Location: Russia

Breaking the Link: Costs and Benefits of Shutting Down Europe’s Last Gas Pipeline from Russia

Posted on January 13, 2025 | Policy Brief

A pressure gauge showing zero pressure in a Russian pipeline gas system, symbolizing the halt of gas transit to Europe.

Ukraine’s decision to halt Russian gas transit from January 1st, 2025, marks the end of decades of direct gas links between Europe and Russia. The EU is unlikely to face significant short-to-mid-term impacts, as Russian pipeline gas imports have already dropped sixfold since Russia’s full-scale invasion of Ukraine. However, uneven exposure to this shock has already created internal tensions within the EU. Further, increased reliance on liquefied natural gas may also slow the green transition. In the region, Moldova faces severe supply challenges and Ukraine will lose transit revenues. Targeted support and stronger cooperation within the EU and with neighboring countries, especially EU candidates, will be essential. In turn, the halt will make Russia face not only financial but also geopolitical losses.

On January 1st, 2025, Ukraine halted the transit of Russian gas to Europe following the expiration of a five-year agreement between Russian Gazprom and Ukrainian Naftogaz, marking a major shift in Europe’s energy landscape. This decision ended decades of reliance on Ukrainian pipelines for Russian gas (see Figure 1). Despite Ukraine announcing its intent not to renew the agreement well in advance (Corbeau, 2023), uncertainty lingered until the contract’s final days. Similarly, the broader implications remain uncertain. This policy brief explores the short-, mid-, and long-term effects of this change on the region.

Figure 1. Russian pipeline network to Europe, 2022-2025

A “Political” Pipeline

The Ukrainian transit route has long been a key corridor for direct gas deliveries to Europe, playing a crucial role in shaping the EU energy security policy. However, this route has also been the site of major disruptions, particularly during the 2006 and 2009 gas disputes between Russia and Ukraine. These incidents exposed Europe’s reliance on transit routes and its vulnerability to geopolitical conflicts, prompting political responses despite the relatively localized impact. To address these vulnerabilities, the EU introduced measures aimed at diversifying energy sources and strengthening internal energy markets (see, e.g., Le Coq and Paltseva, 2012). Early efforts focused primarily on improving the internal energy market’s efficiency while diversification advanced slowly. This changed drastically during the gas crisis that began in mid-2021 and escalated with Russia’s full-scale invasion of Ukraine in February 2022. These events forced the EU to alter its gas import strategy, driving further investments in liquefied natural gas (LNG) infrastructure and new pipelines, such as the Southern Gas Corridor enabling gas imports from Azerbaijan (see e.g., Regulation (EU) 2022/1032 and Regulation (EU) 2024/1789).

As a result, despite the significant burden of soaring energy prices and investment costs, the EU has made remarkable progress in reducing its reliance on Russian piped gas. Indeed, the share of Russian natural gas (both pipeline and LNG) in total EU gas imports, which increased 35 percent in 2015 to 41 percent in 2020, dropped to just 9 percent by 2023. However, the progress was non-uniform among member states (see Figure 2). In turn, by 2024, Russian gas via Ukraine accounted for just 5 percent of EU’s gas supply, with significant reliance limited to Austria, Hungary, and Slovakia (where it still made up between 65 percent and 78 percent of imports, and, between 12 percent and 22 percent of total energy consumption).

Figure 2. Share of Russian pipeline and LNG gas in total gas imports across the EU

Source: Eurostat, 2024. The gas imports include data for both pipeline and LNG imports. The 2024 gas imports data was unavailable at the time of writing this brief. However, several EU member states further decreased their consumption of Russian gas in 2024. For example, while Sweden and Finland were importing Russian LNG both in 2020 and 2023, possibly for re-export, as shown in Figure 1, they both stopped this practice from June 2024.
Further, Austrian data on imports from Russia is not available from Eurostat, and is, instead, compiled from Eurogas, IMF, and Austrian government data.

The Immediate Impact of the Transit Stop

The EU’s reduced reliance on Russian gas has significantly softened the immediate impact of the transit halt. Gas prices showed only a slight reaction, with no clear evidence linking the transit stop to price changes. Even if one would attribute the cumulative gas price increase over 2024 to the expectations of the pipeline shutdown only, the effect was much smaller than during the 2021 gas crisis or the sharp price spikes of 2022, as illustrated in Figure 3. Ample storage levels – 71.8% as of January 01.2025, well within acceptable levels for this time of the year – have further limited the immediate impact.

Figure 3. EU gas prices, 2021-2025

Effectively, the only part of the region facing an immediate and significant impact due to the termination of the gas transit deal has been Moldova. The pro-Russian separatist region of Transnistria, previously fully reliant on subsidized Russian gas via Ukraine and representing 70 percent of Moldovan gas consumption, has been cut off since January 1, 2025, due to the lack of alternative routes. This has also significantly affected the right-bank-of-Dniester Moldova as 80 percent of its electricity supply was previously provided by the Russian gas-based MGRES plant in Transnistria (Anisimova, 2024). In response, Chisinau declared a state of emergency in the energy sector, introducing energy-saving measures and rationing. In turn, Transnistria halted most industrial production and faced widespread blackouts (Kieff, 2025).

The Mid-Term Costs and Benefits for Involved Parties

In the mid-term, the impact will likely broaden and take various forms. Moldova, Ukraine, and Europe are expected to face primarily financial consequences, while Russia will also bear significant geopolitical costs.

Moldova will continue to be the most affected country. Russia could attempt to reroute gas to Transnistria via Turkstream and reversed flow on the Trans-Balkan pipeline. However, since this route briefly passes through Ukraine before reaching Moldova, it would require a transit agreement, an unlikely scenario under current conditions.

Alternatively, the Trans-Balkan route could be used to import gas from Azerbaijan or LNG from Turkey and Greece (Halser and Skaug, 2024). However, this would require political will from both Moldova and Transnistria, and involve substantial costs, likely unaffordable singlehandedly for Moldova or Transnistria, especially as the latter has long received Russian gas for free. Financial, as well as infrastructural support from the EU could help address these challenges.

Ukraine faces an annual loss of transit fees due to the halted agreement amounting to approximately $450 million/year. Formally, the loss should have been around $1.2 billion annually but Russia payed only for 15 bcm/a of gas transit since 2022, instead of 40 bcm/a under the ship-or-pay transit agreement, citing Ukraine’s refusal to transit gas via the Russia-occupied Sokhranivka entry point. This dispute is in international arbitration but is unlikely to be resolved before the war ends (see  Reley, 2025). The absence of a transit gas flow could also undermine the competitiveness of Ukraine’s gas storage services for the EU (Ukraine’s Naftogaz has Europe’s largest underground facilities with a capacity of 30.9bcm, 10bcm of which is available to foreign traders.)

At the same time, the option of renewing the transit agreement could boost Ukraine’s leverage in future talks with Russia. However, this leverage weakens with the EU’s ability to cope with its remaining reliance on Russian gas – greater diversification in EU imports would reduce the importance of Russian pipelines and, consequently, Ukraine’s bargaining position.

