# Billions of Dollars Trapped In Russia!

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 29 Sep 2023, 19 min.

Audio: https://anchor.fm/s/fc0914e0/podcast/play/92761848/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2024-9-8%2F387759610-44100-1-1ecf4b3d55e99402.mp3

Send us a textA large number of western firms have continued to operate and invest in Russia since Putin’s invasion of Ukraine. These companies are estimated to have earned profits of around $20 billion dollars since the invasion. The problem for these companies is that the Kremlin has blocked them from accessing those profits in an effort to clamp down on companies from what they call “unfriendly nations.” Will these companies be able to repatriate these profits at some point in ...

## Transcript

[0:00] Hello and welcome you are listening to Patrick Boyle on
[0:03] Finance, a podcast exploring ideas from quantitative finance,
[0:08] examining events occurring in markets right now and financial
[0:11] history to see what lessons can be taken away, including
[0:15] interviews with some of the most interesting people in the world
[0:18] of finance. To learn more about the podcast,
[0:20] visit on finance.org. A large number of Western firms
[0:29] have continued to operate and invest in Russia since Putin's
[0:33] invasion of Ukraine, according to data obtained by Professor
[0:37] Simon Evenet from the University of St.
[0:40] Gallen and Professor Niccolo Pisani.
[0:43] In fact, they say that less than 9% of Western firms have
[0:47] divested from Russia in their paper, which was published in
[0:51] January this year. According to their research, US
[0:55] based companies accounted for more exits, around 18%, than
[1:01] those based in the EU, around 8% and Japan 15%.
[1:07] These findings, they say, call into question the willingness of
[1:11] Western firms to decouple from economies their governments now
[1:15] deemed to be geopolitical rivals.
[1:18] Jeffrey Sonnenfeld at Yale University disputes those
[1:22] figures. He and his team at Yale have
[1:25] been tracking the responses of over 1500 companies since the
[1:30] invasion of Ukraine occurred. They find that over 1000
[1:34] companies have publicly announced that they are
[1:36] voluntarily curtailing operations in Russia to some
[1:40] degree beyond the bare minimum legally required by
[1:44] international sanctions. But they agreed that many
[1:47] companies have continued to operate in Russia, undeterred.
[1:52] The Kiev School of Economics estimates that overseas
[1:56] companies operating in Russia will have earned profits of
[1:59] around $20 billion since the invasion, and that eighteen of
[2:04] that 20 billion is likely attributable to Western
[2:07] companies. The problem for these companies
[2:11] is that the Kremlin has blocked them from accessing those
[2:14] profits in an effort to clamp down on companies from what they
[2:18] call unfriendly nations. The Kiev School of Economics
[2:23] researcher points out that it's not easy to calculate a precise
[2:28] figure, as most international businesses operating in Russia
[2:32] only disclose their local results annually.
[2:36] Many foreign businesses with operations in Russia have been
[2:40] attempting to sell these assets rather than just shut them down,
[2:44] but doing so has not been easy. As any deal requires approval
[2:48] from Moscow, and even if they could get approval, any deal
[2:52] would likely be done at a steep discount.
[2:55] While US based businesses accounted for the most exits
[2:59] from Russia, the US companies that have remained generated the
[3:03] largest total profit of almost $5 billion, according to the KSE
[3:09] study, followed by German, Austrian and Swiss companies.
[3:14] The Austrian bank Ryfusson reported the biggest 2022
[3:19] earnings in Russia at $2 billion.
[3:22] U.S. companies Philip Morris International and Pepsi earned
[3:26] $775,000,000 and $718 million, respectively.
[3:33] Scania, the Swedish truck maker which has since withdrawn from
[3:37] Russia, made a $621 million profit in the country in 2022,
[3:43] making it the top earner among companies that no longer operate
[3:48] in Russia. The $20 billion that are trapped
[3:52] in Russia are, of course, dwarfed by the $100 billion that
[3:56] European companies alone have reported in write downs and
[4:00] losses from their operations in Russia since the invasion of
[4:04] Ukraine in February 2022. There's detailed information
[4:09] provided on the KSE website, including links to a spreadsheet
[4:13] showing all of the data that goes into their calculations.
[4:17] And charts highlighting the most important points, some companies
[4:22] have found ways around the Russian government restrictions.
