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About the author: Paul Sullivan is a nonresident senior fellow with the Atlantic Council’s Global Energy Center.
As Ukraine bleeds from a vicious invasion by the Russian military, Russia is hemorrhaging investments from foreign companies and investors. It is also hemorrhaging the chances for new business, sport, and other opportunities for future revenue. So many companies and investors are leaving so quickly, it is hard to follow it all.
About 60% of the export earnings and 30% of the federal budget of Russia are from energy revenues and taxes. Energy companies leaving the country will deal a big blow to Russia’s economy, which is the size of Spain’s and much less diversified. Russia is a mostly natural resources state, not an industrial one, especially when compared with its EU neighbors. It cannot afford the outflow of industrial and other investment that is now happening. It cannot afford to lose the technology flows that will leave with them.
Companies are likely leaving because there is significant reputational risk of doing business with Russia. This risk was present even before the invasion of Ukraine, due to the corruption and criminality of the Russian government and within the economy.
Many companies and investors poured into Russia after the collapse of the USSR. They saw massive profits to be made from the vastly underpriced assets in the country. They also saw fantastic opportunity as the soon-to-be oligarchs obtained large parts of metals, mining, energy, and other industries for pennies on the dollars. They were able to buy these on the cheap from a fretful government hurtling towards bankruptcy during the time of Yeltsin and the first years of Putin. Some of those original foreign companies are in the front of the line to leave Russia these days.
The multilateral and national sanctions imposed on Russia’s government entities, banks, oligarchs, and leaders in many fields have brought greater perceived and actual risk to foreign companies and investors in the country. Cutting some Russian banks from bank-messaging system Swift was an unbelievably ominous sign for many of these companies.
Investors and companies look at the estimated return on invested capital, or ROIC, compared to the estimated weighted average cost of capital, WACC, while also considering risk. Estimated ROIC went down. Estimated WACC went up. Estimated risk went up. The math seemed clear to many.
Companies looked at the opportunity costs of staying. There are many other places to invest and operate in that do not have such reputational risks and investment-killing sanctions.
When a company leaves Russia quickly in this environment its assets could be back to the pennies on the dollar, as it was in the earlier years. Some of them will be directly handing over energy sites, infrastructure, cash, and more to their Russian partners. These are losses—but when things seem to be hurtling down hill it is often best to get off the ride.
Departing companies’ Russian partners will also lose due to declining valuations. These hits add to the precipitous declines in the Russian equities and other markets, as well as the collapse of the ruble.
Who is leaving, suspending operations, or cutting back considerably in their operations? The list is extensive: Exxon, BP, Equinor, Shell, Total, ENI, Orsted, OMV, Siemens, Fortum, Uniper, Trafigura, Norsk Hydro, ABB, Sandvik, Deutsche Post, Ford, GM, Boeing, Airbus, Apple, Facebook, Twitter, Netflix, Spotify, Canada Goose, Expedia, Adidas, Harley-Davidson, Daimler Truck, Volvo, Mercedes Benz, Toyota, Mazda, Mitsubishi, Honda, Jaguar Land Rover, Renault, H&M, Dell, Maersk, MSC, Frontline, Electrolux, UPS, Fedex, Norway’s sovereign wealth fund, HSBC, ING, Nordea, RBI, and pension funds in the U.S. and other countries. And this is just a selected list at the time of writing. The giant Asian Infrastructure and Investment Bank in China has frozen all lending to Russia and Belarus due to the war in Ukraine.
Sport is a big business too. Formula 1, soccer leagues, the Paralympics, and many more are banning or excluding Russian athletes, teams, and investors. More bans in sports and other industries are likely to come.
More investors, companies, and sports will leave, suspend their activities, or cut back on their activities in and with Russia. The longer this vicious war on Ukraine continues, the more Russia’s economy will hemorrhage.
The damage from just the last week could have lasting impacts. If this war continues for much longer, there will be very few Western companies left in Russia. As more ugly news comes out of Ukraine, sanctions will continue to tighten, and more companies will bolt from Russia and Russia-related entities.
A question for leaders in Russia at many levels and for the Russian people: Is the war worth it?
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