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Into Russia’s Cauldron
By: Steven Fisher
About Steven Fisher:
Steven worked for thirty-five years with Citibank in emerging markets. His last two assignments, spanning sixteen years, were in the former Soviet Union, where he served in senior leadership roles in Moscow, Russia, and in Kyiv, Ukraine. He is also the author of “Into Russia’s Cauldron: An American Vision, Undone.” A true story based on Leighton Rogers’ personal journal during his time as a young Citibanker in 1916-1918 Russia.
Steven received a Master of Science in Foreign Service from Georgetown University and a Bachelor of Arts from Cornell University. He speaks fluent Russian and Chinese.
What has changed in 100 years?
Russia has long been an appealing market for American businesses and adventurous entrepreneurs, particularly individuals like Leighton W. Rogers, who joined First National City Bank of New York (now known as Citi) to work in Petrograd over 100 years ago.
Citi pursued lucrative profits in Russia, and young Leighton was recruited to work in the Petrograd (now St. Petersburg) office just as the revolution began. The bank opened its first branch in Petrograd in February 1917 and provided loans to the Russian government and businesses. Within a year, the Bolsheviks moved to confiscate all of the bank’s assets, dealing a severe financial blow.[1] Citi ultimately lost $10 million, close to 10% of the bank’s capital. Attempts to negotiate compensation from the Bolsheviks failed.
Citi returned to Russia in 1992, again pursuing lucrative profits and following its corporate global clients into the emerging free enterprise Russian market. Privatization of state assets and the flow of foreign direct investment required Western investment bankers and, eventually, consumer bank products for the emerging Russian middle class. Unfortunately, the conditions that attracted Citi and other international banks began to deteriorate in 2014 when Russia attacked Ukraine and seized Crimea. Then, in 2022, after the second invasion of Ukraine, Citi made the decision to leave Russia. Citi's assets in Russia approximated $10 billion when it made the decision to leave in 2022. Citi estimates its losses in Russia could approach $3 billion.[2]
Another American company lured by opportunity in Russia was Singer Sewing Machines. By 1917, Singer, one of the most successful American companies in the early 20th century, had over 1,000 stores in Russia and generated millions of dollars in annual profits. However, the October Revolution of 1917 unthreaded Singer's success in the country because the new Bolshevik government quickly nationalized all foreign-owned businesses and subsequently privately held Russian companies. Singer attempted to negotiate compensation from the Bolsheviks, but these efforts were unsuccessful, and the Soviet government eventually sold off the company's Russian assets. Singer was forced to withdraw from the country with losses exceeding $84 million, equivalent to $1.49 billion today (according to the Federal Reserve Bank of Minneapolis's Consumer Price Index (CPI) Inflation Calculator).[3]
The historical parallels of Western companies losing money in Russia again are striking. As a century earlier, many Western companies did not act quickly enough to mitigate the risks as the alarm bells rang trouble. Many of the root cause problems that existed 100 years ago persist in Russia today:
Weak Rule of Law – Weak and selective application of civil and criminal law favoring the ruling elite and powerful local bureaucrats. The seizure and ultimate liquidation of Yukos Oil Company, once the largest privately held oil company in Russia, is a case in point of selective application of law;
Corruption – The fish rots from the head. Endemic corruption is a Soviet holdover and a function of selective, rather than equal, application of law. If the Kremlin can do it (Misha 2%), then rent-seeking bureaucrats should also be free to skim off the top;
State Enterprise Control – The domination and expansion of state enterprises crowding out the private sector;
Unprotected Property Rights – Again, a function of the selective application of law and corruption;
Autocratic Repressive Government – Tsarist or Soviet rule, what is the difference? A country ruled by aristocrats or the communist party with civil order enforced with the heavy hand of the security services under the control of the elite ruling class. Today’s Russia is ruled by the security services – Siloviki –, the new ruling elite.
Even before Russia’s renewed invasion of Ukraine in February 2022, the World Economic Forum's Global Competitiveness Report (2020) had highlighted Russia's relative unattractiveness as an investment destination.
According to a study by the Yale School of Management, Western companies have lost more than $59 billion in Russia since the start of the Ukraine war. This includes the cost of writing down assets, exiting the Russian market, and suspending operations. According to Reuters, it is far worse – $80 billion in write-downs and lost revenues.[4]
The losses will continue to mount as more Western companies divest from Russia. According to the Yale study, over 1,000 Western companies have announced intentions to exit or scale down their operations in Russia. Multinational companies also confront reputational risks by maintaining their operations in Russia, as evidenced by consumer boycotts of products and services from companies that continue to do business there.
Recent decrees signed by Vladimir Putin have placed operations of other companies, such as Germany's Uniper, Finland's Fortum, Denmark's Carlsberg, and France's Danone, under the management of the federal state property-management agency, Rosimushchestvo, under the guise of "temporary management." This development exacerbates the risk of remaining in Russia and paves a disconcerting path leading to corruption and the potential for coercion.
Sadly, as the Russian writer and philosopher Ivan Turgenev once said,
Россия быстро меняется за одну неделю, но остается прежней за сто лет
Russia changes quickly in one week, but remains the same in a hundred years
[1] Steven Fisher, Into Russia’s Cauldron (Chicago, IL: Forest Cat Productions, 2021), 379.
[2] David Henry and Manya Saini, “Citigroup reduces forecast for potential Russia losses,” Reuters, April 14, 2022.
[3] “Singer War Loss Was $106,024,543: Soviet Confiscated Sewing Machine Co.’s Russian Business Valued at $84, 302, 231”, The New York Times, July 1, 1923, 18.
[4] Elena Fabrichnaya and Alexander Marrow, “Exclusive: Moscow demands bigger discounts from foreign companies exiting Russia,” Reuters, August 25, 2023.
Vol 2, No 9 - BWR 15.02.2024
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