Ronald McDonald appears to be caught in the economic crossfire between Moscow and Washington. More than 200 of McDonald’s restaurants in Russia—or roughly half the country’s total 440 locations—are now under government investigation, according to the company, and a regulator has already closed nine McDonald’s outlets in recent weeks.
The crackdown on one of the most visible U.S.-owned consumer brands in Russia is widely seen as retaliation for sanctions imposed by the U.S. and Europe over Moscow’s role in the Ukraine crisis. Health and safety regulation “is an instrument that’s often used” by the Kremlin to gain leverage in political disputes, says Nonna Crane, a lawyer with Chadbourne & Parke specializing in Russian business issues. For example, Russian health regulators in 2006 banned imports of wine and mineral water from Georgia amid deteriorating relations that led to a military conflict between the two countries.
McDonald’s (MCD) has been a hit with Russian consumers since 1990, when it opened what was then its biggest outlet in the world on Moscow’s Pushkin Square. The fast-food giant doesn’t disclose revenue by country, but market-research group Euromonitor estimates that McDonald’s Russia sales were $2.2 billion last year—or about 8 percent of its worldwide sales of $28 billion.
McDonald’s enjoyed good relations with the Kremlin as recently as last February, when the company was an official sponsor of the Sochi Olympic Games and built a wheelchair-accessible playground as a gift to local children. In August, however, Russia’s consumer-safety regulator closed the flagship Pushkin Square restaurant, along with several others, for alleged violations of sanitary rules.
In a statement released this weekend on its Russian website, McDonald’s says a court has “ordered the further temporary suspension of operations” at nine outlets, including Pushkin Square. “We disagree with the court’s decision and will appeal it.”
How far will the Kremlin go? If it wanted to close McDonald’s outlets en masse, there’s not much the U.S. company could do about it, says Crane of Chadbourne & Parke. The only avenue of appeal is the Russian court system, and prevailing there against the government would be “very, very difficult,” she says. On the other hand, a mass shutdown could jeopardize the jobs of some 37,000 people who work for the company in Russia, as well as Russian farmers and others who supply food to local outlets.
The trouble in Russia comes at a bad time for McDonald’s, which is expected to report disappointing third-quarter results later Monday. Analysts estimate that revenue fell 1.8 percent, while net income dropped 11 percent. The company also has been hit by a food-safety scare in China and by lagging sales in the U.S., where rising prices are driving away some budget-minded customers.