TheChek News Flow

McDonald’s, Coke, P&G and IBM among those warned that leaders could be arrested, trademarks seized

Russian prosecutors have issued warnings to Western companies in Russia, threatening to arrest corporate leaders there who criticize the government or to seize assets of companies that withdraw from the country, according to people familiar with the matter.

Prosecutors delivered the warnings in the past week to companies including Coca-Cola Co. KO 0.07% , McDonald’s Corp. MCD 2.19% , Procter & Gamble Co. , International Business Machines Corp. IBM -0.31% and KFC owner Yum Brands Inc., YUM 0.38% the people said. The calls, letters and visits included threats to sue the companies and seize assets including trademarks, the people said.

Russian President Vladimir Putin last week expressed support for a law to nationalize assets of foreign companies that leave his country over its invasion of Ukraine. The prosecutors’ warnings were directed at companies across sectors, including technology, food, apparel and banking, the people familiar with the matter said.

The warnings have prompted at least one of the targeted companies to limit communications between its Russian business and the rest of the company, out of concern that emails or text messages among colleagues may be intercepted, some of the people said.

Other companies have moved to transfer executives out of Russia, other people familiar with the matter said.

Spokespeople for Coca-Cola, IBM, P&G PG -1.19% and McDonald’s declined to comment. A Yum spokeswoman declined to comment beyond the restaurant company’s past statements on its decision to pause operations at its KFC and Pizza Hut restaurants in Russia.

Late Sunday, after the online publication of this article, Russia’s embassy in Washington re-tweeted it, stamped with a red “FAKE NEWS” label. “The decision whether to continue entrepreneurial activity in our country is entirely up to the Americans,” it tweeted. “As well as the right to ignore the russophobic hysteria that encourages foreign businesses to suffer huge losses in order to hit @Russia.”

A parade of companies have announced plans to suspend or scale back their operations in Russia in the wake of Mr. Putin’s invasion of Ukraine and sanctions imposed by Western governments.

Many companies, particularly retailers and manufacturers, have said their decisions to stop operations are temporary. Some said they were necessitated by the disruption that sanctions have had on supply chains. Others have committed to leaving for good.

Companies are also evaluating their business in Russia in a different way given the economic instability and expectations that conditions will be volatile for some time, according to people briefed on the matter. Despite the prosecutors’ warnings, a number of the companies aren’t planning to change their decisions to withdraw or suspend operations, the people said. It would also be difficult for companies to smoothly transfer operations to Russia if the government sought to impose its own managers, one of the people said.

The Russian prosecutor general’s office on Friday said it would ensure that companies that have said they are pausing or exiting operations comply with the country’s labor laws. More than 350 foreign companies have said they are leaving or temporarily suspending work in Russia, according to the Yale School of Management.

Wall Street banks such as Goldman Sachs Group Inc., consumer-goods companies such as Coke, retailers such as Levi Strauss & Co. and tech giants such as Apple Inc. have announced plans to pull back. Energy giants such as BP PLC and Exxon Mobil Corp. said they would exit Russian operations.

Mr. Putin endorsed a plan floated last week by a senior member of his dominant United Russia party to nationalize the operations of Western companies exiting the country. Such a move would help prevent job losses and maintain Russia’s ability to produce goods domestically, said Andrei Turchak, the secretary of the general council of the United Russia party.

Washington warned against a nationalization effort.

“Any lawless decision by Russia to seize the assets of these companies will ultimately result in even more economic pain for Russia” and might invite legal action, White House press secretary Jen Psaki tweeted Thursday.

Coca-Cola last week said it would suspend operations in Russia. Coke’s business in Russia and Ukraine contributed about 1% to 2% of its operating revenues and income in 2021. The company had an ownership interest of about 21% in Coca-Cola HBC AG , Coke’s bottling and distribution partner in the region, as of Dec. 31.

Restaurant-owner Yum last week said it was temporarily closing its 70 company-owned KFC locations and signing an agreement with its Pizza Hut franchisee to halt business at its 50 locations. It was also suspending all investment and restaurant development in Russia, the company said.

