In a column for Foreign Policy, economics professor Jeffrey Sonnenfeld opines that imagining Vladimir Putin as the winner in the current situation would be a deep mistake. Based on his analytical vision, he examines the real state of affairs in Russia and points to 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 an impasse, the political support of the West wavers under the pressure of political dysfunction, and the war in the Middle East diverts resources and attention.
However, many reflexive cynics in the Western press go too far in giving credit to Ukraine's adversary, Russian President Vladimir Putin, with one Wall Street Journal columnist even declaring Putin one of the "winners of the year." We cannot fall into the trap of thinking that everything is fine with Putin, and we cannot abandon effective measures to pressure him.
Just this week, the New York Times even suggested that the exit of more than 1,000 multinational companies from Russia had unpleasant consequences, enriching Putin and his henchmen. All the facts indicate that exiting the business will entail significant costs. Economic data clearly show that the Russian economy has paid a huge price for the loss of these enterprises. Putin continues to hide the necessary statistics of Russia's national income - obviously, because there is nothing to brag about.
While Putin has expropriated some assets of Asian and Western companies, most firms have simply abandoned business in Russia, willingly writing off billions of dollars worth of assets. They were rewarded for this as their market capitalization skyrocketed following the news of their exit. Not only is Russia suing foreign companies for leaving, as the departure of ExxonMobil and BP put an end to the technology needed for oil exploration, but Russian giant Rosneft even sued Reuters for reporting on it. Massive supply disruptions leading to the closure of Russian factories in various sectors have been described in on-the-ground reports, leading to the arrest and now a nine-month prison sentence of the heroic journalist who documented the truth.
Consider the following economic statistics that we checked.
Talent drain. In the first months after the invasion, about 500,000 people left Russia, many of whom were precisely the kind of highly educated and technically skilled workers Russia could ill afford to lose. Within a year, this number had grown to at least 1 million people. According to some estimates, Russia has lost 10 percent of its entire technology workforce due to this unprecedented talent flight.
Capital flight. A record $253 billion of private capital was withdrawn from Russia between February 2022 and June 2023, more than four times the amount of all previous capital outflows, according to reports from the Central Bank of Russia. According to some estimates, Russia has lost 33 percent of the total number of millionaires living in Russia.
Loss of Western know-how. This has happened in key industries such as technology and energy. For example, Rosneft alone has had to spend nearly $10 billion more in capital expenditures 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 difficulties in continuing oil drilling projects in The Arctics, which were almost completely dependent on Western technology and experience.
Virtually complete cessation of direct foreign investment in Russia. Foreign direct investment (FDI) in Russia has almost completely stopped for a number of reasons. In the 22 months following the invasion, there was only one month of positive foreign direct investment inflows, compared to approximately $100 billion in foreign direct investment annually before the war.
The 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 strict capital controls on the ruble after the invasion, such as banning citizens from sending money to bank accounts abroad; suspend cash withdrawals from dollar-denominated bank accounts in excess of $10,000; forcing exporters to exchange 80 percent of their sales for rubles; suspend the direct conversion of dollars for individuals who have ruble bank accounts; suspend the direct exchange of currency for the ruble; suspend the ruble exchange. Not surprisingly, ruble trading volumes have fallen by 90 percent, making Russian assets denominated in rubles practically worthless and not tradable on world markets.
Loss of access to capital markets. Western capital markets remain the deepest, most liquid and cheapest source of capital for business financing and risk taking. Since the beginning of the invasion, not a single Russian company has been able to issue new shares or new bonds in any Western financial market. And with the flight of transnational companies, Russian enterprises have no alternative sources of financing and global investors, whose attention could be attracted.
A sharp fall in the value of assets. Thanks in part to the mass exodus of global multinationals, asset values in Russia have plummeted across the board, with even the total value of some state-owned enterprises down 75 percent from pre-war levels, according to our research. As the Times reports, there has been a 50 percent decline in the value of many private sector assets.
These are just some of the costs that Putin had to bear in connection with the exit of more than 1,000 global enterprises; this is without taking into account the damaging effect on the Russian economy of economic sanctions, such as the highly effective oil price cap designed by the US Treasury Department. More than two-thirds of Russian exports were energy carriers, and now it has halved. Russia, which has never supplied finished products - industrial or consumer - to the world economy, is paralyzed. It is not even remotely an economic superpower, almost all of its raw materials can be easily replaced from other sources. The war machine is driven only by the cannibalization of enterprises that are now controlled by the state.
Judging by our big economic data, the verdict is clear: an unprecedented historical exodus of more than 1,000 global companies helped disable Putin's war machine. At such a difficult moment for Ukraine, it would be a mistake to be too optimistic, just as it would be a mistake to be too cynical.