Europe’s mid-term impact from the transit halt will be non-uniform, with Austria, Slovakia, and Hungary facing the highest energy bill increases. However, the effect is expected to be limited due to its well-connected internal energy market, which can absorb shocks and distribute shortages across member states. The shortage is likely to be compensated by increased LNG purchases, which would somewhat increase gas prices due to the current LNG market rigidity. However, with LNG supply capacity increasing already in 2025 and projected to grow by 40 percent by 2028 without a matching rise in demand (IEEFA, 2024), the price increase is not going to last long.

However, the EU may also face a political cost. Expectations of price increases and Slovakia’s loss of transit fees could strain the EU unity, as differing energy dependencies risk deepening intra-EU tensions and complicating policy coordination (see, e.g., here and here). This underscores the importance of Europe’s “one voice” energy policy, which has gained momentum in recent years.

Russia faces significant financial and geopolitical losses from the transit halt. Financially, it risks losing approximately $6.5 billion annually in revenue at current prices (Keliauskaitė and Zachmann, 2024) unless flows are redirected. While temporary price increases – for the sales of Russian gas via Turkstream, and Russian LNG exports to Europe, could offset some of these losses – these are not going to last.

The greater impact lies in Russia’s diminished geopolitical leverage. Historically, Russia has used gas as a political tool, leveraging its dominant position and access to multiple pipeline routes to exert influence over transit countries and dependent nations. This influence would now be lost. Further, with the loss of a Ukrainian transit, Russia’s pipeline connection to EU gas markets now relies solely on Turkey, increasing its dependency on Turkey and potentially altering its alliance dynamics due to higher transit costs. Additionally, as Azerbaijani gas emerges as a viable alternative for Europe, Russia’s bargaining power in its geopolitical relations with Azerbaijan is likely to weaken further. This erosion of influence marks a significant shift in Russia’s regional energy strategy.

Long-Term Effects: Increased Dependence on LNG and the Green Transition

The halt of the Russian gas transit is facilitating the implementation of the RePowerEU goal of fully eliminating EU Russian fossil fuels dependency by 2027. However, its long-term effects, particularly on the timing and success of the green transition, warrant attention. Natural gas is widely considered a transitional fuel, essential for maintaining energy reliability in an energy system relying heavily on intermittent renewables. For the green transition to succeed, it is critical to avoid infrastructure lock-ins, displacement of low-carbon technologies, and the creation of stranded assets.

The shift from Russian gas to the LNG market will likely require substantial infrastructure investments in the EU and LNG-producing countries, increasing the risk of long-term dependency. Geopolitical dynamics add further complexity – e.g., the U.S., which supplied 50 percent of Europe’s LNG in 2023, has advocated for long-term purchasing agreements that could delay green technology adoption and extend the EU’s reliance on fossil fuels. This is already a reality as some EU member states having signed long-term gas contracts with Qatar, lasting beyond 2050, which may hinder efforts to accelerate the green transition.

Conclusion

The impact of the gas transit halt varies depending on whether it is seen from a short-, medium-, or long-term perspective. While all parties involved face losses, the impact of the halt on the EU is drastically different from what it could have been a few years ago due to the dramatic efforts undertaken in the last few years. Further, there are also potential benefits to consider. Notably, the EU has the opportunity to play a crucial role in reducing the economic and political burdens on neighboring countries, particularly those seeking EU membership. By offering targeted financial support and promoting deeper cooperation, the EU can help these nations manage the challenges posed by the halt. In turn, the halt will imply not only financial but also geopolitical losses for Russia.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

What decision did Ukraine make regarding Russian pipeline gas transit? How has the EU’s reliance on Russian pipeline gas changed since Russia’s invasion of Ukraine? What are the potential consequences of the EU’s increased reliance on liquefied natural gas (LNG) following the decline in Russian pipeline gas imports? Read the policy brief “Breaking the Link: Costs and Benefits of Halting Russian Pipeline Gas to Europe” to explore the impact of halting Russian pipeline gas transit on Europe, Ukraine, and energy security.

Nobel Laureate Simon Johnson Shares Insights on Strengthening Sanctions Against Russia

Posted on December 17, 2024 | News

Professor Simon Johnson, 2024 Nobel Laureate in Economic Sciences, discussing strategies for strengthening sanctions against Russia during a SITE seminar.

The Stockholm Institute of Transition Economics (SITE) recently hosted a seminar featuring Professor Simon Johnson, the 2024 Nobel Laureate in Economic Sciences. The event centered on strengthening sanctions against Russia and strategies to reduce its capacity to sustain the war in Ukraine. It highlighted the vital role of economic measures in addressing geopolitical conflicts.

During the seminar, Professor Simon Johnson provided actionable insights into improving the effectiveness of sanctions. Specifically, he discussed mechanisms like the oil price cap and their importance in limiting Russia’s economic resources. Furthermore, he emphasized how these measures could strengthen European security while remaining aligned with international law.

Prof. Simon Johnson

Professor Johnson received the 2024 Sveriges Riksbank Prize in Economic Sciences. He is renowned for his research on the influence of political and economic institutions on national prosperity. With expertise in macroeconomic policy, institutional economics, and technology’s role in economic growth, he offers valuable insights. His experience as Chief Economist at the International Monetary Fund informed his recommendations on strengthening sanctions against Russia to counter its aggressive actions effectively.

Maria Perrotta Berlin, SITE’s sanctions project lead, presented the institute’s latest research findings. Her presentation laid the foundation for an engaging Q&A session. Experts from Ukraine and Sweden contributed additional perspectives, sparking a well-rounded discussion on the global implications of strengthening sanctions against Russia.

The seminar attracted policymakers, academics, and industry stakeholders. Together, they examined how economic tools can help address pressing geopolitical challenges. Specifically, the discussions underscored the importance of strengthening sanctions against Russia as a tool for ensuring international stability and peace.

Professor Johnson’s remarks were rooted in years of groundbreaking research and his tenure as Chief Economist at the IMF. He highlighted the interplay between macroeconomic policies, institutional frameworks, and global stability. His analysis reinforced the value of strengthening sanctions against Russia to disrupt its ability to sustain prolonged conflict.

For updates on SITE’s research and future events, visit SITE’s official website.

Further Reading on the State of Russia’s Economy

Read the report on Russia’s economy: A new analysis reveals that Russia’s economy faces mounting financial imbalances due to the ongoing war against Ukraine. The Stockholm Institute of Transition Economics (SITE) found that strengthening sanctions against Russia has placed significant pressure on its fiscal resources. As a result, Russia’s economic stability is expected to deteriorate further in the coming years.

Belarus’s Progressing Economic Dependence on Russia and Its Implications

Posted on October 21, 2024 | Policy Brief

Image showing the border between Belarus and Russia, symbolizing Belarus' economic dependence on Russia.

This policy brief examines the complexities surrounding Belarus’s economy as it deepens its economic dependence on Russia. Recent growth, driven by increased domestic demand and a resurgence in exports to Russia, has surpassed expectations. This trajectory is largely due to Belarus’s mounting dependence on Russia across trade, energy, finance, logistics, and other domains, a dependency that poses significant long-term risks and uncertainties. The Belarusian regime has begun to see this relationship not only as a lifeline but also as a potential source of economic enhancement. However, this approach may blur the lines between sustainable growth and short-term gains, fostering uncertainties about the true nature of this economic uptick. Hence, questions on whether this growth is viable or merely cyclical persist. The uncertainty and progressing dependence on Russia, in turn, imply numerous challenges for the political domain.

