to our ongoing business and partnerships in the region,” Doug Alder, a spokesman for Chicago-based Boeing, said by e-mail. “We won’t speculate on the potential impact of sanctions or any other potential government actions.”

A prolonged trade standoff could squeeze U.S. and European aerospace manufacturers’ access to titanium, since Russia is the largest global supplier of the lightweight metal widely used in aircraft, said Richard Aboulafia, aerospace analyst with Teal Group, a Fairfax, Virginia-based consultant.

Boeing’s receives about 35 percent of its titanium from VSMPO-AVISMA Corp., which is owned by State Corporation Russian Technologies and produces parts for the 787 Dreamliner, 737 narrow-body jets and other models, according to the U.S. planemaker’s website. Boeing expects to spend $27 billion over the next three decades on Russian titanium, aerospace design-engineering services and other services and materials.

Aerospace Ties

“It’s going to put a chill on Western-Russian aerospace relations,” Aboulafia said. “You can’t rule out the price of titanium being affected.”

While other metals may be affected by the crisis, a shut-off of Ukrainian steel sales to Russia might benefit Russian steelmakers, according to Morgan Stanley analyst Dmitriy Kolomytsyn.

“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.”

While U.S. exports of new and used passenger cars rose 52 percent to $1.26 billion, locally built brands such as Lada and by Asian and European automakers dominate Russian sales. General Motors Co. (GM)’s Chevrolet Cruze was the top-selling U.S. model in January, and ranked No. 12 in Russia, according to the Association of European Business in the Russian Federation.

Russia IPOs

Recent and planned Russian stock offerings are also possible victims of rising tensions. Lenta Ltd., Russia’s No. 2 hypermarket chain, fell 14 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 5.4 percent in Frankfurt today, said 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.”

To contact the reporters on this story: David Rocks in Berlin at drocks1@bloomberg.net; Joe Carroll in Chicago at jcarroll8@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net

To contact the editors responsible for this story: Kevin Miller at kmiller@bloomberg.net; Jacqueline Simmons at jackiem@bloomberg.net

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