More than 400 foreign companies in Russia, some of whom have been in the country for decades, are divesting or suspending operations in the country. This ‘Great Business Retreat’, as it is being called, comes in response to crippling Western sanctions on Russia for its ongoing invasion of Ukraine.
At first glance, it may seem that this exodus is set to have a sweeping impact on the Russian economy. In the short term, however, this is very unlikely for two main reasons. Although the majority of multinationals in Russia have suspended business activity, such as Starbucks and McDonald’s, most have continued to pay their employees, for now. Meanwhile, the minority of Western companies looking to sell (not just suspend) their operations will find it nigh on impossible to do so considering the state of the sanctioned and free-falling Russian economy.
However, what about the longer-term impact? Well, unless Vladimir Putin rapidly U-turns on Ukraine and pulls his troops out, which is highly unlikely, the small group of foreign businesses that have not yet withdrawn from Russia will join the exodus, while companies’ efforts to keep paying their Russian employees are likely to end soon too.
The economic pain will be real, with hundreds of thousands of Russians losing their jobs (albeit mainly on the low-skills end of the spectrum). For example, McDonald’s alone owns 850 restaurants and has 62,000 employees across the country. At this point, the Russian state may very well step in and nationalise foreign companies’ property and assets – something that would stem the bleeding, but not stop it.
The Kremlin, however, cannot save the thousands of new jobs that would have been created by brand new foreign investment to Russia, had the Ukraine invasion never occurred. Foreign direct investment (FDI) to Russia is dead. In fact, the country’s business credibility has been so spectacularly damaged over the past three weeks, that even if Putin left Ukraine right now it would take years for confidence to be restored and companies to return. While all of this sounds catastrophic, it misses one crucial point.
Russia does not rely heavily on foreign investment
Although the Russian economy will certainly feel the loss of jobs and tax revenues from the Great Business Retreat, its impact should not be overstated.
The problem is that FDI does not matter that much to the Russian market, which is why it accounted for just 0.63% of the country’s GDP in 2020 (less than the global average). This was not just a one-off.
Since its peak in 2008 at $75bn, FDI into Russia has fallen to an average of $30bn annually, a downward trend that was accelerated after the first invasion of Ukraine in 2014, which spooked Western investors significantly.
In short, foreign investment to Russia has been reduced to minimal levels, so much so that much smaller or poorer nations frequently outperform the country. This is especially true in terms of the diversity of investment in Russia, which for many decades has been dominated by the oil and gas sector.
Add to this the fact that a significant amount of what is reported as official FDI by the Russian authorities is actually just round-tripping – Russian money being channelled back through Cyprus and the Netherlands, for example (see the above chart).
It is clear, therefore, that although the loss of FDI to Russia will be felt, its economic impact will not be huge or devastating. Its social and political impact, however, is far more significant, accelerating Russia’s pariah status in a way that is highly visible to those living inside and outside the country.
Little wonder, therefore, that Ukrainian President Volodymyr Zelenskyy has made so much effort in recent weeks to criticise foreign companies, such as Nestlé, that have not pulled out of Russia. Every company that leaves the country is a moral victory for Ukraine, while the opposite is true for every business that stays.
Understand the impact of the Ukraine conflict from a cross-sector perspective with the Global Data Executive Briefing: Ukraine Conflict.