New Issues on the Belarusian Economic Agenda

The Belarusian economy continues to surprise, displaying output growth substantially higher than previous forecasts (see e.g. BEROC, 2024). In 2024, the economy is projected to grow by around 4.0 percent. The growth is being driven by domestic demand, fueled by rising real wages and labor shortages. However, an underlying factor is the recent resurgence of exports to Russia. The unexpectedly high growth has allowed for the Belarusian economy to surpass pre-war output levels, at the moment defying earlier predictions of stagnation or decline.

Although the growth period has now extended beyond what could be considered a mere “recovery”, the overall picture – as suggested in Kruk (2024) – still appears relevant. Despite the upturn, the economy remains significantly behind the counterfactual ‘no sanctions, no war’ scenario (see Figure 1).

Figure 1. The Dynamics of Output (seasonally adjusted, index, 2018=100): Actual vs. Counterfactual

Line graph comparing the actual economic output of Belarus with a counterfactual scenario, illustrating the impact of war and sanctions on the country's economic dependence.

Source: Own estimations based on Belstat data. Note: The counterfactual scenario assumes that the Belarusian economy continued to grow uniformly from Q2 2021 to the present, at a sluggish growth rate of 1 percent per annum (a conservative estimate of the potential growth rate before the sanctions were implemented (Kruk & Lvovskiy, 2022)).

Moreover, all the risks to long-term growth associated with total dependence on Russia, potential contagion effects from Russia, etc. are still relevant (KAS, 2024; Bornukova, 2023).

At the same time, a prolonged period of growth gives grounds to think about recent trends also from the perspective of ongoing structural changes in the Belarusian economy. Can these changes, besides implying numerous risks, enhance Belarus’s growth potential and degree of sustainability? If so, to what extent, for how long, and under which conditions? With these questions in mind, it is important to gain a better understanding of what aspects of the Belarusian economy are being transformed due to the increased coupling with Russia and which effects, besides increased dependency and corresponding risks, this coupling generates. Are there any growth-enhancing effects? If so, how sustainable are they?

Belarus’s Growing Economic Dependence on Russia

Belarus’s economic dependence on Russia is reaching unprecedented levels, spanning various critical sectors, with new dimensions of reliance emerging in recent years. This dependence is deeply embedded in the trade, energy, financial, and technological sectors of the Belarusian economy, and recent geopolitical shifts have further intensified these connections.

One of the most evident signs of Belarus’s economic reliance on Russia is reflected in its foreign trade. Russian imports make up around 55-60 percent of all imports to Belarus, with a staggering 80 percent consisting of intermediate goods crucial for industrial production. Energy products, including crude oil and natural gas, form the largest part of these imports, with almost all of Belarus’s energy needs being met by Russia. Exports have also become increasingly concentrated to the Russian market. In 2022-2023 there were several periods when about 70 percent of Belarusian exports were directed to Russia, an increase from about 35-40 percent prior to 2022. This surge was driven by new opportunities for Belarusian firms on the Russian market following Western companies withdrawals. Although competition in the Russian market has since intensified, Russia still accounts for around 60-65 percent of Belarus’s total exports (see Figure 2).

Figure 2. The Evolution of Physical Volume of Exports (2018=100) and the Share of Exports to Russia (in percent)

Graph showing Belarus's exports to Russia and other countries, illustrating the country's growing economic dependence on Russia with a significant increase in the share of exports to Russia post-2022.

Source: Own estimations based on data from the National Bank of Belarus.

A major new development since 2022 is Belarus’s reliance on Russia for transportation and logistics. Sanctions and the war in Ukraine have forced Belarus to abandon its traditional export routes through European ports, leaving Russian seaports as the only viable option for further exports. In 2023, Belarus secured around 14 million tons of port capacity in Russia, primarily for potash fertilizers and oil products exports. Although it is still below the needed volumes, this logistics dependency significantly exacerbates Belarus’s external trade dependency. Taking into account direct exports and imports to and from Russia, as well as mechanisms of logistics and transport control, Russia essentially “controls” up to 90 percent of Belarusian exports and about 80 percent of its imports.

Energy dependency is another critical factor to consider. Belarus imports over 80 percent of its energy resources from Russia, making it vulnerable to any shifts in Russian energy policy. In fact, Russian energy subsidies have played a crucial role in keeping Belarusian industries competitive. In 2022, when global energy prices spiked, the low and fixed price that Belarus paid for Russian gas and the steep discount on oil supplies translated into record-high energy subsidies. These amounted to billions of US dollars and shielded Belarus from the economic fallout other countries experienced due to rising energy prices. Although the value of these subsidies has somewhat decreased in 2023-2024, they remain significant and vital for Belarus.

Belarus’s fiscal situation has also become increasingly tied to Russia. After years of running budget deficits, Belarus achieved a budget surplus in 2023, largely due to Russian financial assistance. For instance, the budgetary item ‘gratuitous revenues’, which mainly includes reverse excise tax and other transfers from Russia, reached a historical high in 2023, securing revenues of around 3.0 percent of GDP. Without this external support, Belarus would likely face a severe fiscal deficit, forcing cuts in social spending and other areas. The scale of Russian financial aid has become a key factor in maintaining budgetary stability, imposing a serious risk for Belarus. Were Russia to restrict such financing, Belarus would almost instantly lose its fiscal stability.

In the monetary sphere, Belarus’s dependence on Russia manifests through the informal peg of the Belarusian ruble to the Russian ruble. Given the deep trade ties and shared currency use in bilateral transactions, Belarusian monetary policy is effectively constrained by Russian economic conditions. The Belarusian National Bank has little room for maneuver, as any nominal devaluation or appreciation of the ruble tends to self-correct through inflation or price adjustments tied to Russian trade. This linkage limits Belarus’s monetary sovereignty and aligns its inflation trajectory closely with Russia’s.

Belarus’s debt structure underscores this dependency further. Of the country’s roughly 17.0 billion US dollars in external debt, about 65 percent is owed directly to Russia or Russia-controlled entities like the Eurasian Fund for Stabilization and Development. In 2022-2023, Russia granted Belarus a six-year deferment on debt repayments, providing crucial breathing room for the regime. This deferment, along with Belarus’s limited access to other international financial sources due to sanctions, has cemented Russia’s role as the primary creditor and financial lifeline for Belarus.

New dimensions of dependence have also emerged within infrastructure, technology, and cyberspace. As Belarus is cut off from Western technologies and financial systems, it increasingly relies on Russian alternatives. Belarus has adopted Russian software for critical functions such as tax administration, giving Moscow access to sensitive financial data. Similarly, with several Belarusian banks disconnected from SWIFT, the country has integrated into Russia’s financial messaging system, further entrenching its reliance on Russian infrastructure. Belarusian companies, particularly in sectors like accounting and logistics, have also shifted to using Russian business software, while consumers increasingly rely on Russian digital platforms for social networks, payments, and entertainment.

