How McDonald's won Russia — and then lost it all

Thanks to Covid-19, construction dragged into 2022, finishing in February — just in time for Russia to invade Ukraine. The following month, McDonald’s suspended operations in Russia, and by May, it had exited the market entirely, selling all of its assets to Alexander Govor, a mining oligarch. The Pushkin Square restaurant is now a gleaming new fast food chain Vkusno i tochka (“tasty, period”) that slings Big Specials under a vaguely familiar orangey M.

McDonald’s strategy in foreign markets has long been to go native, hewing to local customers’ tastes and cultural preferences. When it arrived in Russia, it did the opposite, pitching itself as something entirely new for people living under communism. Ads on television teased: “If you can’t go to America, come to McDonald’s.”

Over the following decades, McDonald’s expanded rapidly in Russia, navigating economic crises, kleptocratic officials, opportunistic competitors and international sanctions without appreciably altering its approach. But when nationalism surged under President Vladimir Putin in the mid-2010s, the company became a target, forcing it to adopt a grand strategy to subtly yet convincingly Russify.

Capitalism success story

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The move paid off for a time. From 2015 to 2022, McDonald’s grew from around 500 to 853 stores. Even during the pandemic, it added 55 new restaurants, including its first in eastern Siberia. Drive-thru outlets — dubbed McAutos — set traffic-flow records. In March 2020, the Kremlin classified McDonald’s as a “backbone enterprise”, qualifying it for government aid once reserved for state-operated enterprises such as Gazprom, Aeroflot and Rostelecom.

A study published that year by the country’s Higher School of Economics in partnership with McDonald’s showed that in 2018 the chain purchased about 4% of Russia’s potatoes and 2% of its cheese. It also paid about US$1 billion ($1.3 billion) in taxes during the years studied — 0.1% of all Russian tax revenue from 2014 to 2018, give or take. By 2022, MakDak — as Russians call it — accounted for 7% of all Russian restaurant sales, and Russia accounted for the same share of McDonald’s global revenue.

Then, Ukraine. Russian Apple Stores went dark. Nike, Hermès International and Levi Strauss & Co stopped sales. Malls sat half-abandoned, and security gates were pulled down at store front after store front. On March 8 last year, McDonald’s temporarily paused operations. It called the situation “extraordinarily challenging” and said it raised “many considerations”.

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Russians were told they had one more week of Big Macs. Lines stretched to lengths unseen since the early 1990s. Customers started hoarding burgers, with one person posting a photo showing a refrigerator stuffed with at least 50. Luka Safronov-Zatravkin, a bear-sized pianist and social-media provocateur, handcuffed himself to the Pushkin Square flagship’s doors and yelled: “Closing down is an act of hostility!” as five policemen worked to detach him.

In the US, #BoycottMcDonalds started trending on Twitter, and shareholders began pressuring the company to pull out for good. Finally, on May 16, CEO Chris Kempczinski released a letter noting that his predecessor, Fred Turner, had espoused one value above others: Do the right thing.

“For the first time in our history,” Kempczinski wrote, “we are ‘de-Arching’ a major market and selling our portfolio. They will no longer carry the McDonald’s name or serve our menu. The Golden Arches will shine no more in Russia.”

If the decision seemed to many to have come inexplicably late, it might have reflected McDonald’s struggle to accept the end of an era. The company’s 32 years in Russia did not just symbolise the values it professed to stand for worldwide. They represented a remarkable success story in the history of capitalism.

In 2019, I visited Pushkin Square McDonald’s to meet Khamzat Khasbulatov. He’d been the store’s first manager before becoming McDonald’s Russia CEO. The restaurant is colossal, with four entrances. I picked the wrong one, requiring me to traverse the full restaurant in reverse to find Khasbulatov, past a McCafé, six dining areas with 900 seats, a wall featuring Alexander Pushkin’s poetry and a pack of Yandex delivery people queuing with their massive yellow backpacks.

Earning respect

The Big Mac had earned Russians’ respect, Khasbulatov explained once we sat down, because “they love the message that it is served by Russians and is Russian”. I admitted that mine tasted fresher than its American counterpart. Almost on cue, Khasbulatov boasted that it was because “the lettuce, the beef, and the bread are all Russian”. But it wasn’t always so, he pointed out, taking me back to Jan 31, 1990, when the store first opened.

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McDonald’s predicted an opening-day turnout of 5,000 visitors. Six times that showed up. People inched along under ominous winter skies — armed militia standing by in case of riots — to buy a Big Mac, which costs about 10 loaves of bread.

