Billions of Dollars Trapped In Russia!

Episode Summary

Executive Summary: The episode examines how Western firms, banks, and traders continue to profit from or maintain exposure to Russia despite sanctions, while Moscow uses capital controls, approvals, and trade rerouting to trap profits and preserve foreign exchange. It also shows sanctions leakage through Central Asia, shadow shipping, and commodity re-routing, while highlighting Russia’s weakening ruble, rising inflation, and growing fiscal strain.

Main Topics: Western corporate exposure and trapped profits in Russia (Priority: 5/5): The episode opens with conflicting research on corporate withdrawal: one study says fewer than 9% of Western firms divested, while Yale’s tracking shows over 1,000 companies curtailed operations. Many firms still earn sizable profits in Russia, but Kremlin restrictions and approval requirements make repatriation difficult. Sanctions, capital controls, and blocked cash flows (Priority: 5/5): Russia has prevented many companies from taking profits out, while Indian firms are also trapped by Russia’s blocking of dividend payments. The discussion emphasizes how capital controls in Russia, India, and China complicate cross-border payments and trap local-currency proceeds. Russia’s currency weakness and macroeconomic strain (Priority: 5/5): The ruble’s decline, driven by weaker exports, higher imports, and foreign exchange shortages, is presented as a key signal of stress. Inflation is rising, consumers are cutting spending, and the central bank has been forced into repeated rate hikes. Sanctions evasion via third countries and rerouting trade (Priority: 4/5): Exports to Central Asia and trade through countries like Turkey appear to be channels for rerouting sanctioned goods into Russia. Examples include surging German exports to Kyrgyzstan and copper shipments through Turkey into Italy that appear linked to Russian trade flows. Oil sanctions, shadow fleet, and the limits of the price cap (Priority: 5/5): The episode argues that the oil price cap has been weakened by Russia’s use of a shadow fleet of older, hard-to-track ships. These vessels allow Russian oil to move above the cap and raise environmental and safety risks. Russian banks and continued foreign financial ties (Priority: 4/5): The discussion notes that Chinese banks have expanded exposure to Russia, while some Western institutions like Raiffeisen remain active under pressure from regulators. This shows that Russia’s financial isolation is incomplete. Russia’s war economy and fiscal pressure (Priority: 5/5): Despite official claims of resilience, Russia faces labor shortages, inflation, deficit financing, and rising defense spending. The government plans sharp spending increases in 2024, but the source of the projected income growth is unclear.

Key Arguments: Western corporate disengagement from Russia is far weaker than public rhetoric suggests; many firms remain and continue generating profits. Kremlin rules make it difficult or impossible for foreign firms to repatriate earnings, turning profits into trapped capital. Sanctions are biting, but trade is being rerouted through Central Asia, Turkey, and other intermediaries, reducing their effectiveness. The oil price cap is being undermined by a growing shadow fleet of older vessels operating outside Western insurance and ownership transparency. Russia’s macroeconomic picture is deteriorating: the ruble is down, inflation is high, consumers are cutting spending, and the central bank is tightening. Russia’s ability to finance its war is under pressure, but not yet enough to force policy reversal; the state is still planning substantial spending increases. Foreign financial links have not disappeared entirely, as Chinese banks and a few Western banks still have meaningful exposure. Capital controls in multiple countries complicate sanctions implementation and illustrate why alternative reserve-currency systems, such as a BRICS currency, would be difficult to operate smoothly.

Data Points: Western firms divested from Russia: less than 9% - Estimate cited from Professors Simon Evenett and Niccolò Pisani on post-invasion corporate exits US company exit rate: around 18% - Higher exit rate than EU and Japan among Western firms EU company exit rate: around 8% - Reported in the cited study on corporate divestment from Russia Japanese company exit rate: 15% - Reported in the cited study on corporate divestment from Russia Public company withdrawals tracked by Yale: over 1,000 companies - Jeffrey Sonnenfeld’s team says these firms publicly curtailed Russian operations beyond minimum sanctions compliance Profits trapped in Russia: around $20 billion - Kiev School of Economics estimate of earnings by foreign firms in Russia since the invasion Share of trapped profits attributable to Western companies: $18 billion of $20 billion - KSE estimate for Western-company share of profits trapped in Russia European company write-downs/losses: over $100 billion - Losses reported by European companies from Russian operations since February 2022 Mars payment to parent via debt offset: about $800 million - Mars Russia used offsets against local debt to move money to the parent company Indian energy dividends blocked by Russia: about $400 million - Dividends trapped in Russia from Indian energy companies Ruble decline vs dollar: around 25% YTD - Currency depreciation cited as one of the worst among major emerging markets Pre-invasion export payments in toxic currencies: more than 60% - Share of Russian export payments in dollar, euro, and pound before the invasion Current share of toxic currencies in export payments: less than half - Russian central bank data after the invasion Current share of Chinese renminbi in export payments: 6% - Russian central bank data showing a shift in currency usage China’s exposure to Russian banking sector: quadrupled in 14 months - KSE data through the end of March this year Raiffeisen Russian subsidiary profit growth: almost 10% - First six months of 2023 Raiffeisen staff pay increase in Russia: $210 million - Raised pay for Russia-based staff German exports to Kyrgyzstan: up 1,400% - Used as evidence of rerouted trade via Central Asia Cars and car parts exports to Kyrgyzstan: up 6,000% - Robin Brooks cites this as a likely sanctions-evasion channel Shadow fleet size: from 220 ships to 535 ships - Telegraph-cited estimate of the expansion in vessels used to move Russian oil Average age of shadow-fleet tankers: 23 years - Older ships increase spill and accident risk Imports in average Russian consumer basket: around 40% - Used to show how ruble weakness feeds consumer inflation Consumers cutting basics spending: 19% vs 16% prior month - Survey share reducing purchases of toothpaste, washing powder, and food Russia policy rate: 13% - Central bank rate after a 1 percentage point hike Emergency May rate hike: 3.5 percentage points - Earlier effort to defend the ruble Seasonally adjusted inflation rate: 9% - Central bank estimate over the past three months Expected year-end inflation: 6% to 7% - Central bank forecast, above its 4% target Planned 2024 spending increase: more than 20% / 25% compared with this year - State budget draft and commentary on projected spending growth Planned defense spending: nearly 6% of GDP - Bloomberg-reported budget projection Defense spending this year: 3.9% of GDP - Comparison point in the budget discussion Defense spending in 2021: 2.7% of GDP - Pre-invasion baseline year Ruble threshold breach: 100 per US dollar - Mid-August level prompting central bank action

Pivotal Quotes: "less than 9% of Western firms have divested from Russia" — Narrator: Summarizing the findings of Professors Simon Evenett and Niccolò Pisani "objective data shows that inflationary risks are increasing and the task of reining in price growth is now the number one priority" — Vladimir Putin: Speech addressing Russia’s inflation and currency pressure "The so-called toxic currencies now make up less than half of export payments today" — Russian Central Bank data cited by narrator: Used to show Russia’s shift away from Western currencies after sanctions

Implications: Sanctions are constraining Russia, but enforcement gaps, rerouting, and capital controls reduce their bite. Expect continued pressure on the ruble, inflation, and firms trying to exit Russia, while shadow shipping and third-country trade remain key sanction-evasion risks.