AN INVESTMENT-GRADE RUSSIA AND PEACE
STUCK IN THE MIDDLE WITH YOU | AN ACT OF CONGRESS | FDI INCENTIVES
Dear BWR Shoeshiners and Barbers!
IMPORTANT NOTICE: Please be aware that some e-mail servers (G-mail in particular) may truncate the BWR newsletter, thus depriving you of total enjoyment. If this problem occurs, please read BWR on the Substack platform to enjoy the full newsletter.
Follow BWR’s daily posts on the Blue Sky platform for daily updates and posts.
“Barbershop Whispers….Russia (BWR)” begins with “My Takeaways” on the main topic, followed by a discussion on the main topic. The last two BWR sections are “Follow-ups” on previous publications and “Quick Bites” on emerging events.
In last week’s BWR, I discussed Trump’s alignment with Russia and China at Ukraine’s expense.
In this week’s BWR, I discuss foreign direct investments in Russia and the challenging road to peace over Putin’s war on Ukraine. What are the economic incentives for FDI, and is there a realpolitik Grand Bargain in the making?
Takeaways
INVESTMENT-GRADE RUSSIA—Not. Foreign investors will need much more than peace to return to Russia, although certain sectors may prove attractive to a certain class of investors with a high tolerance for risk. Fortune 100 Internationals have better investment options than Russia, such as Ukraine.
GRAND BARAGIN—Rubio parrots the false Russian narrative that Putin’s war on Ukraine is a U.S.-Russia proxy war. Is he making this argument for Cuba, Venezuela, and Nicaragua and setting the stage for a realpolitik exchange of client states?
AN INVESTMENT-GRADE RUSSIA AND PEACE
STUCK IN THE MIDDLE WITH YOU | AN ACT OF CONGRESS | FDI INCENTIVES
FOREIGN DIRECT INVESTMENT
Since Putin launched his second invasion into Ukraine, total foreign direct investment (FDI) dropped from $497B[1] in 2022 to $235B in 2024, representing a decline of $262B.
According to the Kyiv School of Economics, over 1,800 companies have either exited or suspended operations in Russia since 2014, with these departures accelerating after the second invasion of Ukraine in 2022. In the early days of the “Great Western Exit” in 2022, some foreign companies sold their Russian operations at steep discounts to local managers with buy-back options. For example, Renault sold its majority stake in Avtovaz, Russia’s largest auto manufacturer located in Samara, for 1RUB, including a six-year option to repurchase. It should be noted that in 2023 Avtovaz requested the regional Samara prison service to provide prisoners to help alleviate the labor shortage so they could meet production targets. Should Renault exercise its Avtovaz buy-back option, forced prison labor will be a challenge for them.
Kirill Dmitriev, CEO of Russia’s sovereign wealth fund and newly Kremlin-appointed Special Representative for Investment Cooperation with Foreign Companies, recently estimated that Western companies incurred losses exceeding $300 billion as they withdrew from Russia. The largest Western investments were in the energy, mining, and manufacturing sectors, which are capital-intensive, crucial to the Kremlin’s cash flow, and regarded as areas of national security.
These Western companies were particularly hard hit and caught in a “Stuck in the Middle with You” scenario due to Western sanctions compelling them to exit and retaliatory Kremlin counter-sanctions for their departures. The Western companies that postponed their exit from Russia found themselves receiving a fraction of the asset value of their Russian operations, as the Kremlin forced discounts of up to 50% on asset sales along with an exit tax of up to 35% on the proceeds from the sale.
The beneficiaries of the Western exits have been Kremlin-linked businessmen, politicians, and, to some extent, companies from “friendly” nations. For instance, Danone’s Russian business was sold to Ruslan Alisultanov, Chechnya’s former deputy minister of agriculture, after the Kremlin rejected Danone’s first and preferred buyer. Regarding ‘friendly’ country companies, the Russian auto sector is now primarily dominated by Chinese brands. Over 75% of the Russian market now consists of Chinese-assembled cars and trucks, whereas just four years ago, 90% were Western brands like Ford, BMW, and Mercedes-Benz, which were manufactured in Russia rather than assembled like the new Chinese models.
The Russian foreign investment environment is not improving, especially for companies from “unfriendly”[2] nations. In February 2025, the Russian government approved legislation permitting the seizure of private property. This law is designed to seize billions of dollars of Western cash and securities located in special Central Bank of Russia (CBR) S-accounts and is believed to be the Kremlin’s response to the freezing of $350B of CBR foreign reserves, of which $210B is held in Europe.