Some were unsure how to eat one, flattening it and rolling it into a blini-like tube. The night before, Communist Party officials and George Cohon — founder of McDonald’s Canada and now McDonald’s Russia — popped champagne in a Grand Kremlin Palace ballroom, the first time representatives of a Western company had been allowed in. But Fred Turner, then McDonald’s chairman, stayed at the restaurant as it was being prepped. “He sat at a table in the back,” Khasbulatov said, “smoking cigarettes.”

Culture shift

On opening morning, Khasbulatov — the son of two grocers and a fresh graduate of Toronto’s Institute of Hamburgerology — gave reporters their quote for posterity: “Many people talk about perestroika (a political movement for reform within the Communist Party of the Soviet Union during the late 1980s), but for them, perestroika is an abstraction. Now, I can touch my perestroika. I can taste my perestroika. Big Mac is perestroika.”

From there, Khasbulatov told me, a culture shift began. McDonald’s arrival heralded an immersion in sensual joys such as friendly service and hot, high-quality food. “Soviets were not used to workers smiling,” he explained. McDonald’s became an after-school hangout, date spot and wedding venue. Many of Pushkin Square’s original team members, who’d been chosen from among 27,000 applicants, became Golden Arches lifers.

It all began with Cohon. A charismatic, Chicago-born lawyer, he’d run McDonald’s Canada since the 1960s. His grandparents had escaped the 1906 pogroms in Ukraine, and he became obsessed with the Soviet Union’s potential as a market. “They eat meat, bread, potatoes, and milk,” he explained in his memoir, To Russia With Fries. “Well, as it happened, we were selling meat, bread, potatoes and milk of the highest standards.”

In 1976, officials at the Summer Olympics in Montreal asked McDonald’s — a major sponsor — to loan a bus to the Soviet group. Cohon agreed but took his captive passengers to a nearby franchise, where he began angling for the food-service contract for the next Summer Games in Moscow. “I thought, Why couldn’t it be McDonald’s?” Cohon says in an interview.

The company eventually spent millions on a formal proposal. The Communist Party professed interest and invited Cohon to come to Moscow a half-year before the 1980 Games to sign a contract. After arriving, he was shown to a hotel room overlooking KGB headquarters, where he waited for 17 days. At last, the Central Committee returned to him and said: “Sorry, no deal.”

Cohon says he learned years later that the view “at a very high level” had been that signing that contract would have shown the world that the Soviet Union couldn’t provide its food services. But, he adds, the later decision by many nations to boycott the Games following the Soviet invasion of Afghanistan in 1979 may have made it “the best deal I never made.” McDonald’s would have felt “intense pressure from Western countries” to join the boycott, Cohon says.

For the next decade, as the Soviet Union cycled through four separate leaders, McDonald’s kept negotiating to introduce Big Macs to burger-less Soviets. Cohon says it wasn’t unusual to be summoned to Moscow for an “urgent meeting.” Executives would hop on a plane, only to be informed upon arrival that discussions would resume at a future date. They’d do a vodka toast — “To General Secretary Brezhnev!” “To East-West cooperation!” — and return to the airport.

A very Soviet offer

In 1987, Mikhail Gorbachev finally made McDonald’s a real — albeit very Soviet — offer: A joint venture with the state, with the state taking 51% of the profits. The company accepted. The deal was for a single restaurant in Pushkin Square’s decrepit former food hall. Sales would be in rubles, which weren’t convertible to US dollars.

The Soviet government was on the brink of collapse, and tensions were high. “The simplest things,” Cohon says, “became logistical headaches.” Take French fries. Russia had been the world’s leading potato producer for most of the 20th century, but the Russian varieties were considered too small and waxy to produce fries of the proper McDonald’s texture and length. So potatoes became among the 80% of ingredients the company had to import.

McDonald’s also had to build its production chain from the ground up. Before a single burger was flipped, it spent US$50 million erecting a sprawling plant, dubbed the McComplex, on the outskirts of Moscow. Workers there could bake sesame buns, grind hamburger beef, churn ice cream, dispense apple filling into pies and mix ketchup by the vatful. Over time, the McComplex became so proficient that embassies, hotels and other restaurants started purchasing its products.

The Pushkin Square location was so popular in its early years that the Associated Press wrote that the wait dwarfed the line for Lenin’s Tomb by as much as four to one. When a second McDonald’s opened in 1993, former Russian president Boris Yeltsin took a tour and sampled his first Big Mac, which began with him separating the bun from the meat. “I said, ‘No, you eat the whole thing,’ ” Khasbulatov told me, forming a circle with both hands. Yeltsin urged McDonald’s to open more stores. “Go to the Urals,” where his hometown of Yekaterinburg was, he urged. “Go to Siberia.”

