The Return of the Iron Curtain: How War & Sanctions Affect Mexico

March 15, 2022
7:47 pm
CDMX.

In the past few weeks, the world has aggressively moved down a path towards a Cold War style conflict that most modern businesspeople, investors, and analysts are unfamiliar with. To punish Russia for their unprovoked war in Ukraine, governments are levying fierce sanctions and corporations are removing their products and services from Russia at unprecedented rates.

Although Mexico has a small trade relationship with Russia (less than 0.5% of Mexico’s international trade), the conflict has affected commodity prices and once again disturbed the world’s extremely interconnected supply chains. Additionally, the conflict opens the door for specific actions taken by the Mexican government and/or its private sector to have serious consequences for relations with its major trading partners (USA, Canada, Europe).

As IR professionals communicating with key stakeholders and investors, it is vitally important to be well versed on your company’s compliance with sanctions and how your actions regarding the conflict reflect in your company’s values. In this blog post we’ll discuss some background on Mexico’s trade relations with Russia and look at Mexican companies that have already been affected by the war.

Mexico – Russia Trade Relations

In 2018, things were looking up for Russia and its relations with Mexico. Russia hosted the World Cup that year, ProMéxico had an office in country, and the two-way trade relationship between Mexico and Russia totaled US $2.3 billion.

These hopes and predictions were on track until Russia’s invasion of Ukraine this month. As of the third quarter of 2021, Mexico’s main export to Russia were still auto parts, totaling US $57 million in the quarter. Although a relatively small loss for Mexico, these economic hits are adding up in Russia.

A good example is the Russian car manufacturer Lada. During the Cold War, Lada prided itself in being self-sufficient. Its factory on the Volga River had the capacity to feed all its supply chain needs. Nowadays, however, the company is owned by Renault and it relies on a factory in Romania for subassembly, and over 20% of its components come from abroad. Unsurprisingly, now without access to its assembly plant and its components, the factory was shut down, resulting in thousands of workers being placed on paid leave. Modern Lada, just like modern Russia, is not self-sustaining.

Looking at Mexican imports from Russia, 25-30% of fertilizers come from Russia (along with China, Indonesia, and Chile). This could potentially have more serious impact for Mexico as fertilizer prices were already high in 2021 because of oil prices, this additional shortage could further increase food prices. Steel, Iron and Aluminum complement the top imports coming from Russia to Mexico. Given that both the agricultural and manufacturing sectors are key components to the Mexican economy, a disruption on their supply could further deepen the inflationary cycle.

Mexico’s Response

Mexico first got tangentially pulled into the global conversation when in December of last year, Putin stated in a press conference that the US would feel similarly threatened if it had missiles on its border in Mexico or Canada (Putin’s comparison to NATO). Putin also made the point that NAFTA countries had similar disputes in their past, mentioning that California and Texas used to not belong to the US. Some Mexicans found these statements to be demeaning and disrespectful of Mexico’s relationship with Russia. (source)

In the immediate aftermath of Russia’s attack on Ukraine, Mexico did vote in favor of the United Nations resolution condemning the invasion of Ukraine, but didn’t agree to any additional sanctions against Russia as this had been vetoed in the U.N. AMLO said, along with a criticism of social media censorship of Russian media that, “we are not going to take any sort of economic reprisal because we want to have good relations with all the governments in the world…”

In response, Viktor Koronelli, the Russian ambassador to Mexico, said “we note with satisfaction that the authorities of Mexico refuse to join the anti-Russian sanctions, which shows that its foreign policy is independent.”

Ukraine’s ambassador to Mexico, Oksana Dramarétska, has asked the Mexican government more than once to take concrete actions against Russia. She was recently quoted saying in regards to AMLO’s non-interventionist policy, “tell me who your friends are and I’ll tell you who you are.”

The impact of Mexico not taking a side on this conflict has the potential to cause issues with the US. With one recent headline in the US reading, How Mexico’s refusal to sanction Russia could affect its relationship with the United States. However, it also highlights that the private sector and individuals need to be very careful with their behavior in any business relations related to Russia. The situation is a crisis tinder box with potentially enormous geo-political consequences.

In a widely criticized press release last week, AMLO’s government went so far as to attack the European parliament and European countries for its criticisms of Mexico but also, among other things, for providing weapons to Ukraine.

Directly Affected Mexican Companies

Most large Mexican companies have been affected by having to comply with sanctions, and some even have plants in Ukraine and Russia, such as Bimbo, Gruma, and Nemak. Meanwhile, the crisis has pushed oil prices to highest they’ve been in decades, benefitting Pemex’s sales, however disproportionally affecting regular Mexicans and SMEs paying much more at the pump and for LPG, along with increased inflation.

Bimbo

On March 8^th, McDonald’s announced that it would be temporarily closing all its stores in Russia. McDonald’s CEO Chris Kempczinski said, “our values mean we cannot ignore the needless human suffering unfolding in Ukraine.” This prompted long lines as Russians stocked up on McDonald’s, and this viral photo of one Russian’s fridge full of quarter pounders.

Bimbo QSR happens to be one of the largest suppliers of McDonald’s sandwich buns in Russia. It even expanded Russian operations in 2021 with a new facility to make all types of buns for McDonald’s.

On March 14^th, Bimbo confirmed the suspension of its sales and the halting of new investments in Russia due to “the current international situation and in line with our core values”. According to the statement, in 2021, Russia accounted for less than 0.5% of Consolidated Net Sales of the Company.

Bimbo also has presence in Ukraine from their acquisition of East Balt Bakeries in 2017. The plant is in Dnipro and it closed for the safety of its 150 workers. In the company’s 4Q21 earnings call, on February 23^rd, CEO Daniel Servitje said that “we have interest in Ukraine and Russia because we do have operations and we have a plant in Ukraine and a plant in Russia, and we hope for the best in Ukraine and associates as these events unfold. And, yes, the impact of whatever happens will be seen in commodities, especially in wheat. We’re hedged for some months ahead but not necessarily for the full year.” (source)

Gruma

Gruma is a flour and corn company, that transports its products through the port of Odessa. It stopped the operation of its plant in Ukraine with 500 workers (all Ukrainians). Gruma assured that its clients will be provided for from neighboring plants in Italy and Turkey, and administrative work was being done via home office. They also stated that the division in Ukraine represents only 0.6% of the company’s net sales in the world.

Gruma also has a plant in Russia which opened in 2017. From Gruma’s press release from the opening it said, “today is a very special day because we are opening Gruma’s 75th plant in the world. This clearly attests to our long-term commitment with Russia,’ assured Juan González Moreno, President and CEO of Gruma”. As of late Febuary, Gruma said its operations in Russia were still operating as normal.

Nemak

Nemak the aluminum auto parts manufacturer, started operations in Russia in 2015, with the aim to provide auto parts to Volkswagen. The total investment was US $60 million and has a production capacity of 600,000 motor units. This marked Nemak’s 35th factory and the first in Russia.

On March 3^rd, the company announced that it had stopped operations of said plant “aligned with measures taken by our clients in the country”. Alongside this closure, Nemak vowed 100 thousand euros to the International Committee if the Red Cross.

At Miranda Investor Relations and Miranda Media we’re happy to help you form your IR and Communications strategy and prepare for crises.

Sources:

Contacts at Miranda Partners

Damian Fraser
Miranda Partners
damian.fraser@miranda-partners.com

Ana María Ybarra Corcuera
Miranda-IR
ana.ybarra@miranda-ir.com

The Return of the Iron Curtain: How War & Sanctions Affect Mexico

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