What is “holding back” international businesses to stay in Russia?

Ukrainian President Volodymyr Zelelnsky in a speech this week reiterated his call for all global brands to withdraw from Russia in an unrelenting attempt to put economic pressure on “Aries”.

To date, more than 400 companies have announced their withdrawal from Russia since the country launched a special military operation in Ukraine on February 24, according to a list compiled by the Yale University School of Management.

However, for some brands, this is not an easy thing to do.

They have no right to self-determination

Fast food giants such as Burger King and Subway of the US, UK retailer Marks & Spencer and hotel chains Accor (France), Marriott (US) are many of the companies that are being restricted from withdrawing. because of complicated franchise agreements.

A Subway store in Russia (Image: Getty)

Dean Fournaris, director of franchising and distribution at the law firm Wiggin and Dana (USA), told CNBC: “Unlike companies that are autonomous in their operations, a franchisee goes international. have to make long-term contractual commitments, including complex obligations with a counterparty, usually a franchisee or licensee”.

Under such contracts, a company – known as a franchisor – transfers its trademark to a counterparty – called a franchisee. The franchisee will then own and operate the franchisor’s brand in a specific location.

A franchise agreement can be beneficial for brands looking to expand their footprint in a particular market from both an operational and financial perspective. However, as legally binding contracts, once signed, adjustment seems impossible.

This has complicated efforts by some Western brands to exit Russia – even as many of their peers have either halted operations or pulled out of the market altogether.

Earsa Jackson, a member of the franchising and licensing team at the law firm Clark Hill (USA), said: “Operationally autonomous brands can quickly close locations because they don’t have to deal with franchise obligations”.

Fast-food chain Burger King announced last week that it was ending support for more than 800 of its franchisees in Russia and would refuse to approve any expansion. However, these franchisees still operate under a primary local franchisee.

Similarly, although it doesn’t own any stores in Russia, Subway has 450 independent franchise restaurants that are still operating in the country. “We do not directly control these independent franchisees or their restaurants, and we do not know the details of their day-to-day operations,” Subway said in a statement. “.

Meanwhile, a representative of the retailer Marks & Spencer, with 48 stores in Russia, told CNBC that they have stopped supplying products to the franchisor, the Turkish company FiBA. However, the two sides are still “discussing” the continuation of the brand’s activities there. Hotel chains Accor and Marriott have both suspended the opening of new locations in Russia, but their existing locations are still operated by third parties.

Other factors

Geopolitical tensions have confused many companies. They repeatedly made various commitments regarding the redirection of profits away from Russia or donations to Ukrainian refugees. However, their presence on the main streets of Russia is still largely determined by the franchisors.

“Some franchisees don’t want to shut down because they think the Russians are not the problem and that the brand should continue to serve its clients,” said Craig Tractenberg, director of law firm Fox Rothschild.

This puts many Western brands in a difficult situation as they both have to settle legal obligations and protect their brand image in the context of geopolitical tensions that have not shown any signs of abating. At the same time, Director Fournaris said that the withdrawal from the Russian market will be viewed quite differently by the Russian Government and, more importantly, its people.

Increased Western sanctions on Russia and further disruption to supply chains could give franchisors hope of breaking free from the legal constraints of franchise agreements. due to lack of working conditions.

However, this is not always feasible and it is more likely that companies will have to consider the legal and financial implications of termination.

In addition, ethical factors can also be considered, and the final question is probably which decision will provide the best brand protection?”, said Director Tractenberg.

From a further perspective, existing bottlenecks can bring decisive change to franchise agreements, as future participants may request additional provisions relating to franchise agreements. geopolitical risks such as “civil unrest, rebellion and related events”.

Director Tractenberg added: “Terms may be added to support closures, where trademarks would be removed, if the franchisee wishes to continue operating.

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