An Attempt to Spur Growth Through Coupling with Russia

From the perspective of macroeconomic stability and the traditional view on strengthening growth potential, Belarus’s progressing dependence on Russia is obviously an evil (Kruk, 2023; Kruk, 2024). However, the Belarusian regime sees it as a necessary trade-off, or a “lesser evil”. In 2021-2023, the coupling was done in exchange for economic survival. Firstly, production coupling allowed to counterweight the losses in output associated with sanctions (as niches were freed up in the Russian market) (Kruk & Lvovskiy, 2022). Secondly, the coupling was driven by pressure from Russia and a desire from Belarusian authorities to rapidly obtain some compensations if accepting Russia’s demands. For example, in 2022-2023, Belarusian enterprises were granted a credit line of 105 billion rubles within so-called import-substitution projects.

However, in 2024, coupling with Russia is beginning to look more like a purposeful strategy by the Belarusian economic authorities rather than just a survival strategy. The regime seems willing to sacrifice sustainability considerations in favor of strengthening the growth potential by ‘directive production coupling’, i.e. artificially shaping value-added chains between producers in Belarus (mainly state-owned enterprises) and Russia. For instance, the regime accepted the co-called Union programs for 2024-2026 (Turarbekova, 2024), which encompass numerous activities by the governments of Belarus and Russia aimed at securing ‘production coupling’ in sectors such as machine building, agricultural and automotive engineering, aviation industry, and elevator manufacturing. In some cases, the Belarusian party solely initiates such kind of sectoral activities. It seems that the authorities either accepted the dependency due to the lack of outside options, or they became more optimistic regarding the possibility to spur economic growth through coupling with Russia based on the experiences from the last couple of years. And to some extent, this logic might hold true.

As in the previous two years, the coupling with Russia may, in the short to medium term, more than compensate for certain institutional weaknesses and vulnerabilities in the Belarusian economy. The positive effects may even extend beyond mere cyclical impacts and, under certain conditions, contribute to a semblance of stability for a period of time. For example, economic growth in Belarus could reach some degree of stability under the following conditions:

  • (a) if the war in Ukraine becomes protracted and military demand from Russia remains steady;
  • (b) if the Russian economy continues to grow (albeit modestly) in an environment with limited competition in Russian commodity markets;
  • (c) if specific tools and forms of support for the Belarusian economy remain in place.

Growth driven by a combination of these preconditions could be sufficiently stable as long as they persist. However, the existence of such a status quo is not inherently sustainable and could vanish at any moment. Each of these preconditions is highly unreliable and comes with its own set of determining factors. Thus, one cannot count on the preservation of the entire “package” of preconditions in the long term.

Conclusions

Belarus and its economic prospects are currently in a highly complex situation. The Belarusian economy has been steadily increasing its degree of coupling with Russia, with the ties strengthening both in the range of economic sectors involved and the depth of their integration.

From a long-term growth perspective, the unprecedented level of dependence on Russia is undoubtedly detrimental. In this regard, Kruk’s (2024) conclusion about the economic and political deadlocks remains entirely relevant.

However, as the past two years have shown, this situation can achieve a certain semblance of stability in the medium term. The Belarusian regime is increasingly viewing its coupling with Russia not only as a mechanism for economic survival but also as a means to enhance economic potential. In this way, the growing dependence on Russia, which brings substantial macroeconomic risks, is seen as an unavoidable cost entailed to the only available mechanism to sustain economic growth in Belarus.

How then, should we interpret the related fluctuations in Belarus’s economy? As an increase in economic potential (equilibrium growth rate) or as cyclical acceleration? Traditional economic logic encounters a contradiction here, as the line between equilibrium growth and cyclical fluctuations becomes blurred. An increase in economic potential should inherently be sustainable, whereas cyclical acceleration is inherently transient. Yet, how should we treat a mechanism that might be somewhat sustainable under certain conditions?

This contradiction creates numerous uncertainties, both strictly within the economic domain and beyond it. Economically, it diminishes the effectiveness of conventional macro forecasting tools, making them more dependent on ad-hoc assumptions. For example, if there is indeed an increase in potential, then macroeconomic projections generated without accounting for this channel (e.g. BEROC, 2024) would likely underestimate output growth while overestimating the risks of overheating and destabilization. Conversely, if the model assumes higher equilibrium growth but it proves unsustainable, the forecast could significantly overestimate growth while underestimating macroeconomic imbalances. In other words, the seemingly favorable situation could ultimately be a harbinger of a macroeconomic storm.

These uncertainties are even more pronounced in the political domain. Up to what threshold can an increasing economic dependency on Russia yield macroeconomic gains for the regime? What political consequences can arise if the strategy of coupling with Russia for growth enhancement fails? Can the progressing dependency on Russia undermine the regime politically? If political barriers for democratization are eliminated, what should and can be done to get rid of the dependence on Russia? Are the estimations and prescriptions in Hartwell et al. (2022) – which considers the perspectives of economic reconstruction for a democratic Belarus and the costs of eliminating the dependency on Russia in pre-war reality – still relevant today?

Answering such questions meaningfully using formal research tools ex-ante is nearly impossible. The dependence of macroeconomic sustainability on non-economic factors and motivations leaves little room for an accurate ex-ante diagnosis of the current state of affairs. Only ex-post will we likely be able to reliably assess which diagnosis is closer to the truth. This, in turn, means that we must accept an additional degree of uncertainty in today’s forecasts and projections. Similar challenges are faced by decision-makers in Belarus. As a result, the likelihood of incorrect economic and political decisions due to misdiagnosing the current situation is relatively high, even in the (more optimistic) scenario where the authorities recognize and account for these uncertainties. Such decisions, if made, could not only be costly but might even trigger rapid and drastic economic and political changes.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Russian Economy in the Fog of War | Video

Posted on October 18, 2024 | Videos

A Russian oil tanker docked at an offshore terminal near Sakhalin Island, symbolizing the Russian economy's reliance on oil exports amid sanctions.

Torbjörn Becker, Director of the Stockholm Institute of Transition Economics (SITE) at the Stockholm School of Economics, participated in a seminar to present the report, The Russian Economy in the Fog of War. Commissioned by the National Institute of Economic Research (NIER), this report provides a detailed analysis of Russia’s economic situation amid the ongoing war in Ukraine. It also examines the impact of international sanctions on Russia’s economy.

“We aim to understand the state of the Russian economy using all available analytical tools,” says Torbjörn Becker. “However, we must also adapt to grasp the full scope of the propaganda war surrounding the data provided by Russian institutions.”

Russia’s Pre-War Economy: An Oil-Dependent Powerhouse on a Fragile Foundation

Before Russia’s full-scale invasion of Ukraine, its economy relied heavily on oil and gas exports. These exports accounted for a significant portion of Russia’s GDP. Despite its global political influence, Russia’s economic power was modest, trailing other BRICS nations such as Brazil, India, and China. According to SITE researchers, this reliance on oil prices made Russia vulnerable to global market fluctuations. Moreover, the government strictly controlled economic narratives, shaping public perception through a centralized, politicized economic structure.