But the plan was to expand strategically, not all at once, Khasbulatov said: “First, St Petersburg and Kazan, then the Urals. The logistics of shipping products had to make economic sense.” By 1996, when Khasbulatov was serving as deputy director of Moscow operations, the first McDonald’s outside the city had opened in St Petersburg. Before the turn of the millennium, the chain operated 50 outlets in half-dozen cities, including Nizhny Novgorod and Kazan in Tatarstan. Three years later, Russia got its 100th location, and in 2006 the first opened in Yeltsin’s Yekaterinburg.

Photo: Bloomberg

Thriving where rivals failed

As McDonald’s got off and running, its competitors were being crushed. Pizza Hut had started negotiating with the Soviets in the mid-1980s to open as many as 100 locations, but by 1998, it was operating a total of four stores, two of which closed during that year’s ruble crisis. Taco Bell opened in 1993 and failed within months — Russians found the fare unpalatably spicy. Subway experienced fleeting success after opening a store in 1994 that soon had its highest sales by volume in the world, but the business was quickly seized by armed members of Russia’s Tambov Gang.

KFC was outlined in 1995 at a combination Pizza Hut-KFC location that became one of Pizza Hut’s ruble-crisis closures. Dunkin’ Donuts entered in 1996 but left in 1999 after fights with rogue franchisees who sold liquor and off-menu meat pies. KFC failed again in 2003 before finally buying a more established local competitor and slapping Colonel Sanders on the signs.

Domestic competitors fared no better. In 1995, Yuri Luzhkov, the mayor of Moscow, opened a rival — Russian Bistro — in conjunction with the Russian government, with a flagship also on Pushkin Square. It lasted until 2001, when the Ministry of Internal Affairs accused it of misappropriating US$1.3 million, and its assets went up for auction.

Why did McDonald’s thrive where other fast-food businesses failed? I asked Andrey Dellos, a renowned Russian restaurateur whose holdings include Mu-Mu, a downscale Russo-centric chain, and Café Pushkin, located in a Baroque-style mansion across from the flagship Golden Arches. “McDonald’s success in 1990 was not a question of taste. It was not a question even of food,” he said over espresso at his cafe. “Communists made a fantastic mistake when they closed the doors. They made the United States a dream. For practically all the Soviet people, the United States was a real paradise.” Dellos gestured out the window across Pushkin Square. “And now, can you imagine — a piece, a sample, of that paradise appears just over there?”

The Wild Nineties came to an emphatic end in Russia with the 1998 ruble crisis, which saw the near-collapse of its banking system and an exodus of foreign capital from its markets. With imports now a major financial gamble, McDonald’s began a multi-decade push to increase its share of locally sourced ingredients from just a quarter.

The Russian economy eventually rebounded, and other chains’ boards were dusting off their strategic plans by the late aughts. Burger King arrived in 2010. Dunkin’ Donuts returned the same year. Cinnabon International and Wendy’s entered, too.

All the while, Russia’s oligarchs looked on with frustration and a desire to domesticate fast food — so the experience would be nash (“ours”), according to Melissa Caldwell, a professor at the University of California at Santa Cruz, who studies food in post-Soviet Russia. They spent fortunes attempting to siphon away customers by shamelessly emulating McDonald’s, echoing a dubious Russian tradition (Caldwell notes that the Kremlin under Nikita Khrushchev marketed Kvass, a fermented-bread drink, as Communist Coca-Cola).

One, Blin! Donalt’s, opened in 2002, attempting to turn Russia’s blini pancake into a Big Mac killer. It was owned by Yevgeny Prigozhin, the billionaire food baron who later became notorious for controlling the Internet Research Agency troll factory, and it had red and yellow colours. Blin! Donalt’s dissolved in 2012.

Far more successful was Mikhail Goncharov. After going bankrupt during the 1998 ruble crisis, he took his mother’s blini recipes and started a street stall in St Petersburg that became the ubiquitous chain Teremok. Goncharov told me that the banks would loan McDonald’s money, but not Teremok at first. He complained to Russian media that this shortage of funds forced him to learn which authorities to pay off and which oligarchs to offer stakes in the company.

Seeking to grow, Goncharov conducted a hyper-targeted competitor analysis. “At the beginning, I went and found a McDonald’s training manual,” he said as I tried the cheese blini, chicken noodle soup and Teremok-brand kvass that he ordered for me at a north Moscow outlet, pre-pandemic. These manuals were near-encyclopedic restaurant management guides, a threeinch binder filled with a strategy that had been translated into Russian. Goncharov said Teremok followed their instructions carefully. Workers learned to prep toppings in advance and to deploy what he called the “psychological tactic” of smiling to disarm upset customers.

