Citibank on Thursday issued a press release announcing its intention to close its consumer and local commercial banking businesses in Russia as part of a longer-term “global strategic renewal” first announced in April 2021. “We have explored multiple strategic options for the sale of these businesses in recent months. It is clear that the liquidation path makes more sense given the many complicating factors in the environment,” Legacy Franchises CEO Titi Cole said in the release, although as of July the bank was still trying to negotiate the sale of its local franchise. and consumer banking sectors to local Russian companies, the Financial Times reported at the time. The sanctions have complicated the sale to at least one potential buyer, Rosbank. Owner Vladimir Potanin was recently sanctioned by the UK. Citibank’s announcement and decision to wind down its operations rather than continue to pursue sales is somewhat of an indication that the sanctions and bans are having their intended effect. “Months ago, the United States banned all new investment in Russia’s economy,” Eddie Fishman, a senior fellow at Columbia University’s Center for Global Energy Policy, told Vox via email. “So all the American companies that remain in Russia are barely keeping the lights on.” However, this does not mean that the Russian economy has collapsed. Russia’s central bank is adjusting the country’s monetary policy to keep the ruble afloat, and it is currently the strongest against the dollar since 2018, CNN reported Sunday. After a crash early in the war, when the US froze $600 billion in foreign reserves, the central bank took aggressive action, raising interest rates to control inflation. This appears to have paid off, with inflation apparently leveling off after April’s high of 18%. In addition, banks and businesses from other countries, including China and Japan, have helped soften the blow somewhat, either by maintaining their business ties to Russia or pledging to expand their investments there. China and India increased purchases of fuels, including coal, despite sanctions on Russia’s fossil fuel industry.
Sanctions take some time to affect a large economy
Russia has also been working to soften the impact of sanctions since the US initially imposed sanctions in 2014 over Russia’s invasion of Crimea. When major Western businesses like McDonald’s, Starbucks, Visa and Mastercard left the country early in the invasion, Russian companies were there to soften the blow, Andrey Nechaev, Russia’s former economy minister, told CNN. “The exit of Mastercard, Visa, barely had an impact on domestic payments because the central bank had its own alternative payment system.” Fast food, too, is now becoming a domestic business, with McDonald’s franchises reopening under the name Vkusno i tochka — Tasty, and that’s all — and Starbucks now being launched by Stars Coffee. Starting in 2014, the government pushed western franchises to source their supplies locally. This policy has paid off as imports are now hard to come by. Despite preparations made by the Russian government to help the economy cope with the West’s aggressive sanctions regime, these controls are not sustainable forever. In addition, Russia is still unable to import critical technological supplies and its economy is heavily dependent on fuel exports and is currently benefiting from high prices due to inflation. “Sanctions are having a dramatic impact on Russia’s economy,” Fishman said. “Even the most conservative estimates suggest that Russia’s GDP will contract by 6 percent this year – a bigger blow than the Russian financial crisis of 1998. In the absence of sanctions, Russia’s economy was poised for growth this year.” The country’s inability to import goods “led to shortages of foreign components and a sharp decline in industrial production. The result was a wave of underemployment that would eventually translate into layoffs and a drop in living standards.” Russia’s fuel industry ultimately has a limited lifespan, argues Thane Gustafson 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 draws from these revenues. In 2019, oil and gas exports accounted for 56% of Russia’s export income, totaling $237.8 billion. This revenue contributed to 39% of the national budget, according to Gustafson. Without a strong oil and gas industry — high prices and a large customer base — Russia’s economy will ultimately suffer from a lack of diversification. Furthermore, the full weight of the fuel penalties has yet to be imposed. In December, the EU will ban 90% of all Russian oil imports, cutting Russian production by up to 2.3 million barrels per day of crude and oil products by February 2023, according to the International Energy Agency. It may be difficult to find new customers for these products, Bloomberg reports, as outflows to Asian markets have stabilized in recent weeks.
What role does foreign divestment play?
Sanctions are only part of the strategy. Foreign investment represents a blow to the Russian economy, though not as severe as the curtailment of oil and gas revenues and critical imports. Although many companies, including US and European companies, continue to operate in Russia, more than 1,000 companies have expressed their intention to withdraw from the country to some extent, according to a survey by the Yale School of Management’s Chief Executive Leadership Institute.
“It can take months or even years for some companies to fully unwind their operations [in Russia]Fishman told Vox. “But that doesn’t mean they’re funneling money to Russia.” Financial services companies, heavy machinery, airlines, oil companies, fast food and retail companies based around the world have suspended operations in Russia, affecting people at various income levels. Russian companies and the ultra-rich, for example, can no longer get a Deutsche Bank loan, and ordinary people won’t be able to buy Nike shoes once the company pulls out of Russia entirely, as it announced in June.
For consumer goods like Nike, the decision to divest will not materially affect the bottom line. according to Reuters, less than 1 percent of the company’s revenue comes from Russia and Ukraine combined.
Russia, for its part, has, since the collapse of the Soviet Union, “remained suspicious of integration, resistant to openness, ambivalent towards foreign investment and isolated from major scientific and technical currents,” Gustafson writes in Klimat. These trends only increased during the administration of President Vladimir Putin, according to Gustafson. any promise that most foreign companies saw in the Russian market is now likely to be lost or at best short-lived.
“The Russian economy is one of the most dangerous destinations for foreign investment and will remain so at least until the sanctions are lifted,” Fishman said. Instead, capital flows have often gone in the opposite direction, writes Gustafson in Klimat. “Russia suffers particularly from the tendency of Russian companies and individuals to move their capital out of Russia,” with the super-rich often moving their wealth to offshore havens. In fact, according to a 2018 study by Filip Novokmet, Thomas Piketty and Gabriel Zucman, which Gustafson cites, “the wealth held by wealthy Russians offshore is roughly three times larger than official net foreign exchange reserves and is comparable in size to total household finances. assets held in Russia”.
Early in the war, Putin barred Russian clients from sending money abroad, including to repay foreign debt, although those restrictions were eased somewhat in April. While Russia does not provide data on capital inflows and outflows, Bloomberg reported in June that as many as 15,000 high-net-worth individuals — an estimated 15 percent of its millionaires and billionaires — could leave Russia for places such as Israel and the United Arab Emirates due to tightening sanctions.
Where is Russia’s economy headed — and how does that affect Ukraine?
Sanction projects, in theory, are supposed to impose sufficiently and appropriately painful conditions that induce the sanctioned state to change its behavior. Six months in, Russia has not felt the full extent of the economic pain it will feel in the future if the US, UK and EU succeed in maintaining the energy embargo in particular. “The big question, though, is whether all this economic damage is advancing worthwhile policy goals,” Fishman said. “And it’s a difficult question to answer, as we can never know otherwise.” Russia, despite heavy losses on the battlefield, has maintained its presence on the southern front and plans to increase its total military strength from 1.9 million to 2.04 million, Reuters reports. It is unclear exactly how the military will accomplish this, given reports that many Russian men have reportedly tried to avoid military service. And the conflict has entered a grueling new stage—a war of attrition that requires sustained military strength and morale. A Russian victory would depend on significant mobilization of industry and social support. It is unclear how this will happen, given the challenges that sanctions have brought to the industrial sector and the recent sanctions against defense companies and associated individuals. “Over the past two decades,…
