The US, EU, and other ‘Western’ nations have reacted with historic intensity to Russia’s ongoing invasion of Ukraine, cutting the country out of the world financial system with a barrage of penalties that are only equivalent in scope to the US financial siege of Japan in 1941.
In order to stop the outflow of international corporations, Russia has implemented a series of capital controls on investors, harsh methods reminiscent of a Marxist military regime, as detailed by Maximilian Hess, a fellow at the Foreign Policy Research Institute, in an interview with Investment Monitor. “These countermeasures halt the bleeding but do little to prevent the wound from becoming fatal.” Russia’s FDI is dead as a doornail.”
Making Russia a pariah state in terms of economics
The Russian economy is being strangled by financial sanctions imposed by ‘the West’ in a coordinated strike aiming especially at the country’s banking sector.
The sanctions aimed to cut the Russian government off from the central bank’s nearly $600 billion in reserves (globally), prohibiting all dealings with it and others. They’ve also cut off Russian access to the US dollar and denied certain Russian institutions access to Swift, the key banking communications system.
These moves have a $400 billion impact on Russia’s reserves in the West, effectively freezing them. What’s the end result? According to Klisman Murati, the founder and CEO of Pareto Economics, a boutique London-based consultancy, Russia’s financial system is under severe strain, as evidenced by growing panic across the country as citizens and businesses make bank runs out of fear that withdrawal restrictions will be implemented soon. He goes on to say that limiting Russia’s capacity to use its foreign currency reserves to prop up its banking institutions is suffocating.
While the Kremlin has amassed a much-discussed ‘fortress balance sheet’ ($600 billion), it is far from impregnable.
“People forget how quickly money burns in these crisis conditions, and how your capacity to retain long-term credit determines your entire reputation for long-term access,” Hess says. “Russia’s market credibility has been eroded for a long period, even if we had peace tomorrow.”
For investors, Russia is a no-go zone.
With Russia’s economy in shambles, foreign corporations are announcing their desire to leave the country in droves, which is easier said than done in many situations.
“The sanctions that have been imposed on Russia have effectively isolated the country,” said Eric Honz, deputy regional director for Europe and Asia at the Center for International Private Enterprise, a core institute of the US government’s National Endowment for Democracy.
“Current investments in the country are likely to be stranded, and while reinvestment is possible, getting money out of the country becomes much more difficult.”
BP was one of the first large divestment companies, announcing its plan to sell a nearly 20% share in Russian state-owned oil business Rosneft, resulting in a $25 billion loss. Shell and Equinor, the Norwegian state-owned energy corporation, have followed suit, exiting their joint ventures in Russia. Meanwhile, ExxonMobil has announced that it will abandon its massive Sakhalin-1 project, while TotalEnergies of France has announced that it will no longer invest in new projects in Russia.
According to Russian central bank estimates, the country’s extractive sector is by far the most popular destination for international investors, with more than $116 billion in accumulated FDI. Energy corporations, on the other hand, are far from the only ones leaving Russia. Heavyweights like Canada Goose, Harley-Davidson, General Motors, Volvo, and Daimler Truck are among the many others on the list. With $103.8 billion in FDI stock, Russia’s industrial sector is the second-largest target for international investors.
Each industry is affected differently, exposing some companies and countries to more risk than others. According to Fitch Solutions, German and US corporations (such as Siemens and Honeywell, respectively) are the most exposed to the impact of sanctions among foreign companies working in Russia’s infrastructure sector and construction industry due to their significant position in the market.
“We may expect a lot more divestment across the board,” says one analyst “Hess agrees. “Because they have so many physical operations across Russia, it will be quite intriguing to see what Metro, the huge German store, and Auchan, the French retail firm, do.”
Hess also mentions Irish aviation leasing as a hotspot to watch, citing the fact that the majority of Russian commercial aircraft are leased through Irish special purpose vehicle (SPV) structures. “Irish SPVs are already pulling their plane releases from a slew of Russian firms,” says the report “he continues. “If the Russians let it, hundreds of aircraft might be taken out of the country. It could end up being a major disaster.”
However, many businesses remain stranded in Russia.
Even in the greatest of circumstances, exiting a country is rarely a quick procedure (that is to say, not being at war or under sanctions). As a result, global corporations already operating in Russia will find it difficult to quit the country quickly.
The Kremlin said on March 1 that it was developing a presidential decree that would temporarily restrict foreign investors’ ability to sell Russian assets. For the time being, the specifics of how it will accomplish this remain vague.
Even before this draconian twist, the Kremlin’s decision to cut certain Russian banks off from Swift had raised fears that the move would make it more difficult for foreign companies to divest, a concern exacerbated by the fact that the Moscow Stock Exchange was shut down for several days in an attempt to limit financial damage. On February 24, the country’s stock market dropped by as much as 50%.
Both international investors and the Russian economy have been harmed by Russia’s central bank’s activities. It introduced capital controls on February 28th, prohibiting foreigners from selling securities for foreign assets.
“That means if you possess Russian shares, you won’t be able to sell them for dollars because the central bank won’t allow you to sell them for rubles and then convert them to dollars,” Hess explains. “Russia is eerily eerily eerily eerily eerily eerily eerily eerily eerily eerily eerily Which foreigners will buy BP’s stake in Rosneft, given that a deal with a Russian state corporation would be illegal under the new sanctions?”
In short, while Western foreign investment in Russia has effectively halted for the time being, most international corporations wishing to sell their shares or activities in Russia are largely trapped for the time being, trapped by both the Kremlin’s actions and Western sanctions. Exit announcements, on the other hand, are a potent political tool for delegitimizing Putin’s invasion of Ukraine, and one that many firms are sure to employ.
