A new report reveals how the corporate exodus has already wiped out decades of post-Cold War growth

Over the past six months, Russia has strengthened its economic defenses after Western countries hit it with sanctions for the invasion of Ukraine.

Despite the crackdown, the Kremlin continues to gross billions in oil and gas revenues, which has helped the ruble rally to become the world’s most profitable currency this year.

But all is not well with the Russian economy.

Western sanctions and the widespread corporate exodus from Russia since February 24 have devastated the Russian economy and its future prospects look even bleaker, according to a new report by Yale University researchers and economists led by Yale professor Jeffrey Sonnenfeld. School of Management and Senior Associate Dean for Leadership Studies. It has now become clear that “the Kremlin’s finances are in much, much more serious trouble than conventionally thought” and that “large-scale business withdrawals and sanctions are catastrophically paralyzing the Russian economy,” the researchers wrote.

Deterioration

As of August 4, more than 1,000 companies, including US firms such as Nike, IBM, and Bain Consulting, have reduced their operations in Russia. Although some companies remained, the mass exodus of companies accounts for 40% of Russian GDP and reverses 30 years of foreign investment, the Yale report says.

The international retreat is turning into a wider crisis for the country: a collapse of imports and foreign investments.

Russia has fallen into a technological crisis due to its isolation from the global economy. It has trouble protecting technology and critical parts. “The domestic economy is largely dependent on imports in all sectors … with a few exceptions,” the report said. Western export controls have largely disrupted the flow of imported technology from smartphones to data servers and network equipment, putting a strain on its technology sector. Russia’s largest internet company, Yandex, the national version of Google, is running out of semiconductor chips it needs for its servers.

At the same time, “Russia’s domestic production has stalled completely, with no ability to replace lost assets, products and talent,” the Yale report said. Russian producers and producers are unable to fill the gaps left by the collapse of Western imports. The Russian telecommunications sector, for example, is now hoping to rely on China, India and Israel for the supply of 5G equipment.

In the weeks following the invasion of Ukraine, the Kremlin largely prevented a “full-scale financial crisis” due to swift and harsh measures, such as restricting the movement of money out of the country and imposing a hike. 20% interest rate emergency, Laura Solanko, senior advisor to the Bank of Finland Institute for Emerging Economies in Transition, an organization that researches emerging economies, said Fortune last month. The ruble even rebounded from the March low, when it was valued at less than a dollar cent.

Yet Russia’s financial markets are the worst in the world this year, the report notes. “Putin is using blatantly unsustainable and dramatic fiscal and monetary intervention to smooth out these structural economic weaknesses,” which has led to a government budget deficit for the first time in years and has drained the Kremlin’s foreign reserves despite its continued influx of petrodollars, the researchers wrote. The Russian government is granting subsidies to businesses and individuals to mitigate any economic shocks caused by the sanctions. This “inflated level” of fiscal and social stimulus, in addition to military spending, is “simply unsustainable for the Kremlin,” the report said.

And the recent dramatic turnaround of the ruble does not indicate a strong Russian economy, but marks something far worse: the sharp drop in foreign imports. Sergei Guriev, scientific director of the economics program at Sciences Po, France, and a researcher at the London think tank Center for Economic Policy Research, previously said Fortune which represents a “bad” situation for the nation.

The EU is now phasing out Russian energy, which could affect the Kremlin’s oil and gas profits. Such a scenario would strain the Kremlin’s finances, as Western countries have frozen half of its $ 300 billion in foreign reserves.

Towards economic oblivion

Russia’s precarious economic position means it will face even more dire challenges in the long run.

Sanctions are not designed to cause an immediate financial crisis or economic collapse, but are long-term tools to weaken a nation’s economy by isolating it from global markets, the report said. And the sanctions are doing exactly that for Russia.

The country is losing its richest and most educated citizens as its economy falls apart. Most estimates say that at least 500,000 Russians have fled the country since February 24, with “the vast majority of highly skilled and highly skilled workers in competitive industries such as technology,” the report said. Many rich Russians who run away take their money with them. One estimate is that 20% of Russia’s ultra-high net worth people have left this year. According to Bank of Russia estimates, official capital outflows were $ 70 billion in the first quarter of 2022, but this figure is likely to be a “gross underestimate” of the actual amount of money that left the country. wrote the Yale team.

Russian citizens are also destined to become poorer, despite Putin’s hikes in minimum wages and pensions. A former Putin aide predicts that the number of Russians living in poverty will likely double and possibly even triple as the war continues. Russia “has not yet seen the worst,” said Russian political scientist Ilya Matveev Fortune last month.

“There is no way out of economic oblivion as long as allied countries remain united in maintaining and increasing the pressure of sanctions against Russia,” the researchers wrote.

This story was originally posted on Fortune.com

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