RUSXIT—Russia’s Exit from the Global Economy
RUSXIT—Russia’s Exit from the Global Economy
Western and Russian Market Exits | Bifurcation of the Global Economy
Dear BWR Subscribers,
“Barbershop Whispers….Russia” begins with “My Takeaways” on the main topic, followed by the main topic discussion. The last two sections of “Barbershop Whispers…Russia” are “Follow-ups” regarding previous publications and “Quick Bites” briefly addressing emerging events.
In last week’s BWR, I discussed the Kremlin’s embrace of cryptocurrencies and the CBR’s carte blanche cryptocurrency experiments for international trade settlements.
In this week’s BWR, I will discuss RUSXIT, a term BWR coined to describe Russia’s exit from the global Western-dominated economy and its bifurcation by Russia.
This week’s publication ties together several BWR publications related to Western and Russian exits from the Russian and Western markets, respectively, and Russia’s enablers. These publications are listed in Additional Reading(s).
Takeaways:
RUSXIT—Putin has chosen to lead Russia out of the global mainstream economy and into an emerging parallel global economy, which he co-founded in 2009 with the formalization of the BRICS. Exiting Western and Russian companies from Russia and the West, respectively, is a significant tipping point in the bifurcation of the global economy.
PARALLEL GLOBAL ECONOMY—The Kremlin is leading the emergence of a parallel global economy with functioning beta-level solutions for cross-border trade settlements, manufacturing supply chains, and financial services networks independent of Western influence, control, and oversight.
BRICS, AGGRIEVED, AND ENABLERS—The Kremlin is leading two distinct groups into a parallel global economy: 1. non-aligned countries, and 2. Western sanction countries. The critical enabler and beneficiary of the Russian-led global parallel economy is China. Russia could not pull this off without China, the world’s second-largest economy. Other financial and political beneficiaries are India, Brasil, and Türkiye.
RUSXIT—Russia’s Exit from the Global Economy
Western and Russian Companies Exits | Bifurcation of the Global Economy
Western Companies Exit Russia
Russia is now the most Western-sanctioned country in history. Western sanctions on Russia accelerated and piled up after Russian President Vladimir Putin launched his second invasion of Ukraine in February 2022.
According to Dr. Jeffery Sonnenfeld, Yale Leadership Institute, more than 1,600 Western companies have exited or are in the process of exiting Russia. Western sanctions resulting from Putin’s war have forced these companies to leave and collectively written off approximately $107B of investments.
For example, Danone, Pepsi, and McDonald's have built vertically integrated state-of-the-art domestic infrastructures and supply chains over the past 30 years, critical to the Russian agricultural ecosystem.
In July 2023, the Kremlin seized Danone Trade LLC (RU) and placed it under ‘temporary management,’ appointing 32-year-old Yakub Zakriev, a nephew of Chechen leader Ramzan Kadyrov.
In February 2024, the Kremlin approved the $192M sale of Danone RU to the newly established company Vamin Tatarstan, in which Zakriev holds an interest.
After the July 2023 seizure, Danone took a write-down on its Russian operations of $757M.
Other important sectors that have been particularly impacted by Western sanctions and forcing Western companies to exit have been the financial, manufacturing, and energy sectors. The Kremlin has designated these as strategically important to national security.
For example, Citi, Raiffeisen, and UniCredit were three of Russia's biggest Western retail banks. Citi quickly wound down its Russian retail operations, selling its consumer loan portfolio to Uralsib in December 2023. While Citi continues to have a presence in Russia, it is small and quickly closing down. However, Raiffeisen and UniCredit delayed their exits and had considerable exposure in Russia. Now, they are under tremendous European regulatory pressure to exit.
The Raiffeisen exit has been particularly complicated by the outsized revenues the Russia operations represent to the parent company, Raiffeisen Bank International (RBI), and their inability to repatriate frozen profits in Russia. Raiffeisen Russia operations represented 15% of RBI’s 2023 net profits of €2.4B. An attempt was made to exit Russia through a block share purchase of Austrian construction company Strabag. Still, regulators squashed it because Western-sanctioned Russian oligarch Oleg Deripaska allegedly controlled the share block.
The exit process for companies from “unfriendly” countries, defined by the Kremlin as those imposing or complying with Western sanctions against Russia, is as follows:
Fair Market Value (FMV) is arrived at by an independent appraiser.
The maximum sale price, by law, can be no more than 50% of the FMV.
