“I am often asked about economic sanctions. Here is a brief scientific conclusion, as a professor of finance with a doctorate from the University of Chicago: The Russian economy has been knocked down. . This blatant assessment was posted last week on Twitter by Prof. Maxim Mironov, originally from Russia and now a professor at the IE School of Business in Madrid. Since then it has won tens of thousands of shares.
At the heart of Mironov’s analysis is a fundamental fact: Russia has become a country that is significantly integrated into the global economy, and now its ties with the world are severing.
Mironov specifications. Already transport companies refuse to ship containers to Russia, but you too find someone who would be willing to ship them to Russia, “the question is how are you going to pay for them?”. After all, the income from exports is going to be cut sharply: buyers are trying to find substitutes for Russian products. The variety of factories established in Russia in recent years, Mironov continues, in areas such as automobiles, aviation and electrical products, actually rely on imported components, and will also be harmed. So “what awaits us in the coming months is a halt to entire production chains.”
His analysis continues from one pessimistic prediction to another, including the flight of workers from the country: “Anyone who can leave the country will start doing it, and in fact they are already leaving.”
In the few days since Mironov published his assessment, one could see the dynamics he describes in action. Not a day goes by without another Western company announcing cessation of operations in Russia, from financial giants like Visa and MasterCard, through aircraft makers like Boeing and Airbus, media companies like Apple and Samsung, consulting giants like McKinsey and Accenture, to consumer companies like IKEA and Zara. Russia’s process of integration into the world economy became an overnight direction, and Cold War metaphors, such as the Iron Curtain, made headlines again.
Why are they leaving?
Why do foreign companies leave? In some cases the answer is clear: they must comply with the sanctions imposed by Western countries on Russia and its central bank, on large parts of the financial system, as well as on oligarchs and Russian businesses. The very fear of future sanctions adds a dimension of uncertainty that makes it difficult to continue operations. To this must be added the ruble crash, the logistical difficulties, and also the recommendations of Western governments to their citizens to leave Russia. In short, there is no shortage of reasons.
As Dr. Paul Sullivan, a Fellow of the Atlantic Council, the International Research Institute, put it in an article in The Brunes, there is “pretty clear math” here. , And try to put the risks in the equation as well.When currently the return on capital has gone down, the price of capital has gone up, and the risk has increased.
According to this equation, it is no wonder that Western companies are leaving Russia, or at least suspending their activities at the same time. And as the economist pointed out, at least for some Western companies this is not a very weighty decision: for them Russia is simply not such a significant market. For comparison: in 2020, Russia’s GDP was just under $ 1.5 trillion – about 3.5 times Israel’s GDP.
Do the right thing
And to all these considerations must be added another consideration, which has starred in the rhetoric of the corporate world in recent years – the desire to do the right thing, or at least to weave into the mindset of consumers, or ‘stakeholders’. That too is a consideration. For example, IKEA’s announcement of cessation of operations in Russia (while caring for the network’s employees in the country) mentions together the empathy for the millions of people affected by the war, the significant disruptions to the supply chain and trade conditions.
Public opinion may not have been the consideration that gave the initial impetus for corporations to leave Russia – sanctions and the war itself did. But as the isolation gains momentum, the harder it is to break the line.
The one that provided an example over the weekend is the energy giant Shell, which decided to buy Russian oil at a significant discount. The company, which explained that it was committed to maintaining fuel supply to its customers in Europe, encountered an angry public backlash – announcing that it would donate all profits to a fund it set up for the benefit of the Ukrainian population.
Particularly pessimistic forecast
The sanctions will not be levied on Russia alone. As Prof. Simon Johnson, a former chief economist of the International Monetary Fund, explained in an interview with “Globes” last week. “The idea that you can impose costs on Russia without any costs or risk to the world, is not true. In all sanctions there is a price for both sides,” he said. On Saturday, the IMF had already released an estimate that war and sanctions would have a “severe” impact on the global economy, in part because of the surge in food and energy prices.
But, keep in mind, while not only Russia will be harmed by Western sanctions, the blame still lies with them because they are at the end of the day a response to the war it has launched in Ukraine, and Russia is also the one that will be harmed by them the most.
Returning to the end of the dessert to Prof. Mironov’s particularly pessimistic prediction: “The only positive side of this whole business is that those who long for the Soviet Union with nostalgia will experience all its wonders for themselves. And this will not be the vegetarian Soviet Union of Khrushchev / Brezhnev / Gorbachev Etc., but a Soviet Union headed by a crazy dictator. ”