‘There’s no path out of economic oblivion for Russia’: New report reveals how corporate exodus has already wiped out decades of post–Cold War growth

In the past six months, Russia has beefed up its economic defenses after Western countries hit it with sanctions over its invasion of Ukraine.
Despite the crackdown, the Kremlin continues to rake in billions in oil and gas revenues, which helped the ruble rally to become the world's best-performing currency this year.
But all is not well with the Russian economy.
Western sanctions and widespread corporate exodus from Russia since February 24 have devastated Russia's economy -- and its future prospects look promising, according to a new report by Yale University researchers and economists led by Yale professor and senior Jeffrey Sonnenfeld School of Management, even more somber from Associate Dean of Leadership Studies. It is now clear that the "Kremlin's finances are in a much, much worse state of distress than is widely believed" and that the large-scale "business pullbacks and sanctions are catastrophically crippling the Russian economy," the researchers wrote.
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deterioration
As of August 4, over 1,000 companies, including US firms such as Nike, IBM and Bain Consulting, have restricted their operations in Russia. Although some companies have stayed, the mass exodus of companies accounts for 40% of Russia's GDP and reverses 30 years of foreign investment, the Yale report said.
The international retreat is turning into a major crisis for the country: a collapse in foreign imports and investment.
Russia has fallen into a technological crisis due to its isolation from the global economy. It has problems securing important technologies and parts. "The domestic economy is largely dependent on imports across all sectors ... with few exceptions," the report says. Western export controls have largely halted the flow of imported technology from smartphones to data servers and network devices, straining the tech industry. Russia's largest Internet company, Yandex - the country's version of Google - is running out of the semiconductor chips it needs for its servers.
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At the same time, Russia's "domestic production has come to a complete halt with no capacity to replace lost businesses, products and talent," the Yale report said. Russian producers and manufacturers are unable to fill the gaps left by the collapse in Western imports. Russia's telecoms sector, for example, now hopes to lean on China, India and Israel for supplies of 5G equipment.
In the weeks following Ukraine's invasion, the Kremlin largely averted a "full-scale financial crisis" with quick and tough measures like restricting money flows out of the country and enforcing an emergency 20% interest rate hike, Laura Solanko, senior adviser at the institute for Emerging Economies in Transition by the Bank of Finland, an organization that researches emerging markets, Fortune said last month. The ruble even recovered from a March low when it was valued at less than one US cent.
But Russia's financial markets have been the worst performers in the world this year, the report says. "Putin is resorting to patently unsustainable, dramatic fiscal and monetary interventions to offset these structural economic weaknesses," which has resulted in a government budget deficit for the first time in years and depleted the Kremlin's foreign exchange reserves despite its continued inflow of petrodollars. the researchers wrote. The Russian government provides subsidies to companies and individuals to mitigate economic shocks caused by sanctions. This "inflated level" of fiscal and social stimulus on top of military spending is "simply unsustainable for the Kremlin," the report said.
And the recent dramatic reversal of the ruble points not to a strong Russian economy but to something much worse: the clear collapse in foreign imports. Sergei Guriev, academic director of the economics program at Sciences Po in France and research associate at the London-based think tank Center for Economic Policy Research, previously told Fortune that this represented a "very bad" situation for the nation.
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The EU is now shutting down Russian energy, which could hurt the Kremlin's oil and gas profits. Such a scenario would severely strain the Kremlin's finances, as Western countries have frozen half of their $300 billion in foreign exchange reserves.
On the way to economic oblivion
Russia's precarious economic position means it faces even worse long-term challenges.
Sanctions are not designed to cause an immediate financial crisis or economic collapse, but are long-term tools to weaken a country's economy while isolating it from global markets, the report said. And the sanctions are doing just that for Russia.
The country is losing its richest and most educated citizens as its economy collapses. Most estimates say at least 500,000 Russians have fled the country since Feb. 24, with "the vast majority being high-skilled and high-skilled workers in competitive industries like tech," the report said. Many wealthy Russians who flee take their money with them. According to one estimate, 20% of Russia's very wealthy individuals left the country this year. In the first quarter of 2022, the Bank of Russia estimated official capital outflows at $70 billion — but that figure is likely a "gross underestimate" of the actual amount of money that has left the country, the Yale team wrote.
Russian citizens will also become poorer despite Putin's minimum wage and pension increases. A former Putin aide predicts that the number of Russians living in poverty is likely to double - and maybe even triple - if the war continues. Russia "has yet to see the worst," Russian political scientist Ilya Matveev told Fortune last month.
"There is no escaping economic oblivion as long as allied countries remain united in maintaining and increasing sanctions pressure on Russia," the researchers write.
This story was originally featured on Fortune.com

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