A 15% “voluntary contribution” to the Federal budget is paid based on the maximum deal value.
The Presidential Commission approves the transaction—sale price and buyers.
Putin signs off on the transaction.
Like so many things in life, the devil is in the details of the transaction. Several factors influence the exit price, including the ‘assets’ importance to national security, cash flow, and asset value. For high-cash flow and security-sensitive assets, exit prices will range from 0 to 30% of the FMV, while low-value assets with none to modest cash flows will range from 30 to 42% of the FMV. The latter are generally cash and securities deposits, real estate, or federal licenses.
All Western car manufacturers have exited Russia. Renault sold their manufacturing facilities for RUB1.
The Gaz plant in Nizhny Novgorod manufactured parts for Volkswagen and is now assembling Chinese cars branded as Volgas, the premier Soviet-era apparatchik car.
Western Companies Stay in Russia
Some Western companies have chosen to stay in Russia. This is particularly prevalent among fast-moving consumer goods (FMCG) companies. Several factors play into their decision not to leave. The driving factor is that Western sanctions do not require them to leave, as is the case with Western financial institutions.
The Western companies that stay in Russia claim to have an obligation to their Russian employees and their Russian consumer base, which depends on them for essential food and healthcare products.
The reality is that they are playing a waiting game. They are waiting for Putin’s war to end, and they expect Western relations with Russia to return to “normal.”
Western activists claim these companies have a moral and corporate obligation to Russia because they are contributing to the Russian tax base that is funding Putin’s war against Ukraine. If they do not exist, activists will launch boycotts against those who remain in Russia.
The threat of boycotts and the moral argument only persuade a few FMCG Western CEOs. For example, Mondelez International CEO Dirk van de Put said that his shareholders do not “morally care” whether the company stays in Russia. He went on to say:
“I wonder what happened with the companies that were sold, who got them, and what are they doing with the cash that those companies generate? They all went to friends of Putin…and you can bet that the cash they generate [that] goes to the war is much bigger than the taxes we would pay.”
Another argument often put forward is the impossibility of finding a suitable buyer. A suitable buyer is defined as one financially capable of acquiring the asset and, secondly, suitable in the eyes of Western regulators and shareholders. This argument has merit as it applies to Western financial institutions but is weak when applied to the FMCG and consumer goods sector. At the end of the day, the Kremlin will approve the buyer and the acquisition price and sometimes discard the Western company’s preferred buyer. Putin is using this opportunity to reward loyalists and mint new young oligarchs he will control. This was demonstrated with the Danone sale and is playing out now with the Unilever sale.
Russian Companies Exit Western Markets
Since 2014, Russia has exited Western markets by force and choice, costing it hundreds of USD billions in investment write-offs, infrastructure replacement costs, lost revenues, and market share displacement.
After decades of investment and building a respectable presence in those regions, western sanctions forced Russian banks to retreat from the Americas and Europe. VTB Bank, Russia’s second-largest bank by assets, began winding down its Americas operations shortly after 2014. Sberbank was forced to sell its Swiss and Austrian subsidiaries due to sanctions that came into effect after the second invasion.
The Sberbank European subsidiaries were critical to supporting Russian business globally. From Geneve, Sberbank CH provided trade finance products to Russian companies, facilitating commodity shipments to LATAM and Africa.
Gazprom, Russia’s biggest natural gas company, voluntarily walked away from the European gas market, which it had dominated since Soviet times. Gazprom had inherited from the Soviet-era gas pipeline infrastructure that connects Europe with Russia, a pipeline infrastructure network that would cost hundreds of billions USD to replace today.
As the European Union began to enact more sanctions after Putin’s second invasion of Ukraine, the Kremlin ordered Gazprom to start shutting off the gas to Europe and accelerate the development of the Asian markets.
Gazprom delivered $29B in net income in 2021, the year before Putin’s second invasion. Gazprom’s 2023 net income was ($6.8B), its first loss since Gazprom was formed over two decades ago. It should be noted that Gazprom generated 75% of its revenues from 1/3 of its gas inventory representing exports to Europe. The other 2/3 of its annual gas production represents domestic consumption, generating 25% of its revenues.
Debt renewals will also challenge Gazprom over the next two years. Twenty percent of its $70B international bonds are up for renewal. With the Western capital markets closed to Russian companies, Gazprom has options with limited liquidity—RMB and RUB.
