Russia has been too toxic for doing business even before sanctions hit it - and even more now
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“Sanctions are having a dramatic impact on Russia’s economy,” senior research scholar at Columbia University’s Center for Global Energy Policy Eddie Fishman told Vox in the recent article that takes a deeper look into what really happens in the Russian economy. “Even the most conservative estimates suggest Russia’s GDP will contract by 6 percent this year — a larger hit than the 1998 Russian financial crisis. Absent sanctions, Russia’s economy was poised for growth this year.”

Due to sanctions, Russia lost the ability to import goods, which led to shortages of foreign components and rapidly declining industrial production. The result has been a wave of underemployment that will eventually translate into layoffs and declining living standards.

Moreover, Russia’s fuel industry ultimately has a limited lifespan, Thane Gustafson argues in his book Klimat: Russia in the Age of Climate Change. Russia’s economy is so deeply tied to fossil fuels that it has no significant alternative industry to make up for the money it rakes in from those revenues. Without a strong oil and gas industry — high prices and a large customer base — Russia’s economy will eventually suffer due to the lack of diversification.

Since the collapse of the Soviet Union, Russia, for its part, has “remained suspicious of integration, resistant to openness, ambivalent toward foreign investment, and isolated from major scientific and technical currents,” Gustafson writes in Klimat. Those tendencies have only increased during President Vladimir Putin’s rule, according to Gustafson; any promise most foreign companies did see in the Russian market is now likely gone, or short-lived at best.

“The Russian economy is one of the riskiest destinations for foreign investment, and it will remain so at least until sanctions are removed,” Fishman said.

Russian companies and individuals have been the first to acknowledge it and move their capital out of Russia to off-shore havens. In fact, according to a 2018 study by Filip Novokmet, Thomas Piketty, and Gabriel Zucman, which Gustafson cites, “the wealth held offshore by rich Russians is about three times larger than official net foreign reserves, and is comparable in magnitude to total household financial assets held in Russia.”

While over a thousand companies have already left Russia, the remaining ones should think: if Russian companies and wealthy individuals have been leaving Russia even before sanctions hit it, what are you hoping to achieve in this market?

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