[4:26] Mars, the American food group's Russian subsidiary, was able to
[4:30] pay around $800 million to its parent company last year by
[4:35] offsetting the profits earned in Russia against its debts in
[4:39] Russia, according to its financial statements for 2022.
[4:44] The Russian government has not yet clarified how it plans on
[4:47] dealing with frozen foreign assets within the country, but
[4:51] it's likely that Putin will use them for as much leverage as
[4:55] possible. It's not just companies from
[4:58] unfriendly Western countries that are struggling to
[5:01] repatriate profits from Russia, either.
[5:04] Russia has stopped Indian energy companies from taking about $400
[5:09] million in dividends out of the country, too.
[5:12] Oil India reports that while dividends have been paid, the
[5:16] money is stuck in bank accounts in Russia.
[5:19] Moscow is blocking dividend payments to Indian energy
[5:23] companies because a large amount of money from the export of
[5:26] Russian oil is also stuck in India.
[5:30] This is because India, like China, has a complex and
[5:33] elaborate legal and regulatory framework of capital controls in
[5:37] place which have been in place for decades, along with an
[5:41] extensive array of restrictions on capital account transactions.
[5:46] This is nothing new and it's part of doing business in
[5:49] countries like India and China. The rupees used in payment for
[5:54] Russian oil can't be converted into any other currency.
[5:59] They can only be used to purchase goods in India.
[6:03] Restrictions like this are less of a problem for Russia when
[6:07] dealing with China as Russia needs to buy a lot of goods that
[6:11] are manufactured in China, but they don't need to buy as much
[6:15] from India. Thus, the money stays stuck in
[6:18] Indian rupees. To top this all off, Russia also
[6:22] has capital controls in place and is likely to add more.
[6:27] So while these countries are all trading with each other, the
[6:30] trade is not exactly going smoothly.
[6:33] This might give you an idea as to how efficient a BRICS
[6:37] currency that many people are touting as a possible
[6:39] replacement for the Dollar, Euro, Pound and yen would be.
[6:44] The Russian ruble has been falling quite steadily this
[6:47] year. It's down around 25% against the
[6:50] dollar so far this year, placing it with the Turkish lira and the
[6:55] Argentine peso as the worst emerging market performers.
[7:00] The deterioration in foreign trade has been one of the main
[7:04] reasons for the fall of the ruble.
[7:07] Flows of imports are up year to date, while restrictions on
[7:11] Russia's energy sales, including an oil price cap, have led to a
[7:16] steady decline in exports. As a result, not much foreign
[7:20] exchange has been coming into Russia, but the demand for it
[7:24] remains strong from both importers and households who
[7:28] keep moving their savings abroad as much as they can.
[7:33] Even Finance, the world's largest cryptocurrency exchange,
[7:37] is exiting Russia by selling its business in the country to a
[7:41] company that launched only two days ago.
[7:45] Finance has been kept busy, denying media reports that it's
[7:49] been helping its customers move funds held in sanctioned Russian
[7:53] banks out of the country. The fact that the identity of
[7:57] the buyer of the Russian business is unknown so far has
[8:01] worried the Russian crypto community.
[8:05] The recent decline in the ruble has Morton offset its rise last
[8:09] year when the ruble was propped up with an emergency interest
[8:13] rate hike to 20% and capital controls that prevented Russians
[8:18] from moving money out of the country, combined with rules
[8:22] that required Russian companies to convert most.
[8:25] Of their foreign exchange into rubles before the Ukraine
[8:29] invasion, more than 60% of Russia's payments for its
[8:33] exports were made in what Russian authorities now refer to
[8:38] as toxic currencies such as the dollar, the euro and the pound,
[8:43] with the Chinese renimbi amounting for less than 1%.
[8:48] The socalled toxic currencies now make up less than half of
[8:52] export payments today. While the Chinese renminbi
[8:56] accounts for 16%, according to data from Russia's central bank,
[9:02] Chinese banks, many of which are state owned, have replaced
[9:06] Western banks in lending to Russian financial institutions.
[9:10] China's exposure to Russia's banking sector has quadrupled in
[9:15] the 14 months to the end of March this year, according to
[9:18] data from the KSC. The Austrian bank Rifusen, which
[9:23] I mentioned earlier, remains one of the few Western banks to have
[9:28] continued operations in Russia after most other foreign banks
[9:32] cut their ties and sold subsidiaries last year.