Domestic competitors

Goncharov also became a public thorn in McDonald’s side, seeking to appeal to Russian patriotism. Even as he was expanding his chain to 100 locations by 2010 and more than 300 today, he blasted the rival’s executives, demanded regulations that benefited smaller domestic competitors such as Teremok and released a blini that he said “tastes like a Big Mac” on McDonald’s 30th anniversary.

For a time, McDonald’s could mostly shrug at the competition. In 2010, it had hundreds of locations from the Baltic Sea to southwest Siberia. Per-store traffic was two times greater than its next-busiest international market. It had bought out the Russian government’s half of the joint venture and ranked among the country’s largest corporate landowners. It also boasted of selling the most ice cream there and pouring one in every three cups of coffee.

In 2014, Russia annexed the Crimean peninsula from Ukraine. The US responded to the incursion with severe economic sanctions, and Western businesses started to flee. General Motors wound down operations. ExxonMobil dropped a promising oil deal north of Siberia. Microsoft curbed software sales to Russian clients.

Support for Putin and distrust of the West surged. The Kremlin passed draconian counter-sanctions, banning Western food imports, including meat, seafood, fruits, vegetables, nuts, salt and some packaged goods. The move was in line with a long-standing goal to boost the country’s domestic agricultural sector, which had declined as per capita income increased and drove up imports. Russian authorities bulldozed French cheese wheels into the ground for reporters and incinerated hundreds of tons of contraband food.

With their supply chains threatened, foreign restaurant brands started to panic. Wendy’s closed all eight of its locations. Carl’s Jr abandoned 31. But the real trophy for hardliners was McDonald’s. Lawmakers threatened fines on Big Mac purchases. Protesters shouted, “Down with American fast food!” outside its restaurants. Records from the national consumer protection agency, Rospotrebnadzor, show that roughly half of McDonald’s 433 stores received visits from its inspectors in 2014.

Agents would show up unannounced and issue fines of as much as US$12,000 for violations such as improper ingredient storage, selling fish sandwiches tainted with E. coli and violating Article 4 of the Technical Regulations of the Customs Union (“On the Safety of Toys”). Separately, Ronald McDonald House Charities was accused of laundering money (the company denied any wrongdoing, and a probe by Moscow prosecutors went nowhere). Eleven stores closed temporarily, including Pushkin Square.

At the end of 2014, McDonald’s posted its worst monthly profit decline globally in a decade. It also announced the closure of all locations in Crimea and east Ukraine, prompting ultranationalist politician Vladimir Zhirinovsky to vow, “Very well, we’ll close the rest.” A new, cutthroat breed of copycats filled the void in the vacated regions. A deserted McDonald’s in separatist Luhansk was seized, its sign doctored to read just “Mc.”

Another empty location — rechristened “Burger” — started serving Big Mags. Elsewhere across the region, there were McDaks, DonMaks and AutoCafe drive-thrus, which had cribbed its menu wordings wholesale from the McDonald’s website. AutoCafe’s owners, two McDonald’s ex-managers, contended in the media that subtle recipe changes made the practice legal.

In 2017, the company finally pushed back after a political skirmish that saw Russia warn the US that it might designate McDonald’s as a foreign agent. Making a rare public statement, it noted that 50,000 Russians were employed at its restaurants, 100,000 Russian jobs were supported by its localised supply chain, and more than one million Russians ate there daily. “We’re one of the most Russian companies there is,” the chain told reporters. The ever-quotable Khasbulatov told the media that the Golden Arches weren’t American; they were actually “the Russian arches.”

Rising and falling Arches

Putin and the Kremlin had long pushed Russian self-sufficiency, but import substitution in industries as wide-ranging as auto manufacturing, software development and agriculture hadn’t generally been successful.

McDonald’s, by contrast, had managed the feat almost flawlessly in the years leading up to the annexation of Crimea. The share of its ingredients sourced locally had climbed from 25% in 1998 to 90% by 2015. In 2018, McDonald’s embraced a local potato supplier, bringing the overall ingredients share to 98% Russian. It had that percentage stencilled onto the sides of delivery trucks and began airing TV ads showing farmers harvesting crops while a voiceover said: “When it’s about food, you choose what’s close, what’s native.” Stores received cardboard cutouts of farmers holding produce to reinforce the point.

“We have by far the highest percentage of localisation of any competitor in the market,” Marc Carena, McDonald’s Russia’s CEO until this February, told me not long after the potato switch. Russia had become its most localised market in the world, and Carena said it was aiming for 100%.

