New report reveals how corporate exodus has already wiped out decades of post-Cold War growth
Over the past six months, Russia has strengthened its economic defenses after Western countries imposed sanctions on it following its invasion of Ukraine.
Despite the crackdown, the Kremlin continues to rake in billions of dollars in oil and gas revenues, helping the ruble become the world’s best-performing currency this year.
But all is not well with the Russian economy.
Western sanctions and the widespread exodus of businesses from Russia since February 24 have ravaged Russia’s economy – and its future prospects look even bleaker, according to a new report from Yale University researchers and economists led by Jeffrey Sonnenfeld, professor at the Yale School of Management and senior associate dean for leadership studies. It has now become clear that “the Kremlin’s finances are in a much more difficult situation than is usually thought” and that “large-scale pensions and trade sanctions are catastrophically crippling the Russian economy”, have writes the researchers.
As of August 4, more than 1,000 companies, including US companies like Nike, IBM and Bain Consulting, have reduced their operations in Russia. Although some companies have stayed, the massive corporate exodus represents 40% of Russia’s GDP and is reversing 30 years of foreign investment, according to the Yale report.
The international setback is turning into a larger crisis for the country: a collapse in imports and foreign investment.
Russia is plunged into a technological crisis due to its isolation from the world economy. It struggles to secure technology and critical parts. “The national economy is largely dependent on imports in all sectors…with a few exceptions,” the report said. Western export controls have largely halted the flow of imported technology from smartphones to data servers and networking equipment, straining its tech industry. Russia’s biggest internet company, Yandex, the national version of Google, has run out of the semiconductor chips it needs for its servers.
At the same time, “Russia’s domestic production has come to a complete halt, with no ability to replace lost businesses, products and talent,” the Yale report said. Russian producers and industrialists are unable to fill the voids left by the collapse of Western imports. The Russian telecommunications sector, for example, now hopes to rely on China, India and Israel to supply 5G equipment.
In the weeks following the invasion of Ukraine, the Kremlin largely prevented a “full-scale financial crisis” through swift and severe measures, such as restricting the movement of money out of the country and imposing of an emergency 20% interest rate hike, Laura Solanko, a senior adviser at the Bank of Finland’s Institute for Emerging Economies in Transition, an organization that studies emerging economies, said Fortune last month. The ruble even rebounded after hitting a low in March, when it was valued at less than one US cent.
Still, Russian financial markets are the worst performers in the world this year, the report notes. “Putin is resorting to blatantly unsustainable and dramatic fiscal and monetary intervention to mitigate these structural economic weaknesses,” leading to a government budget deficit for the first time in years and draining the Kremlin’s foreign exchange reserves, even with its continued influx of petrodollars, the researchers wrote. The Russian government provides subsidies to businesses and individuals to mitigate the economic shocks caused by the sanctions. This “inflated level” of fiscal and social stimulus, on top of military spending, is “simply unsustainable for the Kremlin”, the report says.
And the ruble’s recent dramatic swing does not indicate a strong Russian economy, but marks something much worse: the obvious collapse of foreign imports. Sergei Guriev, scientific director of the economics program at Sciences Po, France, and research fellow at London-based think tank the Center for Economic Policy Research, previously said Fortune that he represents a “very bad” situation for the nation.
The EU is phasing out Russian energy, which could hurt the Kremlin’s oil and gas profits. Such a scenario would put a strain on the Kremlin’s finances, since Western countries have frozen half of its $300 billion in foreign exchange reserves.
Towards economic oblivion
Russia’s precarious economic position means it faces even more serious long-term challenges.
Sanctions are not designed to cause an immediate financial crisis or economic collapse, but are long-term tools to weaken a country’s economy while isolating it from world markets, according to the report. And the sanctions do exactly that for Russia.
The country is losing its wealthiest and most educated citizens as its economy collapses. Most estimates indicate that at least 500,000 Russians have fled the country since February 24, with the “vast majority being highly educated and highly skilled workers in competitive industries such as technology,” the report said. Many wealthy fleeing Russians take their money with them. According to one estimate, 20% of Russia’s very wealthy people have left this year. In the first quarter of 2022, official capital outflows amounted to $70 billion, according to estimates by the Bank of Russia – but this figure is likely a “gross underestimate” of the actual amount of money that has left the country, the Yale team wrote. .
Russian citizens are also expected to get poorer, despite increases in Putin’s minimum wage and pension income. A former aide to Putin predicts that the number of Russians living in poverty will likely double or even triple as the war continues. Russia “hasn’t seen the worst yet,” said Russian political scientist Ilya Matveev. Fortune last month.
“There is no way out of economic oblivion as long as allied nations remain united in maintaining and increasing sanctions pressure against Russia,” the researchers wrote.
This story was originally featured on Fortune.com