[9:36] Profits at the Russian subsidiary of Rifusen rose
[9:39] almost 10% in the first six months of 2023, with the bank
[9:44] even raising pay for its Russia based staff by two $110 million.
[9:50] The European Central Bank is increasing pressure on financial
[9:54] institutions it supervises, including Rafferson, to exit
[9:58] Russia. Rafferson has told the press
[10:02] that it's trying to find ways of selling or spinning off its
[10:06] Russian business while staying compliant with local and
[10:09] international laws and regulations.
[10:12] They say that they are committing to further reducing
[10:15] business activity in Russia whilst making progress towards a
[10:19] transaction. While the profits of the Russian
[10:22] subsidiary have grown, it's not obvious that they can be
[10:26] repatriated to Austria at any point soon.
[10:29] Allowing dividends to be distributed requires that a
[10:33] company be from a friendly country.
[10:36] And has become a form of encouragement for good behavior
[10:39] in Russia, which includes making it clear that you plan on
[10:44] continuing to do business in Russia.
[10:47] So how has Russia been dealing with the sanctions overall?
[10:51] Well, the sanctions have without a doubt been hurting the Russian
[10:54] economy, but maybe not as much as you might expect.
[10:58] Robin Brooks, the chief economist at the Institute of
[11:02] International Finance, shows using these charts, that while
[11:06] many countries exports to Russia plummeted, their exports to
[11:11] Central Asia have exploded. It might be reasonable to
[11:15] believe that a lot of these exports to Central Asian
[11:19] countries which border Russia, are being rerouted into Russia.
[11:24] Poland is one of the Ukraine's loudest supporters, but its
[11:27] exports to Central Asia are up way more than the Czech
[11:32] Republic's exports to Central Asia have been since the start
[11:35] of the war. When we look at German exports
[11:39] to Kyrgyzstan, they are up 1400% from the same period in 2019.
[11:46] Robin points out that this is powered by an eyewatering 6000%
[11:51] rise in cars and car parts being exported to Kyrgyzstan.
[11:56] It's not hard to work out what's going on here.
[12:00] Robin has additionally pointed out that a lot of these cars
[12:03] will be filled with semiconductors, which are
[12:06] sanctioned and can be taken from these cars and repurposed.
[12:11] Robin is quoted in a Telegraph article from a few days ago
[12:16] where he points out that since Russia's invasion of Ukraine,
[12:19] Greece's shipping sector has made significant profits
[12:23] shipping Russian oil around the world.
[12:26] But Greek ship owners have recently found an even more
[12:29] lucrative source of revenue, selling their old ships to
[12:32] mysterious buyers linked to Russia.
[12:36] As part of the sanctions against Russia, a price cap was placed
[12:40] on Russian oil at the end of last year.
[12:43] This meant that Russian oil could only be transported via
[12:46] Western ships if it was sold for less than $60.00 per barrel.
[12:52] Putin has been working around this problem by using a shadow
[12:56] fleet of ships that have hard to track ownership and no Western
[13:01] insurance. Meaning that Russia can sell a
[13:03] significant amount of oil above the price cap using these ships.
[13:08] According to the Telegraph article, the world's shadow
[13:11] fleet has ballooned from 220 ships before the war to 535
[13:17] ships today, and this has eroded the effectiveness of the oil
[13:22] price cap. There's been an explosion in
[13:25] secondhand purchasing of clapped out tankers, according to
[13:29] Michelle Weiss Brockman, a senior analyst at Lloyd's List
[13:34] who's quoted in the Telegraph article.
[13:36] These are ships that have an average age of 23, many of which
[13:41] would under normal circumstances be destined for the scrap yard.
[13:45] The risk of oil spills as they pass through European waters is
[13:49] very high because of their age and condition.
[13:53] As was highlighted by an incident in March this year when
[13:56] one of these aging ships filled with Russian oil, lost power and
[14:00] almost ran aground in the Danish Strait, Glencore, the commodity
[14:05] trading firm, received some press this week for having
[14:09] brought thousands of tons of Russian copper through Turkey
[14:13] into Italy in July this year, highlighting how shipments via
[14:18] third countries can finance the Russian economy.