I asked Carena why McDonald’s was so focused on Russia when other markets, such as Australia, Germany and Japan, were bigger and offered less political risk. “The Russian spends only 4% of his household income eating out,” compared with as much as 15% in Europe, he explained. Real disposable income in Russia was growing, average household debt was low, health care was socialised, drive-thrus were still relatively novel, and the market was 11 time zones wide. A more tantalising fast-food market didn’t exist.

There was a certain danger in overcommitting, sure. “But we’re so locally entrenched that we’ve mitigated the risk,” Carena said. “Russians see us as part of their daily life.” It made sense at the time. In announcing McDonald’s departure from Russia last year, Kempczinski, the company’s CEO, wrote: “For three decades, McDonald’s in Russia embodied the very notion of glasnost.” The brand and the country had become “so intertwined that it seems impossible to imagine one without the other. And yet, unfortunately,” he added, “that is where we are today.”

McDonald’s had opened channels with Russian entrepreneurs within a month and a half of the invasion. Govor told the media he first met with company representatives in April, then again in May in Dubai. He said he ultimately acquired McDonald’s assets for a “token fee” that was “well below market price.”

The exact number hasn’t been disclosed, but McDonald’s had previously said Russia accounted for 2% of sales corporate wide, which should have put the market’s annual sales at the north of US$2 billion. Corporate filings also show that 84% of restaurants in Russia were company-owned. As part of the deal, Govor vowed to keep McDonald’s workers employed for at least two years, executives included.

With the McDonald’s sale, Russian media quickly asserted that Mikhail Goncharov’s dream had finally come true. He’d started an attack on his arch nemesis just the October before, with Moscow on pandemic lockdown, releasing footage of a sting operation during which he said Teremok employees had secretly filmed McDonald’s welcoming customers inside stores.

Goncharov claimed 10 locations had violated the city’s takeaway-only decree. When McDonald’s suspended operations post-Ukraine, Goncharov celebrated Russia’s entry to “a new stage of life and new opportunities!” But two days later, he grumbled on Facebook: “I never had such a dream. I only said that competition should be fair.” He almost sounded wistful. “No one will take McDonald’s place in Russia,” he wrote, “since no one in Russia has a similar business system.”

Suitably Russian

David Szakonyi, a co-founder of the Anti-Corruption Data Collective, a group in Washington investigating Russia’s influence on Western companies, says McDonald’s has reason to be proud of its accomplishments in Russia. Even if it “couldn’t restrain the government from its worst impulses,” he argues, it still “provided a lot of good directly to the Russian people in a way that many multinational companies weren’t.” In that sense, Szakonyi says, it may have been “a better company for Russia than it has been for the United States.”

He points to Apple and Google removing an app created by allies of Putin critic Alexei Navalny the day before Russia’s election; Ikea executives signing off on a bribe to gain access to a St Petersburg power grid; Siemens AG paying fines for engaging in fraudulent and corrupt practices; and HP creating a secret multimillion-dollar slush fund that it used to bribe government officials. “Russia’s still transitioning to capitalism, and McDonald’s had a big impact on how restaurants and other consumer-oriented businesses operate,” Szakonyi says.

The Pushkin Square flagship sat empty for about 90 days after McDonald’s withdrew, a shiny shell reflecting the humming plaza to itself. Vloggers would occasionally capture a glimmer of activity inside. At night the self-serve kiosks would sometimes light up, their haunted start-up screens flickering with the Golden Arches.

By early June, crews were deep into “de-Arching” the place, removing or reinterpreting the final traces of McDonald’s. Workers sanded logos off trays and scribbled them off ketchup packets with black marker.

The scene on June 12 — Vkusno i tochka’s grand opening — was 1990 redux. A long line snaked in front. News crews were on hand, alongside influencers with VK, Yandex Zen and RuTube accounts. Vkusno i tochka claims a record 120,000 burgers were sold — four times McDonald’s opening-day number. One guest proposed to his girlfriend. Another hoisted a “Bring back the Big Mac” sign before security whisked him away. The mayor of Moscow appeared to congratulate Vkusno i tochka’s top brass, who had started their careers at the McDonald’s flagship in 1990.

Vkusno i tochka also started running ads around the same time. The first was filmed inside the flagship. It showed young patrons laughing at tables over food while the narrator explained that people sometimes seek out familiar places to have familiar experiences. Viewers see a Vkusno i tochka worker flashing a friendly smile and a couple on an exciting first date. The ad closed with a slogan: “The name is changing. The taste remains.” — Bloomberg Businessweek