The State of the Russian Economy: Official Data vs. Reality

After the invasion, Russia stopped publishing some key economic indicators, only later resuming with limited transparency. Official statistics suggest moderate declines in GDP and rising inflation. However, SITE’s independent analysis suggests that the actual economic impact may be far more severe. Inflation, exchange rates, and GDP growth metrics are likely manipulated to create an optimistic narrative both domestically and internationally.

Economic Sanctions and Their Impact on Russia’s Economic Capabilities

Western sanctions target Russia’s energy exports and restrict essential technology imports. These exports and imports are critical for Russia’s economic survival. As a result, reduced oil and gas revenues have forced Russia to rely on less efficient trade alternatives. This shift further strains its economy. SITE notes that these sanctions contribute to a downward economic trajectory, limiting Russia’s fiscal resources and reducing its capacity to sustain military operations.

Medium- and Long-Term Economic Outlook: Structural Challenges and a Bleak Future

Looking forward, the SITE report warns of long-term challenges for Russia’s economic stability. Structural issues—like reduced foreign investment, a shrinking labor force, and declining productivity—severely affect the country’s growth prospects. Additionally, the exodus of educated youth and business leaders, paired with a growing dependence on military spending, leaves Russia in a precarious position. Declining oil prices, as forecasted, would likely worsen these pressures, weakening government budgets and increasing inflation.

The full report, The Russian Economy in the Fog of War, available on NIER’s website, paints a stark picture of the economic struggles Russia faces today and in the coming years. SITE researchers reveal a path forward for Russia that appears riddled with economic hardship, worsened by ongoing sanctions and an increasingly isolated position in global finance.

More About Torbjörn Becker

Torbjörn Becker has been the Director of the Stockholm Institute of Transition Economics (SITE) at the Stockholm School of Economics (SSE) in Sweden since 2006 and is a board member of several economics research institutes in Eastern Europe.

Read more policy briefs authored by Torbjörn Becker on the FREE Network website.

Moldova’s EU Integration and the Special Case of Transnistria

Posted on October 14, 2024 | Policy Brief

Flags of Moldova and the European Union at a diplomatic meeting, symbolizing Moldova's EU integration efforts.

In the shadow of Russia’s invasion of Ukraine, another East European country is actively working to secure its European future. After three years of negotiating cooperation agreements with the European Commission, Moldova finally obtained its EU candidate status and is now on track to join the EU as a member state. However, among many remaining obstacles on the path to full membership, one stands out as especially problematic: the region of Transnistria. The region, officially Pridnestrovian Moldovan Republic, is an internationally unrecognized country and is rather seen as a region with which Russia has “special relations”, including a military presence in the region since 1992. This policy brief provides an overview of the current state of the Transnistrian economy and its relationships with Moldova, the EU, and Russia, arguing that Transnistria’s economy is de facto already integrated into the Moldovan and EU economies. It also points to the key challenges to resolve for a successful integration of Moldova into the EU.

Moldova’s EU Integration: The Moldovan Economy on its Path to EU Accession

On December 14th, 2023, the European Council decided to open accession negotiations with Moldova, recognizing Moldova’s substantial progress when it comes to anti-corruption and de-oligarchisation reforms. The first intergovernmental conference was held on the 25th of June 2024, officially launching accession negotiations (European Council, 2024). On October 20th, 2024, Moldova will hold a referendum on enshrining Moldova’s EU ambitions in the constitution. However, several issues remain to be solved, for Moldova to enter the EU.

With a small and declining population of only about 2.5 million people and a GDP of 16.54 billion US dollars (2023), Moldova remains among the poorest countries in Eastern Europe. In 2023 the GDP per capita was 6600 US dollars in exchange rate terms (substantially higher if using PPP-adjusted measures; World Bank, 2024a). In the last decade, the largest share of its GDP, about 60 percent, stemmed from activities in the services sector, and about 20 and 10 percent from the industrial and agricultural sectors, respectively (Statista, 2024). Despite substantial economic growth in the last decade (3.3 percent on average between 2016 and 2021) and recent reforms (largely under the presidency of Maia Sandu), Moldova remains highly dependent on financial assistance from abroad and remittances, the latter contributing to about 15 – 35 percent of Moldova’s GDP in the last two decades (World Bank, 2024b).

The COVID-19 pandemic and refugee flows caused by Russia’s invasion of Ukraine have only intensified this dependence. Furthermore, these events excavated existing vulnerabilities in the Moldovan economy, such as high inflation and soaring energy and food prices, which depressed households’ disposable incomes and consumption, while war-related uncertainty contributed to weaker investment (World Bank, 2024c).

The Contested Region of Transnistria – Challenge for Moldova’s EU Integration

In addition to Moldova’s economic challenges, the country also faces a particular and unusual problem; it does not fully control its territory. The Transnistrian region in the North-West of the country (at the South-Western border of Ukraine) constitutes about 12 percent of Moldova’s territory. The region has a population of about 350 000 people, mostly Russian-speaking Moldovans, Russians, and Ukrainians.

Following the breakup of the Soviet Union, a movement for self-determination for the Pridnestrovian Moldavian Republic resulted in a self-declaration of its independence on the 2nd of September 1990. More specifically, the alleged suppression of the Russian language and threats of unification between Moldova and Romania were the main stated reasons for the Transnistrian movement for self-determination, which in turn led to the civil armed conflict in 1992 and a following ceasefire agreement (Government of Republic of Moldova, 1992). The main points of the agreement concern the stationing of Russia’s 14th Army in Transnistria, the establishment of a demilitarized security zone, and the removal of restrictions on the movement of people, goods, and services between Moldova and Transnistria. As of 1992, Transnistria is de-facto an entity under “Russia’s effective control” (Roșa, 2021).

Over the years, the interpretations of the conflict have become more controversial, ranging from the local elite’s perspectives to assertions of an entirely artificial conflict fueled by malign Russian influence (Tofilat and Parlicov, 2020).

Notably, the Moldovan government has never officially recognized Transnistria as an occupied territory (see Article 11 of the Moldovan constitution stating “The Republic of Moldova – a Neutral State (1) The Republic of Moldova proclaims its permanent neutrality.  (2) The Republic of Moldova shall not allow the dispersal of foreign military troops on its territory” (Constitute, 2024)).

Furthermore, the European Council’s official recognition of Transnistria as an “occupied territory” on March 15, 2022, underscores the EU’s stance on the matter and highlights Russia’s pivotal role in providing political, economic, and military support to Transnistria (PACE, 2022).

The Transnistrian Economy: Main Indicators and Weaknesses

Despite Russia’s central role in Transnistria, the region’s economy is, in practice, substantially integrated into the Moldovan and EU economies. This fact should be considered at various levels of decision-making when discussing Moldova’s EU accession.

As depicted in Figure 1, economic activity in Transnistria has been quite “stable” in the last decade. GDP per capita has remained around 2000 US dollars, 2,5 times lower than Moldova’s GDP per capita in 2021.

Figure 1. Moldovan and Transnistrian GDP per capita, in thousand USD

Source: Data from World Bank, 2024; Pridnestrovian Republican Bank, 2024a. Note: since 2022 the Pridnestrovian Republican Bank has suspended publishing official statistics on macroeconomic indicators.