The company is “focused on the safety of our people in the region and will continue to support our teams in Ukraine while evaluating the ways Yum Brands can make a positive impact in the region,” the spokeswoman said.

IBM Chairman and Chief Executive Arvind Krishna wrote in a blog post last week that the company had suspended all business in Russia. “The safety and security of IBMers and their families in all areas impacted by this crisis remains our top priority,” he wrote.

McDonald’s last week said it was temporarily closing its roughly 850 restaurants in the country and would continue paying the 62,000 people it employs in Russia. The company said it couldn’t yet determine when it might reopen the restaurants in Russia and would consider whether any additional steps might be required.

Closing the restaurants is expected to cost the company an estimated $50 million a month for payroll, leases, supply-chain and other costs, McDonald’s said.

P&G, maker of Pampers diapers and Crest toothpaste, said it would halt spending in Russia on capital investments, advertising and promotions while selling only products that focus on basic health, hygiene and personal care. P&G said that Russia and Ukraine combined account for less than 2% of annual revenue. The company said it employs 2,500 people in Russia.

French energy group sharply raises impact forecast as it gears up for new nuclear buildout

EDF has sharply worsened its forecast hit from lower nuclear power output and government measures to curb electricity bills, with the French energy group saying it now expects a €26bn impact on core profit this year.

The state-controlled group is facing outages at several reactors in France as it inspects possible pipe defects, dragging its output to multiyear lows at a time when a surge in energy prices is exacerbated by Russia’s invasion of Ukraine.

The French government has also made EDF shoulder the cost of a move to cap energy bill rises at 4 per cent this year. The group is having to sell more of its nuclear power to third-party distributors such as TotalEnergies at a fixed price well below wholesale rates.

EDF said on Monday that earnings before interest, tax, depreciation and amortisation this year would take hits of €16bn from the production falls and €10.2bn from the regulatory measures, up from previous estimates of €11bn and €8.4bn.

That compares with a core profit last year of €18bn. It is not clear to what extent EDF will be able to offset some of the pain with higher prices on some of the energy it sells.

The hits come at a crucial juncture for EDF as it gears up for a rollout of new reactors that is central to France’s plans to strengthen its focus on nuclear power in the coming decades. Finland’s long-delayed Olkiluoto 3 nuclear reactor, which was built by EDF, began production at the weekend.

President Emmanuel Macron said this year that France, Europe’s sole nuclear power champion, would look to extend the life of as many of the country’s ageing 56 reactors as possible beyond 50 years, a plan that would require maintenance programmes at a cost running into billions of euros.

Macron has confirmed plans to build at least six new European pressurised reactors in the coming years at an estimated cost of €52bn.

Though much of the funding will come from the state, EDF has also been looking to get itself into better financial shape so that it can maintain its credit ratings and access to market borrowing.

The French government moved to shore up EDF’s finances in February, saying it would back a €2.5bn capital raise at the group, which has yet to take place.

EDF said on Monday it was maintaining a goal to have a net debt of about three times ebitda by the end of 2023. But it also warned that it could struggle to reach financial targets.

“The scale and the variety of the risks the group is facing . . . are likely to impact the group’s ability to reach these objectives,” EDF said, adding that it was difficult to estimate the impact of Russia’s invasion of Ukraine.

Activists claim $150mn loan goes against vow to curb fossil fuel financing

Goldman Sachs, which won applause from environmentalists for its 2019 pledge to curb fossil fuel financing, is under fire over a $150mn loan last week to Peabody Energy, the world’s biggest private sector coal producer.

The deal, arranged to shore up Peabody’s derivatives positions amid the market turbulence triggered by Russia’s invasion of Ukraine, highlighted the ambiguity of Goldman’s initial pledge to phase out financing for thermal coal mining companies, environmentalists said. In 2019, the bank said it would only support companies shifting away from coal at a reasonable pace.

Goldman’s 2019 coal pledge was considered the strongest adopted by any big US bank, said the Rainforest Action Network, a San Francisco-based environmental non-profit.