PEACE, SANCTIONS, AND A GRAND BARGAIN
While the Kremlin may appreciate President Donald Trump humiliating Ukrainian President Volodymyr Zelensky in the Oval Office and U.S. cabinet members echoing Kremlin talking points—U.S. Secretary of State Marco Rubio describing the Ukrainian war as a U.S.-Russia proxy war—they also realistically understand that Trump is technically a one-term president, and lifting U.S. sanctions would require an act of Congress.
Even if some U.S. sanctions are lifted, there is no guarantee they will endure beyond a Trump presidency. Furthermore, the lifting of U.S. sanctions would not impact the ongoing status of EU sanctions against Russia. Thus, the growing rift between the U.S., the EU, and Ukraine regarding the terms of any peace deal may prove more challenging than Trump and the Kremlin anticipated. It does not seem that the Europeans are
“sitting obediently at their master’s feet and sweetly wagging their tails,”
as Putin predicted would happen in a Russian state interview in February 2025.
However, there are growing signs of aligned interests between the U.S., Russia, and the EU on the issue of energy, and this continues to be a bargaining chip of peace and potential Russian FDI in peacetime. In December 2024, German Chancellor Olaf Scholz and Putin spoke for two hours about various topics, including energy. During the call, Putin stated
“Russia had always honored its commitments under various treaties and contracts in the energy sector and was still willing to promote mutually beneficial cooperation if the German side showed interest in it.”
The first meeting of senior U.S.–Russian government officials in three years, held in Riyadh, discussed joint U.S.-Russian Arctic energy collaboration. Again, media outlets are reporting discussions of American groups exploring the acquisition of Nord Stream 2 (NS2).
While the energy sector may present a potential foreign investment opportunity in Russia, it still faces legacy challenges from past exits. American and European firms would need to persuade their shareholders that it represents a compelling business case that won't cost billions like the last entry into Russia did.
Rubio’s echoing of the false Russian proxy war narrative, along with the mafia-like Ukrainian protection money on the table—the Ukrainian minerals deal—might indicate the beginning of a realpolitik “Grand Bargain”: the exchange of client states, such as Ukraine, for Cuba, Venezuela, and Nicaragua. After all, Rubio can argue that these Latin American countries are also longtime U.S.-Russia proxy wars worthy of a Grand Bargain in this new world of realpolitik, where the strong rule the world. It also dovetails well into the Trump administrations focus on Russian and Chinese influence in Latin America.
A Grand Bargain might not improve the FDI environment in Russia, but it could encourage the stakeholders who perceive themselves to be “holding all the cards” in the peace process to divide up the world.
Conclusion:
If a peace settlement over Putin’s war on Ukraine occurs, it will not immediately elevate Russia to investment-grade status or result in a sudden stampede of investors. However, it will create opportunities for a select group of entrepreneurial investors and arbitragers who understand and can mitigate the risks associated with the unpredictability of the Russian business environment. These would be commodities traders, e.g., fertilizers, grains, energy, etc., serviced by non-traditional service providers, e.g., finance, insurance, etc.
Footnotes:
[1]. The OECD categorizes FDI inward stock as a measure of the total level of direct investment at a given point in time, usually at the end of a quarter or a year. The inward FDI stock is the value of foreign investors' equity in and net loans to enterprises resident in the reporting economy.
[2] The Kremlin has officially designated countries that impose sanctions against Russia as Unfriendly Nations.
Additional Reading(s)
Dividing up the World - Leave Values at the Door (Barbershop Whispers…Russia 03 Mar 2025)
· Foreign Investment in Russia Hits 15-Year Low as Economic Isolation Deepens (United 24Media, 05 Feb 2025)
One Night in Riyadh & Ukrainian Peace (Barbershop Whispers…Russia 24 Feb 2025)
Bromancing to Peace (Barbershop Whispers…Russia, 17 Feb 2025)
What’s in it for Me? (Barbershop Whispers…Russia, 08 Dec 2024)
Negotiating with Russia is Fraught with Peril (The Cipher Brief, 22 Feb 2025)
Follow-ups & Quick Bites
Follow-ups
No follow-ups this week.
Quick Bites
Trump is Nero
French Senator Claude Malhuret delivered a speech (with English Subtitles) to French lawmakers describing Trump as an incendiary emperor and Elon Musk as ketamine-charged buffoon. He said the American shield is slipping away and Europe must answer the call to protect itself. A French citizen told me,
“Unbelievable !! This is the kind of speech I have been waiting for from American lawmakers!!”
It is a speech (French and English language transcript) that will age well over time.
Additional Reading(s)
Trump Is Nero While Washington Burns (The Atlantic, 08 Mar 2025)
Vol 3, No 10 - BWR 09.03.2025
Thank you for reading “Barbershop Whispers....Russia” written by Adam A Blanco! “Barbershop Whispers…Russia” is a product of e8Q Technologies, a consultancy with insights on all things Eurasia. Subscribe for free to receive new posts.