However, one must be careful when estimating and interpreting Transnistrian economic indicators in dollar terms. The local currency is the Transnistrian ruble which is not recognized anywhere in the world except in Russia. Its real value is thus highly uncertain as there is no market for this currency. Moreover, only Russian banks are authorized to open accounts and conduct transactions in the currency, demonstrating yet another significant weakness for Transnistria as a potential independent state, particularly given the current global ban on most Russian banks. As such, the official exchange rate for US dollars should be taken with a grain of salt. At the same time, there are no alternative statistics as the Pridnestrovian Republican Bank is the only source for relevant data on Transnistria.

Another distinctive feature of Transnistria is the substantial reliance on remittances from abroad (see Figure 2). In 2021, remittances amounted to 143.7 million US dollars, constituting 15.5 percent of GDP in 2021 (if relying on the official exchange rate for US dollars, as published by the Pridnestrovian Republican Bank).

Figure 2. Remittances to/from Transnistria, in million USD

Source: Data from the Pridnestrovian Republican Bank (2024b). Note: CIS denotes the Commonwealth of Independent States and all other countries.

Figure 2 illustrates a notable trend of increasing dependency on remittances in recent years, particularly on remittances originating from CIS countries, chiefly Russia and Ukraine.

In terms of reliance on Russia, this dependency is not a concern when it comes to Transnistria’s exports. Foreign trade data from recent years indicates that the Transnistrian economy no longer relies on exports to Russia. As seen in Figure 3, the share of exports to Russia has been constantly declining since 2014 and amounted to merely 9.2 percent in 2021. At the same time, exports to the EU, Moldova and Ukraine collectively accounted for about 80 percent in 2021. The primary commodities driving Transnistrian exports were metal products, amounting to 337.3 million US dollars in 2021, followed by electricity supplies at 130.1 million US dollars. Additionally, food products and raw materials contributed 87.6 million US dollars to Transnistrian exports in the same period.

Figure 3. Transnistrian exports by destination countries, in percent

Source: Data from the Pridnestrovian Republican Bank Bulletins (2024c).

These figures highlight the significant integration of the Transnistrian economy into the European market and, to some extent, indicate the strong potential to further align in this direction.

The increase in Transnistria’s exports to the EU in recent years can be largely attributed to the implementation of mandatory registration of Transnistrian enterprises in Moldova in 2006 as a prerequisite for engaging in foreign economic activities (EUBAM, 2017). Consequently, Moldova has exercised full control over Transnistrian exports and partial control over its imports since 2006.

However, Transnistria remains reliant on Russia for its imports, particularly in the energy sector. In contrast to the export structure, Russia’s share in Transnistrian imports was significantly larger in 2021. About 45 percent of the imports originated from Russia in 2021, and mostly constituted of fuel and energy goods (447.0 million US dollars) and metal imports (254.3 million US dollars), quite typical for a transition economy.

Figure 4. Transnistrian imports by origin countries, in percent

Source: Data from the Pridnestrovian Republican Bank Bulletins (2024c).

Transnistria’s Energy Dependence on Russia

The biggest challenge for Transnistria, as well as for Moldova, is the large fuel and energy dependence on Russia, mostly in the form of natural gas.

For many years, gas has been supplied to Transnistria effectively for free, often in the form of a so-called “gas subsidy” (Roșa, 2021).  This gas flows through Transnistria to Moldova, effectively accumulating a gas debt. Typically, Gazprom supplies gas to Moldovagaz, which in turn distributes gas to Moldovan consumers and to Tiraspol-Transgaz in Transnistria. Tiraspol-Transgaz then resell the gas at subsidized tariffs to local Transnistrian households and businesses. This included providing gas to the Moldovan State Regional Power Station, also known as MGRES – the largest power plant in Moldova. MGRES, in turn, exports electricity, further highlighting the interconnectedness of energy distribution between the Transnistrian region and the rest of Moldova.

Figure 5. Export/import of fuel and energy products from/to Transnistria, in million USD

Source: Data from the Pridnestrovian Republican Bank Bulletins (2024c). Note: Data for 2017 and 2018 unavailable.

The revenue generated from energy exports to Moldova has been deposited into a so-called special gas account and subsequently channeled directly into the Transnistrian budget in the form of loans from Tiraspol-Transgaz. In this way the Transnistrian government has covered more than 30 percent of their total budgetary expenditures over the last ten-year period. This further points to Transnistria’s’ fiscal inefficiencies and highlights its precarious dependency on gas from the Russian Federation.

In the last few years there have however been repeated disruptions in the gas supply and continuous disputes about prices and how much Moldovagaz owes Gazprom. De jure Tiraspol-Transgaz operates as a subsidiary of Moldovagaz, but de facto its assets were effectively nationalized by the separatist authorities in Transnistria (Tofilat and Parlicov, 2020). These unclarities has led to multiple conflicts over who owes the built-up gas debt. Given the ownership structure the debt is often seen as “Moldovan debt to Russia” (see e.g., Miller, 2023), albeit created by Transnistrian authorities. According to Gazprom, the outstanding amount owed by Moldovagaz to Gazprom stood at approximately 8 billion USD at the end of 2019 (Gazprom, 2024). This corresponds to about 7 times of Transnistria’s GDP. The Moldavian assessment of the debt is about two orders of magnitude lower  (Gotev, 2023).

The disagreement on the debt amount was the official reason for the gas supply to be drastically reduced in October 2022. From December 2022 to March 2023, Russia’s Gazprom supplied gas only to Transnistria and it was not until March 2023 that supplies to the rest of Moldova were resumed. Since then, there have been shifts back and forth with Moldova mainly buying gas from Moldovan state-owned Energocom, which imports gas from suppliers other than Gazprom (Całus, 2023; Tanas, 2023). Understanding all turns and events is at times challenging due to lack of transparency in dealings.

Currently, despite Gazprom’s debt claims, the entirety of Transnistria’s gas is still being provided by Russia. While this is a relatively “cheap” investment from the Russian perspective, its impact on Moldova is large, as highlighted by Tofilat and Parlicov (2020) “the bottomline costs for Russia with maintaining Transnistria as its main instrument of influence in Moldova was at most USD 1 billion—not too expensive for twenty-seven years of influence in a European country of 3 million people”.

Corruption in Transnistria – Who is the Real “Sheriff”?

Another obstacle hindering a resolution of the Transnistrian conflict is the near complete monopoly of political and economic power held by Transnistria’s former President Igor Smirnov (1991-2011), through his strong ties to the Sheriff corporation. The corporation, established in 1993 by two former members of Transnistria’s “special services” (Ilya Kazmaly and Victor Gushan), was enabled by Transnistria’s former president, Igor Smirnov. For instance, the Sheriff company was exempt from paying customs duties and was permitted to monopolize trade, oil, and telecommunications in Transnistria. In return, the company supported Smirnov’s party during his presidency. For more on the conflict between Transnistria’s power clans and their relationships with Russia, see Hedenskog and Roine (2009) and Wesolowsky (2021).

