In a column for Foreign Policy, economics professor Jeffrey Sonnenfeld argues that it would be a grave mistake to imagine Vladimir Putin as the winner in the current situation. Drawing on his analytical vision, he examines the real state of affairs in Russia and points out its far from positive nature.
This is perhaps the most difficult moment for Ukraine since the beginning of the Russian invasion in February 2022, when the situation on the battlefield seems to have reached a stalemate, political support from the West is wavering under the weight of political dysfunction, and the war in the Middle East is diverting resources and attention.
Yet many reflective cynics in the Western press go too far in giving credit to Ukraine’s adversary, Russian President Vladimir Putin, and one Wall Street Journal columnist even declared Putin one of the “winners of the year.” We cannot fall into the trap of thinking that all is well for Putin, and we cannot abandon effective pressure on him.
Just this week, the New York Times even suggested that the exit of more than 1,000 multinational companies from Russia has had an unfortunate consequence, enriching Putin and his cronies. All the evidence suggests that the departure of businesses will entail significant costs. The economic data clearly shows that the Russian economy has paid a huge price for the loss of these enterprises. Putin continues to hide necessary statistics on Russia’s national income — apparently because there is nothing to brag about.
While Putin expropriated some assets of Asian and Western companies, most firms simply gave up doing business in Russia, willingly writing off billions of dollars in assets. They were rewarded for this, as their market capitalizations soared after news of their exits broke. Not only is Russia suing foreign companies for exiting, as the departures of ExxonMobil and BP have put an end to the technology needed to explore for oil, but Russian giant Rosneft even sued Reuters for reporting on it. The massive supply disruptions, leading to the closure of Russian plants in various sectors, have been documented in reports from the ground, leading to the arrest and now nine-month prison sentence of a heroic journalist who documented the truth.
Consider the following economic statistics that we have verified.
Brain drain. In the first months after the invasion, an estimated 500,000 people left Russia, many of them highly educated and technically skilled workers that Russia could ill afford to lose. Within a year or so, that number had risen to at least 1 million. By some estimates, Russia lost 10 percent of its entire technological workforce in this unprecedented brain drain.
Capital flight: According to reports from the Central Bank of Russia, a record $253 billion in private capital was withdrawn from Russia between February 2022 and June 2023, more than four times the volume of all previous capital outflows. By some estimates, Russia lost 33 percent of the total number of millionaires living in Russia.
Loss of Western know-how. This has happened in key sectors such as technology and energy. For example, Rosneft alone has had to spend almost $10 billion more on capital expenditure over the past year, according to its own figures, which amounts to about $10 in additional costs for every barrel of oil exported, in addition to the difficulties of continuing its Arctic oil drilling projects, which have relied almost entirely on Western technology and expertise.
Virtually complete cessation of foreign direct investment in Russia. Foreign direct investment (FDI) in Russia has almost completely ceased for a number of reasons. In the 22 months following the invasion, there was only one month of positive FDI inflows, compared to approximately $100 billion in FDI annually before the war.
Loss of the ruble as a freely convertible and exchangeable currency. With global multinational corporations fleeing in droves, there was little to stop Putin from imposing unprecedented and severe capital controls on the ruble after the invasion, such as banning citizens from sending money to bank accounts abroad; suspending cash withdrawals from dollar-denominated bank accounts of more than $10,000; forcing exporters to exchange 80 percent of their profits for rubles; suspending direct conversion of dollars for individuals with ruble bank accounts; suspending direct currency exchange for rubles; suspending exchange for rubles. Not surprisingly, ruble trading volumes have fallen by 90 percent, making Russian assets denominated in rubles virtually worthless and untradeable on world markets.
Loss of access to capital markets. Western capital markets remain the deepest, most liquid, and cheapest source of capital for financing businesses and taking risks. Since the invasion, no Russian company has been able to issue new shares or new bonds in any Western financial market. And with the flight of multinationals, Russian companies have no alternative sources of financing and no global investors to attract.
Asset values plummet. Partly due to the mass exit of global multinationals, asset values in Russia have plummeted across the board, with even the total value of some state-owned enterprises falling by 75 percent from pre-war levels, according to our research. The Times reports that many private sector assets have fallen by 50 percent.
These are just some of the costs Putin has had to bear in the wake of the withdrawal of over 1,000 global companies; and that’s without taking into account the devastating impact on the Russian economy of economic sanctions, such as the highly effective cap on oil prices imposed by the U.S. Treasury. Energy accounted for more than two-thirds of Russian exports, and now that figure has been halved. Russia, which has never supplied finished goods—industrial or consumer—to the global economy, is paralyzed. It is not even remotely an economic superpower; virtually all of its raw materials are easily replaceable from other sources. The military machine is powered only by cannibalizing enterprises that are now state-controlled.
Judging by our big economic data, the verdict is clear: an unprecedented historic withdrawal by more than 1,000 global companies has helped cripple Putin’s war machine. At such a difficult time for Ukraine, it would be a mistake to be too optimistic—just as it would be a mistake to be too cynical.
