March 12, 2022 | The Berkshire Eagle

Russia sanctions grow faster, larger than South Africa sanctions in 1980s

March 12, 2022 | The Berkshire Eagle

Russia sanctions grow faster, larger than South Africa sanctions in 1980s

When I lived in Moscow, I worked for Bloomberg, banked at Citibank, used my Visa card at Ikea, lunched at McDonald’s and flew home on Aeroflot to New York.

As of this week, all that is over. As more than 300 Western companies head for the exits, financial sanctions have hit Russia’s economy like an atom bomb. Next month, Russia is expected to default on its $40 billion worth of bonds held by foreigners. This would be Russia’s first major default since the Bolsheviks seized power in 1917. Since then, Czarist railroad bonds have made nice wallpaper. Today, foreign banks, largely European, have $121 billion in exposure to Russia.

For now, public opinion polls show a majority of Russians support Vladimir Putin’s attack on Ukraine. Let’s see how they feel after the world’s 11th biggest economy becomes the world’s biggest North Korea. For the last 23 years, Putin’s post-Soviet deal with Russians was: You get a consumer goods revolution, and I get unchecked political power.

With one stroke, Putin’s attack on Ukraine triggered the unwinding of three decades of foreign investment in Russia.

In the two weeks following Russia’s attack on Ukraine, more than 300 major western companies have halted Russian operations, according to a tally maintained by Jeffrey Sonnenfeld, a Yale School of Management professor. This exceeds the 200 big companies that took part in the 12-year campaign to divest from white-ruled South Africa.

Let’s look at the Western companies that were my daily companions when I lived in Moscow from 2006 to 2014. After Russia passed a law imposing 15-year jail sentences on reporters calling Russia’s actions in Ukraine a “war,” Bloomberg stopped covering Russia. The New York Times announced this week it is withdrawing its reporters from Russia. Last week, Voice of America and Radio Free Europe closed their joint bureau in Moscow. The VOA bureau opened in 1989 under Premier Mikhail S. Gorbachev. The Times bureau dates back to 1922, the time of Vladimir Lenin.

Today, Citigroup is trying to sell its retail operations in Russia. UniCredit, an Italian bank I also used in Moscow, warned Wednesday that it faces up to $8 billion of losses in Russia.

Last week, Visa, Mastercard, American Express and PayPal stopped processing foreign purchases for millions of Russian citizens. Apple and Google shut off their smartphone payments, cutting off cashless commuters at Moscow subway stations.

Ikea, the Swedish home goods retailer, is temporarily closing its 17 stores across Russia. Among the retailers joining the shutdowns are: Adidas, H&M Group, L’Oréal, Nike, LVMH, Louis Vitton, Hermes, Chanel and Zara.

Levi Strauss & Company has stopped sales in Russia of its blue jeans — a symbol of post-Soviet consumer freedom. From the consumer side, Russians’ purchasing power vaporized after the ruble devalued by 50 percent since the war’s start.

On Tuesday, McDonald’s announced that it will temporarily close all 847 restaurants in Russia. Starbucks also said they would temporarily close all of its 130 coffeeshops in Russia.

“Western companies probably haven’t lost so much money so quickly due to geopolitics since the Shah was overthrown in Iran,” Renaissance Capital chief economist Charlie Robertson told Reuters, referring to the Islamic revolution of 1979.

Aeroflot, Russia’s national flag carrier, is now a domestic airline. Last week Aeroflot announced that the suspension of all international flights. Russian airlines are banned from flying to the European Union, United Kingdom and the U.S. Delta has dropped Aeroflot from its codeshare alliance.

Boeing and Airbus account for about two-thirds of all passenger jets used in Russia. Last week, Boeing and Airbus said they will no longer service the planes. Three Irish companies lease a total of 200 jets to Russian airlines. Now the companies want to repossess the jets, valued at $3 billion, reports the Irish Times. But a new Russian law may bar their return. On Thursday, President Putin threatened to nationalize foreign-owned companies.

His chief propagandist, Russia Today editor Margarita Simonyan wrote on Telegram: “Is there a reason why all these Pizza Huts and Ikeas and so on aren’t nationalized already?”

Irritating Simonyan, the European Union last week banned Russia Today as a propaganda arm of the Kremlin. RT America closed last week in the wake of a massive boycott by U.S. cable networks.

Worrying the Kremlin is the threat that millions of jobs will evaporate due to the West’s massive divestment campaign.

In Russia’s key natural resources sector, a series of heavyweights have announced plans to pull out of Russia: Exxon Mobil, BP and Shell. Ford, GM, Daimler Truck, Volvo and Volkswagen announced last week that they are suspending operations in Russia.

Rio Tinto, the Anglo-Australian multinational that owns the world’s second-largest metals and mining corporation, says it is “terminating all commercial relationships it has with any Russian business.” Rio Tinto owns 80 percent of a joint venture with Rusal, the world’s second-largest aluminum company. Vladimir Potanin, the nickels magnate and reportedly Russia’s richest man after Putin, warns nationalizations would “bring us back 100 years, to 1917.”

For Russians, doing business, creating companies and selling products abroad are increasingly difficult. Two weeks ago, most Russian banks were largely cut off from SWIFT, the international payments system. This cutoff puts Russian in a category approaching North Korea today and Iran a decade ago.

Goldman Sachs, emblematic of Russia’s go-go financial era, announced that it is closing in Russia. Further hampering Russian companies ability to raise money, the “big four” audit firms — E&Y, PwC, KPMG and Deloitte — plan to withdraw from Russia. Robert Homans, an American financial expert, wrote Thursday on the impact of the war: “[this departure] may make it difficult for lesser-known Russian companies…to gain legitimacy with international investors, through having audit reports prepared by Big 4 firms.”

With no sign of Putin withdrawing from Ukraine, the Biden Administration is asking Congress to remove Russia’s status of “permanent normal trade relations.” This could raise tariffs on U.S. imports of Russian goods from 3 percent to 33 percent. There are bipartisan calls in Congress to kick Russia out of the World Trade Organization. Maersk and two other major shipping lines have stopped servicing Russian ports. With Moscow’s stock market closed for last two weeks and international ratings agencies cutting Russian sovereign bonds to junk status, Russia’s gross domestic product is expected to contract by 15 to 20 percent this year.

“The crisis will be most severe for a minimum of three years — take the 1998 crisis and multiply it by three,” Oleg Deripaska, a metals billionaire, said referring to the partial default, big devaluation and five percent GDP drop in 1998. This 1998 economic crisis paved the way for the rise of Putin to the presidency in the following year.

Back in 1970, Andrei Amalrik, a young Soviet dissident, wrote an essay with a heretical title: “Will the Soviet Union Survive Until 1984?”

Now the question may be: Will Putin survive until 2024?

Lenox native James Brooke is a visiting fellow for the Foundation for Defense of Democracies. FDD is a Washington, DC-based, nonpartisan research institute focused on national security and foreign policy.

Issues:

Issues:

Russia

Topics:

Topics:

Australia Europe European Union Iran Islam Kremlin Moscow New York North Korea Reuters Russia South Africa Soviet Union The New York Times Ukraine United Kingdom United States Vladimir Putin Voice of America Washington