But now the Peabody deal “demonstrates how vague and therefore non-committal the [bank’s] policy is,” said Alison Kirsch, a policy and research manager at RAN.

As the sole bank on the Peabody deal, Goldman “does not look like [it] is getting out of coal,” she said.

Goldman Sachs declined to comment.

Since 2019, other banks have gone further in limiting deals with coal companies. In December, HSBC said it would phase out thermal coal financing in the EU and OECD countries by 2030. A global phase out of coal would be finished by 2040, HSBC said.

For Goldman, “the main issue here is how vague coal policy is,” said Yann Louvel, a senior policy analyst at Reclaim Finance, a non-profit group affiliated with the Friends of the Earth. The bank has wriggle room “open to internal interpretation by the bank, which makes it difficult to prove a clear breach of the policy,” he said.

Peabody said coal derivative contracts it entered into in 2021 were hammered by the surge in coal prices and that the company was hit with a $534mn margin call, prompting the need for the Goldman loan. Shares in Peabody, which owns stakes in 17 active coal mines in the US and Australia, are up 500 per cent from a year ago.

Global banks have come under increasing scrutiny for their business deals with fossil fuel companies — and shareholders have continued to ramp up pressure. Citigroup last week lost a request at the Securities and Exchange Commission to block a shareholder proposal demanding the bank halt lending and underwriting for new fossil fuel supplies.

“A $150mn loan to a coal company that doesn’t violate Goldman’s supposedly ambitious climate policy should be all the proof we need that Wall Street banks can’t be left to their own devices to fix their climate problem,” said Adele Shraiman, the campaign representative for the Sierra Club’s Fossil-Free Finance campaign.

Tech unicorn has cornered the meals market but faces growing competition in nascent groceries sector

If Uber’s decision to take meals off the menu disappointed diners in Brazil, its main rival there must have been licking its lips.

The Silicon Valley giant has exited from restaurant deliveries in Latin America’s largest economy after struggling to break the dominance of iFood, a homegrown app and the undisputed national leader.

At the forefront of a technology explosion in the region that has drawn in record amounts of venture capital, business has boomed for the Brazilian start-up during the Covid-19 crisis.

As orders have doubled from pre-pandemic levels to above 60mn a month, iFood has extended further beyond its core activity into groceries, logistics and even credit for establishments on its system.

“The point is not just to deliver food, it’s an ecosystem with various services that reach all the customers in Brazil, and which has the purpose of making the country function better through technology,” said Fabricio Bloisi, chief executive, in an interview with the Financial Times at the company’s headquarters in a suburb of São Paulo. “We have already expanded a lot and will expand more.”

The opportunity is huge: despite broader economic malaise, Brazil has a large population of 214mn and there has been a surge in ecommerce activity since the onset of Covid-19.

All this will be in the sales pitch to prospective investors, as a 33 per cent slice of the privately held group is shopped around by shareholder Just Eat Takeaway.

Giving an indication of the potential valuation for iFood, Europe’s biggest meal delivery company last year said it had rejected a bid of €2.3bn for the stake as “simply too low”.

Yet while celebrated as a standard-bearer for tech innovation in South America, challengers have accused iFood of unfair behaviour to solidify its position.

The criticism centres on its exclusivity agreements, not uncommon among delivery apps, which prevent bars and restaurants from joining other platforms. Combined with iFood’s dominant position, detractors argue the practice is abusive and stifles effective competition.

Although calculations of market share vary, an estimated 80 per cent of eateries that offer delivery are on iFood, according to the Brazilian Association of Bars and Restaurants (Abrasel).

Following a formal complaint by Colombian competitor Rappi that was seconded by Abrasel, the country’s antitrust watchdog provisionally banned iFood from signing any new exclusivity deals almost a year ago while an investigation continued.

Uber Eats, which had previously departed from several other markets around the world, said in a letter to regulators earlier this month that “artificial barriers imposed by iFood” and “exclusionary conduct” had contributed to its retrenchment in Brazil.

Both adversaries of iFood have insisted they are not against contracts of this nature per se, and even have their own. But Rappi, which is backed by the Japanese tech investor SoftBank, recently requested all of iFood’s existing exclusivity agreements be ended.

