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BUSINESS RETREATS AND SANCTIONS ARE CRIPPLING THE RUSSIAN ECONOMY



118 Pages Posted: 20 Jul 2022 Last revised: 1 Aug 2022

See all articles by Jeffrey Sonnenfeld


JEFFREY SONNENFELD

Yale School of Management


STEVEN TIAN

Yale Chief Executive Leadership Institute


FRANEK SOKOLOWSKI

Yale Chief Executive Leadership Institute


MICHAL WYREBKOWSKI

Yale Chief Executive Leadership Institute


MATEUSZ KASPROWICZ

Yale Chief Executive Leadership Institute

Date Written: July 19, 2022


ABSTRACT

As the Russian invasion of Ukraine enters into its fifth month, a common
narrative has emerged that the unity of the world in standing up to Russia has
somehow devolved into a “war of economic attrition which is taking its toll on
the west”, given the supposed “resilience” and even “prosperity” of the Russian
economy. This is simply untrue – and a reflection of widely held but factually
incorrect misunderstandings over how the Russian economy is actually holding up
amidst the exodus of over 1,000 global companies and international sanctions.

That these misunderstandings persist is not surprising. Since the invasion, the
Kremlin’s economic releases have become increasingly cherry-picked, selectively
tossing out unfavorable metrics while releasing only those that are more
favorable. These Putin-selected statistics are then carelessly trumpeted across
media and used by reams of well-meaning but careless experts in building out
forecasts which are excessively, unrealistically favorable to the Kremlin.

Our team of experts, using private Russian language and unconventional data
sources including high frequency consumer data, cross-channel checks, releases
from Russia’s international trade partners, and data mining of complex shipping
data, have released one of the first comprehensive economic analyses measuring
Russian current economic activity five months into the invasion, and assessing
Russia’s economic outlook.

From our analysis, it becomes clear: business retreats and sanctions are
catastrophically crippling the Russian economy. We tackle a wide range of common
misperceptions – and shed light on what is actually going on inside Russia,
including:

- Russia’s strategic positioning as a commodities exporter has irrevocably
deteriorated, as it now deals from a position of weakness with the loss of its
erstwhile main markets, and faces steep challenges executing a “pivot to Asia”
with non-fungible exports such as piped gas

- Despite some lingering leakiness, Russian imports have largely collapsed, and
the country faces stark challenges securing crucial inputs, parts, and
technology from hesitant trade partners, leading to widespread supply shortages
within its domestic economy

- Despite Putin’s delusions of self-sufficiency and import substitution, Russian
domestic production has come to a complete standstill with no capacity to
replace lost businesses, products and talent; the hollowing out of Russia’s
domestic innovation and production base has led to soaring prices and consumer
angst

- As a result of the business retreat, Russia has lost companies representing
~40% of its GDP, reversing nearly all of three decades’ worth of foreign
investment and buttressing unprecedented simultaneous capital and population
flight in a mass exodus of Russia’s economic base

- Putin is resorting to patently unsustainable, dramatic fiscal and monetary
intervention to smooth over these structural economic weaknesses, which has
already sent his government budget into deficit for the first time in years and
drained his foreign reserves even with high energy prices – and Kremlin finances
are in much, much more dire straits than conventionally understood

- Russian domestic financial markets, as an indicator of both present conditions
and future outlook, are the worst performing markets in the entire world this
year despite strict capital controls, and have priced in sustained, persistent
weakness within the economy with liquidity and credit contracting – in addition
to Russia being substantively cut off from international financial markets,
limiting its ability to tap into pools of capital needed for the revitalization
of its crippled economy

Looking ahead, there is no path out of economic oblivion for Russia as long as
the allied countries remain unified in maintaining and increasing sanctions
pressure against Russia, and The Kyiv School of Economics and McFaul-Yermak
Working Group have led the way in proposing additional sanctions measures.

Defeatist headlines arguing that Russia’s economy has bounced back are simply
not factual - the facts are that, by any metric and on any level, the Russian
economy is reeling, and now is not the time to step on the brakes.

Download the visual slide deck accompanying this research monograph here:
https://yale.box.com/s/7f6agg5ezscj234kahx35lil04udqgeo



Suggested Citation: Suggested Citation

Sonnenfeld, Jeffrey and Tian, Steven and Sokolowski, Franek and Wyrebkowski,
Michal and Kasprowicz, Mateusz, Business Retreats and Sanctions Are Crippling
the Russian Economy (July 19, 2022). Available at SSRN:
https://ssrn.com/abstract=4167193 or http://dx.doi.org/10.2139/ssrn.4167193


JEFFREY SONNENFELD

YALE SCHOOL OF MANAGEMENT ( EMAIL )

New Haven, CT 06520
United States



STEVEN TIAN (CONTACT AUTHOR)

YALE CHIEF EXECUTIVE LEADERSHIP INSTITUTE ( EMAIL )

New Haven, CT 06520
United States



FRANEK SOKOLOWSKI

YALE CHIEF EXECUTIVE LEADERSHIP INSTITUTE ( EMAIL )

165 Whitney Ave New Haven CT 06511
New Haven, CT 06511
United States



MICHAL WYREBKOWSKI

YALE CHIEF EXECUTIVE LEADERSHIP INSTITUTE ( EMAIL )

165 Whitney Ave New Haven CT 06511
New Haven, CT 06511
United States



MATEUSZ KASPROWICZ

YALE CHIEF EXECUTIVE LEADERSHIP INSTITUTE ( EMAIL )

165 Whitney Ave New Haven CT 06511
New Haven, CT 06511
United States



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Plum Print visual indicator of research metrics
 * Usage
   * Abstract Views: 133258
   * Downloads: 43398
 * Captures
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 * Mentions
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   * News Mentions: 24
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