Western business is still sustaining Russia’s war

How is Russia still fighting in Ukraine? Nearly a year after a “special military operation” against its western neighbor, Russia’s President Vladimir Putin’s military misadventures have cost the country’s armed forces enormous costs and left Moscow a global powerhouse with few credible international partners. changed to a pariah. Over time, knowledgeable observers predict that this situation will dramatically impoverish the Russian state. For the time being, however, many are puzzled as to how the Kremlin was able to sustain its chosen war.

Part of the answer lies in energy.

The country’s current account surplus last year hit a record $227 billion, despite pressure from Western countries, due to continued declines in oil and gas exports and imports abroad. Simply put, Russia, at least so far, has managed to survive by selling energy to aggressive consumers (such as China) while importing less goods from abroad. As a result, there is still money to burn on the war machine.

But another important reason for this continued solvency has to do with Russia’s commercial ties with the West. That’s because despite widespread international sanctions and extensive commitments by politicians and business leaders, only a small percentage of Western companies have actually stopped doing business in the Russian Federation.

A new study jointly conducted by researchers from the Swiss management school IMD Institute and the University of St. There has been only a “very limited withdrawal of EU and G7 companies” since the war began in late February last year.

“Many companies headquartered in these countries have effectively resisted pressure from governments, media and NGOs to leave Russia since the Ukrainian invasion,” say academics Simon Evenett and Niccolo. A study authored by Pisani concludes:

Details are terrible.

At the time Putin decided to “demilitarize” and “de-Nazi” Ukraine, there were 1,404 EU and G7 companies operating in Russia with 2,405 subsidiaries. As of late November 2022, when the survey was conducted, only 120 of these companies had sold at least one of their Russian subsidiaries. This equates to “less than 9%” of all Western companies, researchers note.

American companies are a little more accountable, and American companies refrain from doing business with the Kremlin more than European companies. However, the difference is small. Overall, less than 18% of American subsidiaries in Russia have sold assets and ceased operations since the start of the Ukraine war. More than 1 in 5 of them have completed their exit. “

The resulting image is dark.

“In principle,” Evenet and Pisani “could represent the bulk of Western investment in Russia,” he said. But it’s not. Rather, he accounts for only 6.5% of the “gross pre-tax profits of all his EU and G7 companies with active commercial activity in Russia”. In other words, the West’s commercial relations with Russia have changed little.

These findings run counter to conventional wisdom that there has been a real exodus of businesses and funds in response to the Russian attack on Ukraine. , nothing of the sort has happened – and Western corporations continue to put profit ahead of orders to stop funding Putin’s war effort.

As a result, the United States and its international partners face a serious dilemma.

Since the war began in February 2022, the West has imposed an unprecedented amount of sanctions on Moscow to stop the Putin regime from trying to dominate and conquer Ukraine. However, it is becoming increasingly clear that the success of that effort will depend heavily on the private sector truly curtailing business with the Russian Federation.

All of this suggests that Washington and Western capital will need to force Western companies to cut ties with the Russian market in order to put more pressure on Moscow. Otherwise they will continue to sustain the Russian economy.

Ilan Berman is senior vice president of the American Foreign Policy Council in Washington, DC. This non-profit organization provides expert analysis to those who determine or influence U.S. foreign policy and is dedicated to helping world leaders build democracies and market economies. I’m here. He is leading the future of the Council’s public diplomatic projects.

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