The Sheriff company encompasses supermarkets, gas stations, construction firms, hotels, a mobile phone network, bakeries, a distillery, and a mini media empire comprising radio and TV stations. Presently, the company is reported to exert control over approximately 60 percent of the region’s economy (Wesolowsky, 2021).

A straightforward illustration of Sheriff’s political influence is the establishment of the Sheriff football team. For the team, Victor Gushan constructed the Sheriff sports complex, the largest football stadium in Moldova, accommodating
12 746 spectators. This investment in sports infrastructure is notable, especially considering that the total population of Transnistria is only approximately 350 000, and that the region is fairy poor. A similar example concerns the allocation of a land plot of 6.4 hectares to the company “to expand the construction of sports complex for long-term use under a simplified privatization procedure” signed directly by the former president.

While these details may seem peripheral to broader problems, they illustrate how some vested interests in the Transnistrian region may not be keen to change towards a society based on the rule-of-law, increased transparency and a market-oriented economy.

Moldova’s Options for Resolving the Transnistrian Conflict in EU Integration

As Moldova grapples with both the consequences of the ongoing conflict in Ukraine and the prolonged “frozen” conflict with Transnistria, its economy remains vulnerable. With the recent attainment of EU candidate status, it’s essential for the Moldovan government to map out ways to solve the conflict despite strong interest from powerful political and economic groups in preserving the status quo.

While the perspectives of resolving the Transnistrian conflict obviously hinge on Russian troops withdrawing from the region, Moldova would also need to address a wide range of economic issues. The Transnistrian economy faces numerous critical structural challenges including a persistent negative foreign trade balance, an unsustainable banking system, and pervasive corruption. Notably, the dominant oligarchic entity, the Sheriff company, exercises monopolistic political and economic influence, striving to preserve the status quo for Transnistria. The obvious unviability of the local currency due to its artificial nature and a complete dependency on Russia’s banking system are additional challenges to be solved for Moldova to be able to integrate Transnistria properly into its economy. Therefore, introducing additional measures such as restricting access to remittances in Transnistria, and imposing personal sanctions on elite groups could help Moldova in establishing economic control over the region.

Furthermore, while the Transnistrian region de-facto has strong economic ties with the Moldovan and European markets in terms of exports, its heavy reliance on Russian gas imports remains a significant vulnerability.

When integrating Transnistria and severing its ties with Russia, Moldova would also need to resolve the issues arising from its reliance on the electricity produced at MGRES using subsidized Russian gas. Natural gas bought at market prices would make Moldovan electricity highly costly, presenting financial challenges to Moldova, and effectively destroying the competitive advantage and important source of revenue in the Transnistrian region. Moreover, alternative electricity routes to Moldova are yet to be completed (with an estimated cost of approximately 27 million EUR).

These and other issues need to be dealt with for a successful Moldovan transition into the EU. Although these challenges are highly important from a Moldovan point of view, and even more so from a Transnistrian perspective, it should be emphasized that these issues are, in economic terms, relatively small for the EU. Given that the EU has opened the way for Moldovan accession, it should be ready to step up financially to help Moldova solve these issues and stay on the membership path.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

The Russian Economy in the Fog of War | New Report

Posted on October 3, 2024 | News

A toy tank on crumpled Russian rubles, symbolizing the impact of war on the Russian economy.

A new report highlights the growing instability of the Russian economy as it grapples with the effects of war and sanctions. Official figures on inflation and GDP growth present an overly optimistic picture, according to the Stockholm Institute of Transition Economics (SITE). The report reveals that Russia’s fiscal resources are under severe strain, threatening its economic future.

Economic Instability in the Russian War Economy

Russia’s war in Ukraine has caused unprecedented challenges for its economy. The report shows that Russia’s heavy reliance on oil exports remains a double-edged sword. International oil prices continue to dictate economic performance, but sanctions and declining demand have strained this vital revenue stream. This has deepened the instability in the Russian war economy.

Sanctions have blocked Russia from Western markets, forcing it to use costly and inefficient trade routes through China and other “friendly” nations. As a result, costs have surged and profits have shrunk, further destabilizing the economy.

Key Research Findings

  • Official statistics likely understate the real inflation rate and overestimate GDP growth.
  • Russia’s financial reserves, vital for war spending, may be depleted within a year, raising economic risks.
  • Fiscal policies are unsustainable, with rising public spending at odds with monetary tightening.
  • Sanctions are undermining long-term economic growth, especially in the energy sector.

Sanctions and Long-term Risks for the Russian War Economy

The report explains how international sanctions are driving the Russian economy toward long-term decline. Sanctions are not only limiting financial resources but also cutting off access to key technology and raising trade costs. This erosion of Russia’s industrial base, coupled with heavy war spending, has reduced investment in critical infrastructure and innovation. The future of the Russian war economy looks bleak, with the risks continuing to grow as the conflict drags on.

Read the Full Report “The Russian Economy in the Fog of War”

For a comprehensive understanding of Russia’s economic challenges in the context of war, read the full report by the Stockholm Institute of Transition Economics (SITE). Access the complete report on the Institute’s website.

About SITE

SITE was set up as a research institute at the Stockholm School of Economics (SSE) in 1989 with the mandate of studying developments in the Soviet Union and Eastern Europe. Today, SITE is a leading research-based policy institute on these issues. SITE has also built a network of research institutes in the region (FREE Network) that includes the Kyiv School of Economics (KSE). KSE not only provides a premier economics education to future leaders in Ukraine but is also involved in the analysis of the Ukrainian, as well as the Russian, economy, including analysis of the role of sanctions in limiting Russia’s destructive capacity. KSE has been an important contributor of the data and analysis that underlies this report. For more information, visit SITE’s homepage.

To read more policy briefs published by SITE’s experts, visit the Institute’s page on the FREE Network’s website.

Disclaimer: The opinions expressed in policy briefs, news posts, and other publications are those of the authors and do not necessarily reflect the views of the FREE Network and its research institutes.

Russia in Africa: What the Literature Reveals and Why It Matters

Posted on September 23, 2024 | Policy Brief

Industrial oil factory in Africa symbolizing Russia’s influence on Africa's resources and economy.

Following the full-scale invasion of Ukraine in February 2022, Russia has become increasingly isolated. In an attempt to counter Western powers’ efforts to suppress its economy and soft power impacts, Russia has tried to increase its influence in other parts of the world. In particular, Russia is increasingly active in Africa, having become a key partner to several African regimes, typically operating in areas with weak institutions and governments. Additionally, Russia’s approach has a different focus and objectives compared to other foreign actors, which may have both short and long term consequences for the continent’s development. Deepening our understanding of Russia’s distinct approach alongside those of other global actors, as well as the future implications of their involvement on the continent is, thus, of crucial importance.

Introduction

The new Foreign Policy Concept, adopted by the Russian government in March 2023, dedicates, for the first time, a separate section to Africa. The previous versions of the policy grouped North Africa with the Middle East and contained only a single paragraph, kept unchanged over time, about Sub-Saharan Africa. In the midst of its war against Ukraine, Russia is getting serious about Africa. What do we know about the reasons for and implications of this trend?