“The departure of Uber Eats makes it clear that it is not a healthy market and more drastic intervention will be required,” said Victor Santos Rufino, at the law firm Mudrovitsch that is representing Rappi.

No date has been set for a final decision by regulators.

Without going into specifics, Bloisi rejected the accusations, and claimed that the biggest single channel for meal orders in Brazil today was WhatsApp, followed by telephone.

“We are very convinced that what we do is totally legal, there is nothing anti-competitive, and what makes us grow is 5,000 people [employees] focused on serving the ecosystem very well [and] innovating with purpose,” he said. “In general, the product is better, customers like it more, delivery people like it more.”

Although iFood declined to provide details of financial performance, disclosures by another backer give an idea of its growth trajectory.

The group’s revenue tripled in local currency terms in the financial year ending March 31 2021, according to Prosus, the internet assets division of South African multinational Naspers. Even as restrictions on restaurants lifted, its top line increased two-fifths in the six months ending in September.

Despite trading losses increasing by $83mn to $100mn in the half-year period, driven by investment in grocery deliveries, Prosus said iFood’s core business was close to break-even.

Created in 2011, the popular app is a subsidiary of Movile, a Brazilian tech mini-conglomerate with roots in an IT enterprise co-founded by Bloisi in the late 1990s. In turn majority-owned by Prosus, Movile’s portfolio includes ventures in ticketing, games, logistics and financial technology.

Since its founding, iFood has raised about $700mm in funding and made nine acquisitions. It began deliveries in 2018; before then restaurants were responsible.

Today it has unrivalled reach across the continent-sized nation with presence in 1,500 towns or cities and an army of 200,000 couriers dispatching from 300,000 restaurants.

The company said its innovations have improved efficiency and brought down costs, with artificial intelligence helping to reduce delivery times, map out optimum routes and foresee orders based on customer data patterns.

However Fernando Lunardini, managing director at Boston Consulting Group, said with the pandemic waning he believed the Brazilian meal order market might be reaching a “plateau”. 

“It’s very expensive for the restaurant,” he added. “Margins get tight, you have to increase prices, orders decrease. The balance is not favourable.” He warned that iFood might have to cut what it charges restaurants.

This perhaps helps explain the push into other areas, such as grocery delivery. iFood is building so-called “dark stores” to supply goods directly to customers in this nascent market.

However, sector specialists caution of tougher conditions in this segment, given the stronger bargaining power of supermarket chains and an array of competing apps.

Despite giving up on meals in Brazil, Uber Eats is betting big on this market in the country through CornerShop, a Chilean start-up in which it bought out the remaining stake it did not already own last year.

“It’s a business with potentially better economics because of higher tickets and more regular purchases,” said Cristina Alvarenga, head of the operation there.

Ahead of presidential elections in the South American nation this year, the favourite to win, former leftwing president Luiz Inácio Lula da Silva, has pledged to boost rights for digital gig economy workers.

iFood insisted it was ahead of the curve. It already offers insurance to deliverers, created a 28-day sickness and quarantine benefit during the pandemic and has a minimum route value for drivers.

Bloisi called for new legislation that is “flexible and ready for the future” to enshrine such protections. After receiving regulatory approval to begin drone dispatches, he said investment in AI was another priority.

“This is our big dream — to be able to predict what the customer wants before they do, faster, cheaper and with better quality.”

China’s central bank found regulatory breaches and lapses during a recent inspection of the ubiquitous payments network

HONG KONG—Chinese technology giant Tencent Holdings Ltd. TCEHY -5.19% is facing a potential record fine for violations of some central bank regulations by its WeChat Pay mobile network, as Beijing toughens its regulations for fintech platforms, according to people familiar with the matter.

Financial regulators recently discovered that WeChat Pay had flouted China’s anti-money-laundering rules and had lapses in compliance with “know your customer” and “know your business” regulations, among other things, some of the people said. Tencent’s ubiquitous mobile payments network was also found to have allowed the transfer and laundering of funds with illicit transactions such as gambling, the people added. For WeChat Pay, “know your customer” and “know your business” procedures mean it must verify the identities of users and merchants transacting on its platform and the source of funds for those transactions.

