Cisco exit will drive Russia further into China's embrace
Before there was glasnost and perestroika there were no golden arches in Moscow. McDonald's opened its first burger store there in 1990 as Western brands piled into a country previously walled off by the Communists. Fast forward 32 years and Russia is reverting to its 1980s look, as those same Western brands withdraw in protest at the war in Ukraine. Cisco this week became the latest from the technology sector to do so.
Big Mac-chomping Muscovites are unlikely to miss the business-facing brand as much as they miss their American junk food. Not at first, anyway. Cisco is like that vital component under the hood of your car, or the obscure silicon supplier for your mobile phone. Nearly four decades since it was founded, it remains the world's largest maker of the routers and switches that direct traffic around the Internet. And Russia does not have a homegrown alternative.
Like several other big technology firms, Cisco had already suspended activities in Russia, halting sales and services in March. It has now gone much further, outlining plans for a complete withdrawal. "We have now made the decision to begin an orderly wind-down of our business in Russia and Belarus," said the company in an official statement this week.
Operating in Russia would have been difficult because of US sanctions. Introduced shortly after Russian dictator Vladimir Putin sent troops over the Ukrainian border, these currently prohibit the sale of products using much American chip technology to Russian companies. Despite efforts to expand into software, Cisco is still mainly a hardware business, counting only $3.7 billion of the $12.8 billion it booked in recent third-quarter revenues as software sales (although a substantial chunk of Cisco's revenues comes from services as well).
Software sales have also become more difficult, and Cisco would additionally have been worried about its reputation. Many companies that initially appeared to carry on as normal in Russia were slammed for being unethical by campaigners and consumer groups. The criticisms have not always been fair. Companies are right to worry about protecting local employees and the seizure of important assets by the Russian government. An immediate withdrawal by communications equipment providers such as Ericsson and Nokia would risk cutting off Russians unsympathetic to Putin's actions.
Lost sales and write-downs
Quitting Russia will not be a pain-free exercise for Cisco. In its last fiscal year (ending in July 2021), it made about $500 million in revenues from Belarus, Russia and Ukraine, it revealed in its latest quarterly update. This, however, equates to only 1% of the Cisco total for that year. Ericsson and Nokia look more heavily exposed, each deriving about 2% of revenues from the Russian market alone.
Cisco may also have to write off assets valued at roughly $195 million across these countries, although this amount was only 0.2% of total assets in the previous fiscal year. It evidently does not have major production facilities in the region that could be seized by Russian authorities.
One uncertainty is over the level of support that existing Russian customers will receive during the withdrawal period. Cisco has not, for instance, said if it will continue to maintain cloud services for Russian customers buying its software this way (rather than hosting software on their own premises).
But the early termination of contracts could force it to offer compensation, it has acknowledged. "We will communicate directly with customers, partners, and vendors to settle our financial matters, including refunding prepaid service and software arrangements, to the extent permissible under applicable laws and regulations," it said in its statement.
The impact on Russia will probably be worse. It means Russian organizations can no longer buy from Cisco, Ericsson or Nokia – three of the world's biggest suppliers of networking products – following similar moves by the Scandinavian equipment makers. Russia has no domestic rivals to these industry giants and may be stuck with ageing kit while other countries take advantage of newer technologies.
In the absence of homegrown replacements, the departures by Western companies will drive Russia even further into China's embrace. Unlike their Western competitors, neither Huawei nor ZTE has announced any suspension of business in Russia, let alone plans to quit the market. Huawei is likely to be Russia's top alternative to Cisco for many product lines. In its early days, it was even accused of ripping off Cisco technology and embroiled in legal disputes with the US company.
Russia, then, risks becoming as dependent on Chinese technology as Europe is on Russian gas. As Putin threatens to cut supplies and Germany prepares for gas rationing, German homes could be facing a long, cold winter. History shows that dictators and megalomaniacs often make awkward bedfellows, but Putin will have to pray he can stay on good terms with Xi Jinping. Otherwise, Russia could be in for a deep freeze of the technology kind.
- Nokia mobile boss says Russia backlash could bring 5G gains
- Nokia to 'exit' Russia as Huawei reportedly stops work
- Ericsson halts business in Russia
- The Russian roulette of buying software written in Moscow
- Ukraine has made Huawei even more toxic for European telcos
— Iain Morris, International Editor, Light Reading