The rapid isolation of the Russian economy following the invasion of Ukraine marks the end of Russia’s 30-year experiment of integration into the global economy.
In the last three weeks, doing business in Russia became unseemly for most Western investment banks, former politicians and even fast-food restaurants. According to Jeffrey Sonnenfeld at the Yale School of Management, more than 400 companies have left Russia. But before the start of the full-scale war, a decade of Russian foreign aggression had not prevented most major energy firms, banks and pension funds from investing in Russian assets.
These rapid exits no doubt come as a great shock to Russian President Vladimir Putin and the Russian elite. So why did Putin underestimate the extent of economic punishment from the West? Research for my recent book on globalization and corruption in Russia offers an explanation (Global Finance, Local Control: Corruption and Wealth in Contemporary Russia).
Autocrats can thrive under globalization
In retrospect, it might seem puzzling that as Putin’s regime descended into repressive authoritarianism, Russia’s economy became increasingly globalized. Much of the U.S. grand strategy of “normalization through globalization” after the end of the Cold War was premised on the idea that free markets in countries like China and Russia would lead to democracy.
Indeed, some political science research finds that greater mobility of capital due to long-term economic development or even short-term changes in financial openness policies can increase the chances of democratization. But democracy is not guaranteed. Under some circumstances, global integration can sustain autocracies for decades.
Consider the Russian oligarchs. They acquired their assets by benefiting from corrupt institutions. But the same weak rule of law that allowed oligarchs to steal their wealth also made it challenging to protect it. Northwestern University political scientist Jeffrey A. Winters describes the problem: “the claim ‘all of this is mine’ will constantly be confronted with the response ‘says who?’ ”
How global finance transformed Russia
The oligarchs solved this problem by ensuring Western financial markets were open and accessible. As I detail in my book, Russian industries underwent privatization (1992-1994), re-privatization (1995-1996) and re-nationalization (2003-2005). Successive cliques of oligarchic interests relied on Russia’s integration into the global financial system to validate their claims to the newly acquired property.
Financial integration ensured access to both liquidity and legitimacy, making it more costly for current and future political enemies to confiscate the oligarchs’ wealth. Moreover, Western financial institutions and major corporations helped bring Russian money into the pool of global capital — and made handsome profits in the process.
Open financial borders were integral to Russia’s kleptocratic regime from the start. In addition to the super-rich from the 1990s, Putin created his own cadre of oligarchs. After this group gained control over most of the energy sector, Putin and the oligarchs who were allowed to stay in Russia broadly agreed on the policy of financial integration.
By the end of Putin’s second term in office, new rules of asset control combined with financial openness became broadly accepted in the West. As a result, the number of Russian billionaires ballooned from zero in 2000, when Putin took office, to more than 100 by 2012, when he returned for his third presidential term.
The Russian government grew willing to tolerate the risks associated with high levels of exposure to the volatile global markets. The Kremlin was ready to deploy its foreign reserves before ever considering capital controls after the 2008 global financial crisis, after the 2012-2013 Cyprus banking crisis and broadly during the past 10 years of Western sanctions against Russia.
Russia’s corporate giants benefited handsomely from openness, even as the Kremlin’s aggression toward Russia’s neighbors escalated. After the annexation of Crimea in 2014, Russian-owned giants like Gazprom, Rosneft and Sberbank successfully raised capital in the West to fund their expansion. Despite sanctions, Russia’s leading stock exchange (MOEX) signed agreements with Western clearing houses and securities depositaries to make it easier and cheaper for foreigners to buy shares of Moscow-listed companies. Less than a year ago, nonresident investors owned about 80 percent of the “free float” of shares listed on the now-shuttered exchange.
Putin expected milder sanctions
Notably, Russia’s financially open autocracy could not have been maintained without willing participation by private Western companies. Only a handful of foreign business leaders and prominent Western companies severed ties with their Russian counterparts before February. By and large, until Feb. 24, sanctions did not significantly alter the calculus of Westerners doing business in Russia — or undermine the ability of wealthy Russians to gain access to Western financial markets and legal protections.
Although nearly all Western energy giants have either withdrawn from Russia or paused further investment after the start of the war in Ukraine, they had been doing business with the Kremlin despite corruption, expropriations, human rights abuses and military aggression for nearly two decades.
In many instances, these companies actually deepened their footprint in Russia even as Russia became subject to more severe sanctions. For example, British Petroleum’s stake in Rosneft (headed by Putin’s closest ally, Igor Sechin, who had been sanctioned since 2014) increased to 22 percent in 2020. Pension funds like the California Public Employees’ Retirement System were invested in Gazprom as of 2020. Rosneft and U.S. energy services giant Schlumberger signed a technology cooperation agreement in June 2021.
This recent history of ever-deepening economic ties explains why Putin and Russia’s economic elite must be surprised by the exodus of private companies. Years of personalist rule and the recent self-imposed isolation probably led Putin to make stunning misjudgments about Russian military capabilities and the Ukrainians’ will to fight.
But the history of Russia’s globalization and Western sanctions suggests it was entirely reasonable to expect a mild reaction from Western businesses. For 15 years, Russia’s autocracy — deeply integrated into the global economy — proved durable against major external and internal shocks. The lackluster sanctions policies of Western countries and the profit-seeking by multinational companies reassured Putin that yet another invasion would go mostly unpunished.
Igor Logvinenko (@igorlogvinenko) is an associate professor of diplomacy and world affairs at Occidental College and the author of “Global Finance, Local Control: Corruption and Wealth in Contemporary Russia” (Cornell University Press, 2021).