This Is No Time for Business as Usual in Russia

This Is No Time for Business as Usual in Russia
A worker removes McDonald’s logotype from a restaurant in Moscow on June 17, 2022. (Photo by Alexander Nemenov/AFP via Getty Images)

In a phone call in March, President Donald Trump and Russia’s Vladimir Putin reportedly discussed the war in Ukraine, the need for “improved bilateral relations” and “enormous economic deals and geopolitical stability when peace has been achieved.”

The call was a follow-up to U.S-Russia talks in Riyadh, Saudi Arabia, in February that also emphasized restoring economic and investment opportunities between the United States and Russia if a ceasefire can be reached. The Riyadh meeting constituted the first such high-level contacts between Moscow and Washington since Russia launched its full-scale invasion of Ukraine in 2022. The two sides agreed to “lay the groundwork for future cooperation on matters of mutual geopolitical interest and historic economic and investment opportunities” in anticipation of a “successful end” to the conflict in Ukraine, according to a U.S. statement.

Secretary of State Marco Rubio, who led the U.S. delegation in Riyadh, declared that ending the war in Ukraine could “unlock the door” for “incredible opportunities that exist to partner with the Russians geopolitically on issues of common interest and, frankly, economically on issues that hopefully will be good for the world and also improve our relations in the long term.”

On the surface, Russia may appear to be an attractive place in which to do business. Russia is historically a consumer-oriented economy, with domestic consumption making up almost 70 percent of its gross domestic product, and it holds the most gas reserves globally. The country also is rich in natural resources, holding significant reserves of coal and oil, among other minerals and rare earths.

But there are lots of reasons – both moral and practical – why American companies should pass up opportunities to do business in Russia if given the chance. Not least is that revenue generated from American companies could help fuel the Russian war machine. Russia also lacks rule of law that could protect businesses, nor does it offer predictability or a friendly business environment. It is rife with corruption, and it can be a dangerous place for Americans to visit – witness the repeated instances over the years of Americans wrongfully detained and/or held hostage.

Sanctions Relief and Restarting Nord Stream 2?

Yet just three weeks after the Riyadh meeting, the Trump administration began prepping proposals for sanctions relief and held talks to resume the transportation of Russian gas via the Nord Stream 2 pipeline, an almost 800-mile artery from Russia to Germany. Most recently, Russian Foreign Minister Sergey Lavrov stated that “there is a conversation about Nord Stream” with the United States and that “it would be interesting if the Americans used their influence on Europe and forced it not to give up Russian gas.” A similar agreement between the two countries is currently under consideration for joint projects involving rare earth metals, with several companies reportedly expressing interest. Meanwhile, the American Chamber of Commerce, which represents American companies operating in Russia, is working on a report for the U.S. government with proposals to lift restrictions and recover lost market share connected to existing sanctions.

Putin, eager to reopen the Russian market to Western businesses after years of being ostracized because of his brutal 2022 invasion of Ukraine and eyeing a potential infusion of dollars, ordered his Cabinet of Ministers just days after the Riyadh meeting to prepare for the return of Western companies into the Russian economy. A week later, hoping to capitalize on the budding relationship, Putin endorsed the idea of his own minerals deal with the United States as a counterproposal to negotiations being conducted at the time between the United States and Ukraine. Putin’s offer of resources to American partners – including in “new territories,” a brazen term coined by Putin for Russian-occupied parts of Ukraine – is designed to lure eager American businesspeople.

The Russian delegation in Riyadh included Kirill Dmitriev, the head of the Russian Direct Investment Fund and a close friend of Putin’s daughter, underscoring how much Russia wanted to dangle the prospect of resuming business between the two countries. Trump’s special envoy Steve Witkoff is Dmitriev’s closest counterpart. “U.S. oil majors have done very well in Russia,” Dmitriev said in an interview with The Guardian. “We believe that at some point they will return – why would they pass up the opportunities Russia has provided for access to its natural resources?”

Not So Fast

But it’s too early for American companies to be exploring a return to business as usual in Russia, despite a strong Trump administration push for a ceasefire.

