Putin ended Russia’s trade relations with the West overnight
“Our priority is the gradual integration of Russia into the European and world economy,” Putin said at the conference, stressing Russia’s desire to double its economy and also attract investment in the sectors of the high technology and aerospace. Such cooperation, he said, three years into his presidency, would be “a great investment in strengthening Europe’s stability”.
Nearly 20 years later, those agreements and plans lie in shambles as Western governments and corporations isolate Russia during its invasion of Ukraine. BP, Shell and Exxon said they would abandon billions in energy investments. Banks and insurance companies around the world are reducing their dealings with their Russian counterparts.
Computer chip makers, shipping companies and a host of exporters are halting shipments to Russia to comply with sanctions. Western nations close their skies and ports to Russian planes and ships. European retailers are closing stores in Russia and some oil traders are refusing to buy Russian crude.
Russia’s economic integration with the outside world has never been smooth and easy. Corruption and lawlessness have often strangled industrial development, leaving the country overly dependent on the export of its natural resources. The rigged privatization of oil and metal companies in the 1990s left an oligarchic class in control of the economy.
Yet in the decades following the collapse of the Soviet Union, the Russian economy grew, slowly and imperfectly, forging important trade and investment ties with the outside world.
With alarming rapidity, the events of the past week have severed those bonds.
“It took many years to become part of the global economy. Now most of it is destroyed, just flushed down the toilet in five days. And that can’t be easily undone,” said Konstantin Sonin, a Russian economist at the University of Chicago who is spending a gap year in Moscow.
The economic breakup is part of a wider rift that is also severing cultural and educational ties, as sports leagues, philharmonies and universities drop relationships with Russian individuals and institutions over the Kremlin invasion . The cancellation of many flights to and from Russia means that even tourist connections are collapsing.
The shock is causing an uproar at all levels of the Russian economy, from the largest companies to small and medium-sized enterprises. Now, Russian entrepreneurs with business partners and bank accounts abroad must fear that their assets will be frozen, Sonin said.
The oligarchs or corrupt politicians who will be affected by the sanctions number in the hundreds or thousands, he said. But the entrepreneurs and upper-middle-class professionals who will be “totally devastated by this” number in the millions, he added.
“People are crying talking to each other…no one really knows what’s going to happen,” said Sonin, who was one of hundreds of Russian economists to sign an open letter protesting the war.
For a Russian business executive in Siberia, the impact was immediate. As banking and other sanctions drive down the value of the rouble, his mayonnaise and ketchup factory faces a huge price spike in imported tomatoes and egg yolks, he said in an interview. telephone, asking that he remain anonymous for fear that Russian authorities will punish the critics.
Some foreign suppliers are also refusing to deliver shipments to Russia, further complicating matters, he said.
“The effect is catastrophic…even the labels become more expensive because the ink comes from abroad,” he said. “Within a week…a small business in Russia is half dead.”
For much of the Cold War after World War II, the Soviet Union had limited trade ties with the West, consisting mainly of oil and gas exports to Europe and imports of food and machinery. The collapse in oil prices in the 1980s decimated the country’s export earnings and exacerbated domestic product shortages, helping to trigger the Soviet collapse of 1991.
Russia entered a long period of turmoil after the end of the command economy, rocked by hyperinflation, organized crime and the corrupt auctioning off of state-owned companies for a fraction of their value to political supporters of President Boris Yeltsin.
Further shocks came to Russia’s doorstep in 1998, when financial turmoil in Asia triggered a sudden collapse in the price of oil, causing a sharp devaluation of the ruble and the decimation of the savings of many Russians for the second time. in less than a decade.
Economic stability – and rising oil prices – began to return the following year when Putin came to power, triggering a “honeymoon period” for foreign investment in the economy, according to Sergey Aleksashenko, a senior official of the Russian Ministry of Finance and the country’s central bank. 1990s.
