Prolonged War Poses Dilemma for Korean Companies: Sanctions Compliance vs. Maintaining Russian Public Sentiment on Choco Pie...

Raw Material Supply Instability and Ruble Depreciation
Growing Concerns Over Profitability Decline
Global Russia Boycott Adds Pressure

[Asia Economy Reporter Eunmo Koo] As Russia's invasion of Ukraine prolongs, domestic food companies operating locally are facing increasing concerns. There are worries about deteriorating profitability due to supply instability of raw materials and the depreciation of the ruble. Recently, the spread of global companies' 'Russia boycott' is also adding to the burden.

According to the food industry on the 10th, currently Orion, Lotte Confectionery, and Paldo have local subsidiaries in Russia. Since these companies operate local subsidiaries focusing on domestic demand, there is no possibility of damage from Russia being excluded from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment network. However, if the situation prolongs, it is expected that not only raw material supply issues but also demand contraction and ruble depreciation will reduce profitability.

Among domestic food companies operating in Russia, the largest is Orion. Orion's Russian subsidiary boosted sales by 31.4% from the previous year to 117 billion KRW last year, led by the popularity of 'Choco Pie.' Orion officially entered the Russian confectionery market by establishing a factory in Tver in 2006 and has maintained double-digit high growth rates annually since 2019. In the first half of this year, it is also preparing to complete its third factory in Tver Oblast.

Orion states that it is not currently affected by sanctions against Russia. It has secured 2 to 3 months' worth of raw materials needed for local production, so there are no issues with sales. The completion of the new factory is also reportedly proceeding without problems. However, since raw material supply could become unstable if the situation prolongs, Orion plans to prepare countermeasures through its subsidiaries in Korea and China.

Lotte Confectionery is in a similar situation to Orion. It has stockpiled several months' worth of raw materials, so there are no immediate problems. However, to prepare for a prolonged situation, it is increasing its raw material reserves and exploring ways to secure local funds as countermeasures. Lotte Confectionery's local subsidiary recorded sales of about 50 billion KRW last year and invested approximately 34 billion KRW earlier this year to expand production lines and warehouse buildings.

Paldo, which leads the Russian cup noodle market with its 'Dosirak' cup noodles, is also monitoring the situation. Paldo currently operates two factories in Russia, which are more than 1,000 km away from conflict zones, allowing normal operations. It has also secured raw materials for several months.

Meanwhile, as global companies such as McDonald's, Starbucks, and Coca-Cola continue to withdraw from the Russian market, there is growing pressure on domestic companies to join the boycott. As corporate social responsibility becomes more important, domestic companies may need to consider temporary business suspensions.

Professor Yonggu Seo of the Department of Business Administration at Sookmyung Women's University said, "It is a dilemma to participate in the international community's sanctions while not losing the goodwill of the Russian people." He added, "As companies recently emphasize ESG (environment, social, governance) in management, our companies also need to become action-oriented brands by participating in sanctions at least during the war period."

This content was produced with the assistance of AI translation services.