Let’s start with the moral reasons: It’s wrong for American and Russian officials to be talking about resuming business activity at the same time as Russian forces continue to kill Ukrainian citizens every single day and continue to commit war crimes in a barbaric and unprovoked invasion that has caused tens of thousands of civilian casualties.

Many American companies rightly abandoned Russia after the full-scale invasion and the resulting imposition of significant sanctions against the Putin regime. Companies that decided to stay put in Russia and put revenue before ethics have generated roughly $16 billion for Moscow’s war effort. These funds have been a boon for the Russian economy, helping it stay afloat while carrying out the invasion and enduring Western sanctions. American companies shouldn’t contribute any more.

The dangers of doing business in Russia are clear. Understanding the risks associated with the Russian market, several U.S. businesses have ceased their operations since the start of the 2022 invasion to avoid financial blowback, including General MotorsCiscoIntel, among many others.

Russia is also a financially risky place for American businesses to consider investing. The country has fully transformed into a war economy that suffers additionally from isolation due to the sanctions. Russia’s economy is in fairly dire straits, with inflation likely to soar as high as 10 percent this year, based on a survey conducted by the Central Bank of Russia (CBR). Other metrics are similarly dismal: The CBR opted to leave the country’s benchmark interest rate at 21 percent, the highest level since the early 2000s, for the sixth straight month.

Russian industrial conditions look equally frail, with growth in several sectors having stagnated.  During an annual board meeting for the Ministry of Economic Development, Russian Minister Maxim Reshetnikov acknowledged sluggish growth in food, chemicals, and specific aspects of machine building. Just as concerning for U.S. businesses is Reshetnikov’s admission that consumers are buying less special equipment and fewer automobiles due to the absurdly high borrowing costs. As Moscow continues to tap into its National Wealth Fund to manage economic pressures, it inches closer to stagflation, in which high inflation meets minimal growth.

Emigration and war-induced casualties and recruitment have also undermined an already dwindling Russian population. Technocrats and specialists began fleeing the country to work abroad shortly following the start of the full-scale war in 2022, a trend that has only increased since then. Young people, many in their prime reproductive and workforce years, have also left Russia, hampering the potential for population growth in the future. The ruble will struggle to attract those Russians who emigrated as it spirals and adds pressure to its financial system and the labor force. All of that will make it exceedingly difficult for American companies to take full advantage of a workforce that otherwise would be far less costly than in Western countries.

The Corruption/Kleptocracy Risk

Economic factors aren’t the only causes for concern. Corruption is an inherent feature of the Kremlin, which consequently makes the corporate environment extremely hostile for returning businesses. This year’s Corruption Perception Index by Transparency International ranks Russia near the bottom of 180 countries assessed on levels of corruption, at 154.

The country also has a long history of asset seizures and corporate raiding. Just one month after Putin decided to wage his unjustified war, the Kremlin drew up plans to nationalize the assets of foreign-owned businesses operating in Russia. Proving that it wasn’t an empty threat, Moscow began expropriating the assets of Western enterprises a year later, such as with the cases of French corporation Danone and Danish brewery Carlsberg. Major financial companies with global reach have faced similar scenarios, highlighting that no company operating in Russia is safe from the Kremlin, no matter how significant the company’s presence.

Returning companies will likely face a harsher future. The Kremlin is preparing to broaden its authority to confiscate corporate assets under draft legislation, and has ordered stricter requirements for foreign investors, such as arranging local production in Russia despite its bleak demographic outlook and transferring proprietary technology from their home countries to Russia.

As concerning as these developments are, they are only the newer mechanisms in the Kremlin’s long history of corporate requisition. Take, for example, the 2017 case of Pavlovskgranit, a successful granite company that fell victim to Russia’s corporate raiding tactics – known in Russian by a Russian-English mashup term “reiderstvo.” In a filing with the U.S. District Court for the Southern District of New York, PPF Management LLC, which was legally representing Pavlovskgranit in the United States due to the unreliability of Russia’s commercial judicial system, asserts that the granite company was purposefully devalued to seize its assets. Orchestrated by Russia’s largest state-owned bank, Sberbank, Pavlovskgranit stated, the scheme was an attempt to eliminate the company as a competitor in the Russian market.

