About the Author: Paul Sullivan is a Nonresident Senior Fellow at the Atlantic Council’s Global Energy Center.
As Ukraine bleeds from a vicious invasion by the Russian military, Russia is hemorrhaging investment from foreign companies and investors. It also haemorrhages the chances of new business, sports and other future income opportunities. So many companies and investors are leaving so quickly that it’s hard to keep track of everything.
About 60% of export earnings and 30% of Russia’s federal budget come from energy revenues and taxes. Energy companies leaving the country will be a blow to Russia’s economy, which is the size of Spain and much less diversified. Russia is a predominantly natural resource-rich, non-industrial state, especially when compared to its EU neighbors. It cannot afford the industrial and other investment outflows that are happening now. It cannot afford to lose the technological flows that will leave with them.
Companies are likely leaving because there is a 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 economy.
Many companies and investors flocked to Russia after the collapse of the USSR. They saw huge profits to be made from the vastly undervalued assets in the country. They also saw a fantastic opportunity as future oligarchs get much of the metals, mining, energy and other industries for pennies on the dollar. They were able to buy them cheaply from a restless government that was hurtling towards bankruptcy in the days of Yeltsin and Putin’s early years. Some of these quirky foreign companies are on the front lines of leaving Russia these days.
Multilateral and domestic sanctions imposed on Russian government entities, banks, oligarchs and leaders in many areas have increased the perceived and real risks to foreign companies and investors in the country. Cutting off some Russian banks from the Swift banking messaging system was an incredibly worrying sign for many of these companies.
Investors and companies look at the estimated return on invested capital, or ROIC, against the estimated weighted average cost of capital, WACC, while factoring in risk. The estimated ROIC has gone down. The estimated WACC has increased. The estimated risk has increased. The math seemed clear to many.
Businesses have looked at the opportunity costs of staying. There are plenty of other places to invest and operate that don’t have such reputational risks and investment-killing penalties.
When a company quickly leaves Russia in this environment, its assets can revert to pennies on the dollar, as was the case in previous years. Some of them will directly hand over energy sites, infrastructure, money, etc. to their Russian partners. These are losses, but when things seem to be falling apart, it’s often best to step back.
The exiting companies’ Russian partners will also lose out due to falling valuations. These successes come on top of precipitous declines in Russian stocks and other markets, as well as the collapse of the rouble.
Who is leaving, suspending operations or drastically reducing operations? The list is long: 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, Norwegian Sovereign Wealth Fund, HSBC, ING, Nordea, RBI and pension funds in the US 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 loans to Russia and Belarus due to the war in Ukraine.
Sport is also big business. Formula 1, football leagues, Paralympics and many more ban or exclude Russian athletes, teams and investors. Further bans in sport and other industries are likely to occur.
More investors, businesses and sports will leave, suspend operations or reduce activities in Russia and with Russia. The longer this vicious war against Ukraine continues, the more the Russian economy will hemorrhage.
The damage from just the last week could have lasting effects. If this war lasts much longer, there will be very few Western companies left in Russia. As more bad news comes out of Ukraine, sanctions will continue to get tougher and more companies will leave Russia and Russian-related entities.
A question for Russian leaders at many levels and for the Russian people: is the war worth it?
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