“Many sectors were open, investment was flowing in, the economy was growing at 7% per year, and many western companies took advantage of this,” he said in an interview.
Ikea opened its first store in Moscow in 2000, attracting tens of thousands of customers on its first day, and quickly added other stores across the country. French retailer Auchan has started building a chain of supermarkets, and automaker Renault has opened a factory in Moscow.
Exxon began investing seriously in 2001, leading a consortium of Russian and foreign investors to develop a major oil and gas project off Sakhalin Island.
In 2003, Shell unveiled a $10 billion investment in another project off Sakhalin Island and BP signed its joint venture agreement.
Shell and Exxon executives, including Rex Tillerson, Donald Trump’s future secretary of state, occasionally met with Putin and other senior officials, a sign that the Russian president remained interested in cultivating foreign business executives, even as he suppressed local leaders like Mikhail Khodorkovsky, whom he saw as a threat to his power.
Foreign investment in Russia was small compared to the huge sums flowing into China, and much of it was limited to the extraction of oil and minerals and/or the production of consumer goods. But the trend was positive and was also accompanied by an increase in investment by Russian companies.
Mikhail Kokorich opened his first retail store in Novosibirsk, Siberia’s largest city, in the early 2000s, eventually creating a chain of 100 locations that he likens to Bed Bath & Beyond. At one point, he traveled to the United States to study the retail industry, but he never thought of emigrating there, he said in an interview.
“I thought not, Russia is much more interesting,” he said. “The early 2000s was like a golden age.”
The global financial crisis of 2008, at the end of George W. Bush’s presidency, hit Russia along with the rest of the world, and the recovery was slow. Things got worse in 2014, when Putin launched his first invasion of Ukraine and the annexation of Crimea. The United States imposed sanctions on a number of Russian banks and companies it said supported Putin’s regime, helping to chill bilateral relations and trade.
After that, many foreign companies already operating in Russia continued to reinvest their profits, but few new investments were announced, Aleksashenko said.
The unraveling of the remaining links in recent days has happened with breathtaking speed. As the United States and European countries unleashed crippling sanctions, many banks and businesses stopped doing business with their Russian counterparts, fearing they would violate sanctions or not get paid. Some also expressed outrage at the suffering inflicted by Russia on the Ukrainian people.
Danish shipping giant Maersk said it was halting all new sea, air and rail shipments to and from Russia until further notice due to sanctions.
Mercedes-Benz, Volkswagen and Renault have stopped car production in Russia, while General Motors and Daimler Truck have stopped exporting to the country. “We are deeply shocked by the military violence in Ukraine and very concerned about the threats to peace and stability in Europe,” Martin Daum, chairman of Daimler Truck, wrote in a message to employees on Monday.
Ikea said it would ‘suspend’ all retail and production operations in Russia and halt deliveries to and from the country, leaving 15,000 jobs in question and triggering a rush to its stores by fearful consumers to lose access to Western products.
Norway’s state-controlled oil company and sovereign wealth fund have announced plans to divest their assets in Russia. Taiwan Semiconductor Manufacturing Company and other computer chip makers have begun suspending shipments to Russia, depriving manufacturers of essential electronic components.
The biggest Western oil companies are also jumping ship, after more than two decades of work in Russia.
BP said it would shed its $14 billion stake in Russia’s Rosneft, calling the invasion “an act of aggression that has tragic consequences across the region”. Shell and Exxon quickly followed suit, announcing their intention to abandon their Sakhalin businesses. It was unclear whether any of the companies would find buyers for their assets or simply walk away.
“Russia will pay a huge price in the economy…the future is very bleak,” said Aleksashenko, Russia’s former finance official, who now lives in the United States.
If new leaders somehow come to power in Russia and end the war, it is possible that trade relations could be slowly rebuilt, he said.
But “if Putin stays in power for another 10 or 15 years,” he said, “I think that by then Russia will be more isolated from the world economy than it was in the time of the Soviet Union”.