A former American champion of investing in Russia, Michael Calvey, was similarly strongarmed into forfeiting some of the assets of his company, Baring Vostok, one of the most notable private-equity firms in Russia, to Russia’s Sovcombank. With support from major corporate sponsors, Baring Vostok had quickly grown to holdings of about $4 billion from its startup in the mid-1990s. But Calvey and five other firm managers were arrested in 2019 on fraud charges after a fallout with his former business partner and Putin associate Artem Avetisyan, whom Putin reappointed in 2020 as director of new business for the Agency for Strategic Initiatives.

Calvey was eventually found guilty of embezzlement in Russian court and received a suspended sentence after two years under house arrest. Russian authorities ultimately cleared his criminal record years after Baring Vostok agreed to pay more than $32 million to Vostochny Bank, owned at the time by Avetisyan. Since his release and departure from Russia, Calvey has gone public on the risks of long-term investments in Russia, warning against the dangers for businesses that offend the Kremlin. “What I didn’t really appreciate, and only realized with my arrest, was the depth of the control and influence of the ruling caste of Russia,” he told the New York Times recently. Calvey decided to divest from Russia shortly after the 2022 invasion of Ukraine.

A Range of `Sketchy Tactics’

Other sketchy tactics exist, from capturing financial and commercial control of competitors and political opponents to outright violence. In the highly publicized case of financier Bill Browder’s Hermitage Capital Management, a London-based investment firm operating in Russia, Sergei Magnitsky, a lawyer and tax adviser for the firm, was murdered in a Russian prison in 2009 after exposing the theft of $230 million by Russian tax officials. In just one year after his arrest, forensics determined that Magnitsky’s death was caused by heart failure and toxic shock caused by the abuse he experienced while incarcerated. (At least Magnitsky’s name lives on due in larger part to Browder’s campaign for sweeping sanctions legislation starting with the U.S. Magnitsky Act against Russia and extending to global measures and a number of other Western countries that have adopted similar laws.)

Other cases involving Russian business figures also have raised suspicions. And that’s not to mention the countless U.S. citizens who have been incarcerated for much less. They include Russian-American journalist Alsu Kurmasheva, ballet dancer Ksenia Karelina, Marine veteran Trevor Reed, teacher Marc Fogel, and journalist Evan Gershkovich.

While the state of the Russian corporate ecosystem should be enough to deter firms from taking such risks, other challenges are becoming more apparent, too. Legal obstacles have emerged due to the apparent division in U.S. and European sanctions strategy. While the Trump administration seems interested in lifting some of the existing restrictions, Europe remains steadfast in its support for Ukraine, including continued use of sanctions. This rift in a once-unified approach will leave U.S. businesses at a crossroads that forces many to choose between the Russian and European markets.

And businesses based in Europe also may disassociate from American companies that rejoin the Russian market to avoid breaching policies in their own jurisdictions. As a result, companies would risk losing a much more valuable market than Russia. The EU is home to nearly 450 million consumers, accounts for about 14 percent of global trade in goods, and has the world’s third-largest economy. These numbers far outweigh those of Russia, which was never an important trading partner for the United States. Prewar trade totaled $6.4 billion in U.S. exports to Russia in 2021 and $29.7 billion in U.S. imports.

Any promise of a prosperous future between American businesses and Moscow should be viewed skeptically. In its 2020 country report on Russia, the Congressional Research Service stated that Russia continues to be a difficult business environment for U.S. companies due to “state dominance in the economy, lack of broad economic reform, and weak rule-of-law.” And that was before the sanctions resulting from Russia’s 2022 full-scale invasion of Ukraine.

Doing business in Russia has long been risky. American companies should think twice before again taking the Russia plunge.

 and , Published courtesy of Just Security

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