Unfair Russian market for Western companies

Governments in “unfriendly” to Russia countries implemented sanctions, and businesses made withdrawal announcements. And although the Kremlin was at least conceptually ready for the former, the latter’s moves were a complete shock.

Wrong tactics of the players

McDonald’s estimates that over 30 years, the company has invested $ 2.5 billion in Russia; however, at least a third of this sum has already been amortized, meaning that direct losses at the beginning of 2022 were between 70 and 80 percent of the assets’ market value.

Many businesses that primarily engaged in trade handed over assets to their managers with the understanding that buybacks would be possible in the following few years. Naturally, in this case, the players who invested heavily in opening their stores or purchasing retail space suffered the greatest losses. According to various estimates, IKEA lost between $150 and $200 million as a result, and companies like Inditex, Uniqlo, H&M, and Decathlon collectively lost about RUB65 billion, or between $850 and 900 million at the time of the loss.

There is no safe or free market in Russia now

It is safe to say that what is taking place in Russia right now is the biggest robbery on foreign investors in recorded history. Some estimates place the overall amount of their losses at $240 billion. However, it is not recommended to take this number at face value. Russian money entering the nation through offshore holdings appears to have never been invested there, according to statistics on foreign direct investment (FDI) in Russia.

Many analysts firmly estimate $70 billion, which includes lost revenue and decreased sales. Even when calculating only direct losses (i.e. write-offs of assets lost permanently or temporarily (if there are agreements on the possibility of repurchasing) assets), it turns out that foreigners lost $28 billion to $34 billion in Russia in the 12 months following the date of the first sales, which started as soon as in the second half of April 2022. This is about five times higher than comparable losses of multinational corporations from expropriations of their property in Venezuela and $30 billion.

Path of ultimatum as state regulation

In the ongoing process of confiscating property, Russian authorities have created an innovation: it doesn’t amount to nationalization or expropriation because no assets become the property of the state, as had previously occurred in the majority of developing nations over the past 50 years. Instead, the Kremlin cynically creates circumstances that make foreign activity in the country impossible (directly, through the adoption of various rules and laws, and indirectly, through the ongoing war in Ukraine, which makes the presence of major Western companies in Russia extremely expensive from a reputational standpoint). These restrictions compel them to voluntarily move assets to private entities with restricted access to global markets.

This procedure presupposes that the harmed party cannot file a lawsuit against the Russian Federation (although numerous claims are pending against Venezuela that have already been successful in international courts). They also aren’t able to sue the new owners because the transfers appear to be voluntary. Thus, Russia today adds nothing less than a new chapter to the history of Western property expropriation by governments of periphery nations, demonstrating the existence of a “commercial state” in which the executive branch engages in entrepreneurial activity.

Brand or exclusive benefits still hold the others

In the Russian environment, local business people accept firms whose work necessitates intensive organization and which were either crucially “tied” to supply from abroad or gained clear benefits from the recognition of their brand. Since it is obvious that at the Moscow Renault plant it is only possible to build pre-disassembled Chinese automobiles that are passed off as a “reanimated” Moskvich, it is worthwhile to watch how successful the stolen enterprise will be in the hands of the new owners. With a total revenue of RUB73.5 billion in its first year of operation, Vkusno i tochka, the restaurant that took McDonalds’ position, reported a loss of RUB11.3 billion.

Banks and infrastructural facilities are examples of purchases that are less “problematic”. But generally speaking, it is difficult to doubt that both their management level and the caliber of the goods and services they create will decline. Such “import substitution” is regressing Russia, although foreign investment inflows were for many years the main driver of its modernization.