Burger King says Russian operator ‘refused’ to close hundreds of restaurants

In a letter to employees, RBI President International David Shear said the company demanded the shutdown of all Burger King operations in Russia but that Kolobov “refused.” It has proved difficult to withdraw from the complicated web of business agreements established 10 years ago, he added.

“Would we like to suspend all Burger King operations immediately in Russia? Yes. Are we able to enforce a suspension of operations today? No,” Shear wrote.

“But we want to be transparent with our actions and explain the steps we have taken to stand with the international business community in response to Russia’s attack on Ukraine and its people,” he said.

Burger King’s experience illustrates the difficulty many corporations face when trying to extricate themselves from decades-old investments.

Western corporations are under tremendous public pressure to leave Russia amid the humanitarian crisis enveloping Ukraine. Russia has become an economic pariah after the United States and its allies hit Moscow with a slew of sanctions. Russian financial markets have been shuttered for nearly three weeks, and at least 400 foreign corporations have exited the country. Some of Russia’s government bonds — just last month widely traded global assets — are selling for cents on the dollar.

But many corporations have found themselves bound to Russia by legal agreements, client relationships and other complicated entanglements. And those that do cease operations face the prospect that their local assets will be nationalized and restarted under Russian ownership, in some cases under trademarks that closely resemble Western brands.

Businesses that operate through franchising models have had particular trouble leaving the country. Their ability to cut ties with Russia has been dependent on how many of their branded stores they actually own.

“When master franchise agreements and joint ventures are formed, there are extensive commitments to long-term investments and accountabilities to grow the business together. There are no legal clauses that allow us to unilaterally change the contract or allow any one of the partners to simply walk away or overturn the entire agreement,” Shear wrote.

“Any current attempt to enforce our contract would ultimately require the support of Russian authorities on the ground and we know that will not practically happen anytime soon,” he added. “This is also why you may see other brands in Russia with similar structures continue to operate in the market.”

The 450 Subway stores in Russia, for example, are locally operated and managed by a master franchisee.

“We don’t directly control these independent franchisees and their restaurants, and have limited insight into their day-to-day operations,” the company wrote in a statement Wednesday.

McDonalds, meanwhile, has pursued a global business model in which it directly owns more of the stores that carry its brand. It owns 84 percent of its roughly 850 Russian locations, allowing it to order the bulk of them to shut down, although it promised to continue paying employees.

In his letter to employees, Shear said his team has been working around-the-clock to “do all the right things.” RBI has suspended all new investments there, and is redirecting any Russian profits to the United Nations’ refugee agency, he said.

It’s possible that Russian operators could continue operating Western-branded stores even when the foreign franchiser tells them to cease and desist. Russia’s government and legal system does not recognize Western sanctions as legitimate, and is unlikely to enforce a foreign company’s claim to its own brand. Russian President Vladimir Putin has vowed to nationalize businesses that try to pull out of the country.

Various knockoff brands are already appearing in Russian trademark filings, for example, says D.C.-based trademark lawyer Josh Gerben.

“Russian trademark squatters are out in full force,” Gerben tweeted Friday. He referenced Russian trademark filings for “IDEA FURNITURE FACTORY,” featuring a logo similar to Ikea’s, alongside apparent Instagram imitators RUSTAGRAM and INSTARUS.

Another Russian business, called Uncle Vanya’s, trademarked a logo resembling the famed McDonald’s Golden Arches, inverted on its side against a familiar red background.