Russia and the Emerging Parallel Global Economy
Since 2009, Russia has increasingly aligned itself with an emerging parallel global economy comprised of two groups:
Non-aligned countries—Brasil, India, Türkiye, and others.
Western-sanctioned countries—Iran, North Korea, Venezuela, Cuba, and others.
The non-aligned group is the BRICS, formalized in Yekaterinburg (Russia) as the BRIC (Brazil, Russia, India, and China) summit 2009. South Africa officially joined in 2010, changing the acronym to BRICS.
The estimated 2023 GDP of the BRICS is $27T, representing 26% of the global economy. Russia represents 7% and 2% of the BRICS and global GDP, respectively.
As the co-founder of BRICS, Russia exercises outsized political influence within the organization relative to its small $2T economy. Russia’s influence is drawn from its permanent membership status in the UN Security Council, its nuclear arsenal, its vast mineral resources, and its Soviet DNA for supporting anti-Western movements. It also draws influence from its junior partnership role with China, another UN permanent member, on the global stage. As discussed in BWR’s publication, “Russia’s Useful Enablers,” dated 14 Jul 2024, without China’s a’s $17T economy, Russia could survive its exit from the global economy.
The Western-sanctioned group, more appropriately described as the ‘Coalition of the Aggrieved,’ is comprised of Russia, Iran, and North Korea. These are the three most Western-sanctioned countries in history.
Although they are a small economic block, representing less than 2% of the global economy, they wield political influence and power due to their nuclear ambitions—North Korea and Iran—and their control over energy resources—Russia and Iran.
Led by Russia, and with China, India, and Türkiye serving as its enablers, these two groups are coalescing into a formalized and systemic parallel global economy with infrastructure for settling cross-border trade, manufacturing supply chains, and financial services networks independent of Western financial infrastructure and regulatory governance.
However, their collective weak spot is the absence of an anchor currency with the liquidity and trust of the USD. This will be a challenge to replicate if one considers the time and effort it took the European Union to launch the EUR in 1999.
Conclusion:
Putin has chosen to lead Russia out of the global mainstream economy and into an emerging parallel global economy. The emerging parallel global economy has developed beta-level solutions for cross-border trade settlements, manufacturing supply chains, and financial services networks independent of Western influence, control, and oversight.
As discussed in BWR’s publication, “Russia’s Useful Enablers,” dated 14 Jul 2024, China is central to this emerging parallel economy because it is the second-biggest economy in the world.
Other enablers and beneficiaries of Russia leading the bifurcation of the global economy are India, Türkiye, and Brasil.
Additional Reading(s)
Western Companies Exiting the Russian Market—Not So Easy, (Barbershop Whispers…Russia, 17 Sep 2023)
“Should I Stay or Should I Go”—Western Companies Reconsider Their Russia Exit, (Barbershop Whispers…Russia, 09 Jun 2024)
Gazprom Flare Out, (Barbershop Whispers…Russia, 16 Jun 2024)
Russia’s Useful Enablers: Alliance of the Aggrieved (AOA)– (Epilogue), (Barbershop Whispers…Russia, 14 Jul 2024)
Russian Rubles for Rupees and Yuan - Cross Border Settlements without USD, (Barbershop Whispers…Russia, 2 Jun 2024)
The Kremlin and Cryptocurrencies, (Barbershop Whispers…Russia, 8 Sep 2024)
Follow-ups & Quick Bites
Follow-ups
No follow-ups
Quick Bites
Central Bank of Russia (CBR) Raises Rate to 19%
The CBR raised its key interest rate by 100bps to 19% as it struggles to control inflation in the face of increased military spending on Putin’s war in Ukraine.
The CBR released a statement saying,
“Current inflationary pressures remain high. By the end of 2024, annual inflation is likely to exceed the July forecast range of 6.5–7.0% […]growth in domestic demand is still significantly outstripping the capabilities to expand the supply of goods and services […] further tightening of monetary policy is required.”
Additional Reading(s)
Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to the Board of Directors meeting on 13 September 2024, (Central Bank of Russia, 13 Sep 2024)
Ukraine Launches a Swarm of Drones on Moscow
Last week, Ukraine launched the biggest drone attack on Russia since the start of the second invasion. It is estimated more than 150 drones were launched, causing the closure of three Moscow airports and damage to a residential building.
Ukraine is increasing the number of attacks deep into Russian territory and, again, bringing the war to the Russian people. The “Special Military Operation” is boomeranging back home as a war.
Vol 2, No 43 - BWR 15.09.2024
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.
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