[14:22] Imports of Russian copper by Turkey have nearly tripled in
[14:26] the first seven months of this year compared with the same
[14:29] period a year earlier. Italy has become Turkey's
[14:33] largest export destination for copper, growing 3% this year.
[14:38] Compared with steep declines for Germany and the United Kingdom
[14:43] 18 months after its invasion of Ukraine, Russia displays many
[14:47] symptoms of a struggling wartime economy.
[14:50] Such as inflation, labor shortages, rising government
[14:54] spending, and deficit financing. For Ukraine and its Western
[14:59] supporters, the big question is whether the pressures on the
[15:02] Russian economy are enough that at some point in the future they
[15:07] will force Russia to back down. Western sanctions are
[15:10] undoubtedly a major contributor to these pressures, especially
[15:15] by cutting Russia's oil and gas export revenues.
[15:19] In a recent state budget draft, it appears that Russia plans to
[15:24] increase state spending in 2024 by more than 25% compared with
[15:29] this year. Bloomberg reports that Russia
[15:32] plans to raise defense spending to nearly 6% of GDP, an increase
[15:37] from 3.9% this year and 2.7% in 2021, the year before Putin
[15:44] ordered the invasion. The rise in expenses suggested
[15:49] by the draft budget is not the real surprise, however.
[15:52] It's the nearly identical increase in income that the
[15:56] country is projecting. It's hard to understand where
[15:59] this big increase in state income is expected to come from
[16:03] based on what's been disclosed. Putin has claimed in his
[16:08] speeches that the Russian economy is growing and that
[16:11] wages are rising. But despite his efforts to put a
[16:14] positive spin on events, he's been unable to avoid addressing
[16:19] the decline of the ruble. In a speech last month, he said
[16:23] objective data shows that inflationary risks are
[16:26] increasing and the task of reining in price growth is now
[16:30] the number one priority. I asked my colleagues in the
[16:34] government and the central bank to keep the situation under
[16:38] constant control. With imports still making up
[16:42] around 40% of the average Russian consumer, basket surveys
[16:47] show Russians have already started to slash their spending.
[16:51] A report last month showed that 19% of respondents had begun
[16:56] cutting back on purchases of basic goods such as toothpaste,
[17:01] washing powder and food in July, compared to 16% the month
[17:06] before. Russia's central bank raised its
[17:09] policy interest rate by one percentage point to 13% two
[17:14] weeks ago, the latest in a series of efforts to halt the
[17:19] steady devaluation of the ruble. The bank had already raised the
[17:23] rate by 3 1/2% at an emergency meeting in mid August after the
[17:29] ruble fell through 100 to the US dollar.
[17:34] The Russian Central Bank says that inflationary pressure
[17:37] remains high in the Russian economy, with the seasonally
[17:41] adjusted inflation rate reaching 9% in the past three months.
[17:46] They expect inflation to reach 6 to 7% by the end of the year,
[17:51] well above their target of 4%, a deputy Russian finance minister
[17:56] told the press last week. That Moscow wanted to turn to
[18:00] strict capital controls for the first time since the early weeks
[18:04] of the invasion to ease pressure on the ruble.
[18:07] The finance ministry has been lobbying for increased capital
[18:12] controls amid ballooning deficits from increased military
[18:16] spending, a drop in export revenues and a growing reliance
[18:20] on imports. Government officials instead
[18:23] decided to encourage exporters to sell more of their foreign
[18:26] currency revenue last month after Putin chaired a meeting on
[18:31] the topic. Thanks for joining today's
[18:33] podcast, and a special thanks to those of you who've been sending
[18:37] links to your friends, as my listenership has really been
[18:41] taking off over the last month or so.
[18:43] Have a great week and talk to you again soon.
[18:46] Bye. If you enjoyed this episode, be
[18:49] sure to subscribe so you're notified when a new episode is
[18:52] posted. Thank you to everyone who is
[18:54] supporting this content on Patreon.
[18:57] If you enjoyed this content, you can find more like it on YouTube
[19:00] on the Patrick Boyle on Finance channel or follow us on Twitter
[19:05] at Patrick E Boyle. Thanks for listening.
[19:07] Bye.

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