The People’s Bank of China, the country’s central bank, uncovered the breaches during a routine inspection of WeChat Pay that concluded in late 2021, the people familiar with the matter said. The size of the fine is still under deliberation and it could be at least hundreds of millions of yuan, some of the people said. That would be much larger than the fines regulators typically imposed on nonbank payment companies for anti-money-laundering rule violations in the past.

Tencent, a social media and videogame behemoth, has so far been largely unscathed by Beijing’s sweeping crackdown on big internet platforms that began in late 2020. Chinese authorities have given heavy fines to e-commerce heavyweight Alibaba Group Holding Ltd. and food-delivery giant Meituan for anticompetitive business practices, launched cybersecurity probes into ride-hailing leader Didi Global Inc. and its peers, and forced a business overhaul at financial-technology giant Ant Group Co., whose Alipay network competes with WeChat Pay.

Last year, a Tencent subsidiary, Tencent Music Entertainment Group, was stripped of its exclusive rights to some music labels. Tencent also failed to engineer a merger between two videogame streaming platforms that both count it as a shareholder. Still, Tencent as a group and WeChat, its crown jewel, have avoided substantial reprimands and penalties from Chinese authorities.

The impending fine for Tencent comes as Chinese fintech platforms are bracing for a fundamental change in the government’s approach to curbing money laundering activities. Last June, the government published a draft amendment to its anti-money-laundering law that sought to broaden and deepen the scope of its regulations. The PBOC also said last year that nonbank payment companies have obligations to detect and prevent money laundering, just like banks and other financial institutions.

The amendment also opens the door to much higher penalties on companies, which could be fined for every violation count—meaning fines could add up to large sums—and gives more PBOC branches power and discretion to levy fines in their jurisdictions. That raises the stakes for mobile-payment platforms like WeChat Pay and its archrival Alipay, because of the massive volume of financial transactions that they facilitate.

The PBOC, in its most recent annual anti-money-laundering report, said it imposed fines totaling 526 million yuan, or $83 million, on 537 institutions in 2020. Common money laundering offenses involved activities such as gambling, smuggling and drug dealing, the report said.

Tenpay Payment Technology Co., the licensed entity that runs WeChat Pay, was previously hit with small fines that typically were less than 10 million yuan. The new fines are likely to be far higher, because China is seeking to bring its anti-money-laundering enforcement up to international standards, some of the people familiar with the matter said.

WeChat, a do-everything app, boasts 1.26 billion monthly active users, the majority of them in China. Its embedded payment function is used by many individuals to pay for purchases online and in stores, as well as for peer-to-peer money transfers. Tens of millions of merchants in China accept payments made via WeChat Pay.

In the second half of last year, the PBOC’s various branches across China conducted comprehensive inspections at WeChat Pay, the people familiar with the matter said. Those inspections—which look for compliance lapses—are performed on all licensed financial institutions and are typically carried out once every three years, some of the people said.

Ant’s Alipay is due to be inspected this year, some of the people said. It would be the first time the company’s operations are scrutinized in this manner since the cancellation of Ant’s initial public offering in November 2020. Alipay has been preparing for the examination and has conducted simulated inspections, people familiar with the matter said.

Both Ant and Tencent are required to set up financial holding companies—overseen by the PBOC—that encompass all of their licensed financial operations. Ant has been working with regulators to turn itself into a financial-holding company, which will include all its payment, banking, insurance, credit-scoring, fund management and other licensed activities. The road map for Tencent, however, is more nuanced and complex.

WeChat Pay and other financial services have long been integral to the WeChat app, which has myriad other functions such as messaging, gaming and shopping. It remains to be seen if WeChat Pay will be separated from the broader ecosystem to be housed in Tencent’s financial-holding company.

Tencent President Martin Lau said in an earnings call last year that setting up the financial holding company would “involve organizational change, but it doesn’t really impact the businesses,” he said.