A relatively large literature in economics, political science, international relations, and other related fields has dealt with the Soviet Union’s engagement with African regimes (see overviews in Morris, 1973 and Ramani, 2023). However, the number of studies following the evolution of these relations since the collapse of the Soviet Union is significantly smaller, reflecting Russia’s strategic withdrawal from the region between 1990 and 2015. Following the full-scale invasion of Ukraine, Russia’s increased interest in and engagement on the African continent has been increasingly discussed by security analysts and think tanks (see for instance Siegel, 2021; Stanyard, Vircoulon and Rademeyer, 2023; Jones, et al., 2021). Primarily highlighted are Russia’s interest in mineral deposits, its large-scale arms’ exports to African regimes, its dominance on the nuclear energy market with resulting dependency on Russian nuclear fuels, and its ambition to undermine Western capacities by the spread of Russian propaganda and anti-Western sentiments (Lindén, 2023). Each of these dimensions carries potentially profound and far-reaching implications for the continent’s development, as underscored by various strands of literature. Research contributions on this specific new trend are however still very limited and predominantly of a qualitative and exploratory nature.

There is, however, substantial general knowledge about the various forms that foreign interests can take, including trade, investment, development aid, propaganda, election interference, and involvement in conflicts, and their potential consequences for development. This brief presents an overview of selected literature that most closely relates to foreign influence in Africa.

Background: Theories of Foreign Policy

Two contrasting approaches are used to describe the way countries engage with the international community. The first one is the so-called realist perspective, which emphasizes the role of power, national interests, and security in shaping foreign policy (Mearsheimer, 1995). In this model, countries act in their self-interest, and often in competition or even conflict with other countries. Strategic alliances and a willingness to use force to advance one’s interests are contemplated under this perspective. The second approach is the idealist perspective, in which foreign policy is used to promote democratic values, human rights, and international cooperation, prioritizing tools such as diplomacy, international law, and multilateral institutions (Lancaster, 2008). For countries at the receiving end of major powers’ foreign policy agendas, and particularly for developing countries, the implications from the contrasting approaches will be widely different. While even a realist foreign policy may ostensibly incorporate concerns about the welfare and development of its allies, these are often not more than a thin disguise for the ultimate objective of buying political support and commercial advantages. A genuine interest in the welfare and development of receiving partners only finds a place under the idealist perspective, although even idealism is at times claimed to “greenwash” state actors’ own interests (Delmas and Burbano, 2011). While this claim has some substance to it, such accusations can also stem from the anti-western rhetoric typically pursued by Russia and aimed at undermining the credibility of actors with good intentions.

In practice, most countries’ foreign policies incorporate elements of both realism and idealism, although the balance between the two may vary. Some countries may have a predominantly realist approach, while others may prioritize idealist goals. Additionally, the same country may shift its approach over time, depending on changing circumstances and priorities. Idealism may be more prominent during periods of stability and prosperity, when countries have the resources and political will to pursue more ambitious foreign policy goals. Realism tends to become more prominent in times of crisis, when countries face serious threats to their national security or economic well-being. Historical examples of the latter are the aftermath of World War II, the Cold War, and even the 2008 global financial crisis (Roberts, 2020).

Comparative Analysis of Foreign Influence

A few studies, recent enough to encompass Russia’s renewed interest in Africa post-2015 but not enough to cover the current day resurgence, explicitly compare the strategy of different actors and their long-term influence. Trunkos (2021) develops a new soft power measure for the time-period 1995–2015, to test the commonly accepted claim in the political science literature that American soft power use has been declining while Russian and Chinese soft power use has been increasing. In the author’s own words, “the findings indicate that surprisingly the US is still using more soft power than Russia and China. The data analysis also reveals that the US is leading in economic soft power actions over China and in military soft power actions over Russia as well.”

Castaneda Dower et al. (2021) take a longer-term perspective and categorize African countries into two blocs one Western-leaning and one pro-Soviet, based on a game-theoretical model of alliances. This categorization aligns well with UN voting patterns during the Cold War, but it does not predict alignment as effectively in the post-Cold War period. The study finds no significant difference in average GDP growth between the two blocs for the period from 1990 to 2016. However, the bloc with Western-like characteristics shows higher levels of inequality and greater reliance on the market economy – as opposed to the planned one. It also has higher human capital, more gender parity (in education), and better democracy scores, but lower infrastructure capital compared to the other bloc.

Another strand of literature has looked into the deep changes that have occurred over time within the global development architecture, highlighting changes in donor and partner motivations after the end of the Cold War (Boschini and Olofsgård, 2007; Frot, Olofsgård and Perrotta Berlin, 2014), through the Arab Spring (Challand, 2014), and more recently under the emergence of new actors, chiefly China (Blair, Marty and Roessler, 2021). Studies in this area aim to highlight what implications the varying ideologies and motivation for cooperation in the donor countries have for countries at the receiving end. Competing aid regimes generate soft power through public diplomacy, often in the form of branding (for instance through putting origin “flags” on aid projects or investments). This type of positive association has been shown to generate ‘positive affect’ toward donors (Andrabi and Das, 2010), and to strengthen recipients’ perceptions of the models of governance and development that such donors promote – liberal democracy, for example, or free market capitalism (Blair, Marty and Roessler, 2021).

Emerging Players on the African Stage

An extensive literature has examined the various facets of established power actors’ presence on the continent, spanning foreign aid, diplomatic relations, and military involvement, revealing significant impacts on local economic development through multiple channels. The United States, along with other former colonial powers and major Western donors, plays a particularly prominent role in this context. Against this background, recent research has increasingly focused on the rise of new actors, and in particular China’s expanding role as a donor and investor in Africa (Bluhm, 2018; Brautigam, 2008; Brazys, Elkink and Kelly, 2017; Dreher et al. 2018). While the consensus is still unclear on whether China’s approach to aid attracts support among African citizens (Lekorwe et al. 2016; Blair, Marty, and Roessler, 2021), recent research also shows that Chinese aid exacerbates corruption and undermines collective bargaining in recipient countries (Isaksson and Kotsadam 2018a; 2018b).

As mentioned, there are as yet very few recent articles concerned with the reasons for Russia’s renewed interest in Africa (see Marten, 2019; Akinlolu and Ogunnubi, 2021; Ramani, 2023), and even fewer analyzing the potential impacts from it. One working paper, not citable due to the authors’ wishes, has quantitatively mapped and explicitly analyzed the impact of Russian military presence (in particular, of the Wagner Group) in Africa. The study found that the infamous paramilitary group faces fewer repercussions for human rights violations and commits more lethal actions than the state actors that employ them. In another recent study on the Central African Republic (CAR), Gang et al. (2023) found not only mortality levels in CAR to be four times higher than what estimated by the UN but also that Wagner mercenaries have contributed to “increased difficulties of survival” for the population in affected areas. Pardyak, M. (2022) explores the communication strategies employed by the key actors in the war, specifically focusing on how these strategies are received in African societies. Based on the analysis of over 140 media articles published in several African countries up to 15 October 2022, complemented by street surveys in Cairo, and in-depth interviews with Egyptians and Sudanese migrants, the study concludes that Russia’s multipolar perspective on the international order is more widely supported in Africa than Western strategies.

When viewed in a historical context, however, Russia’s actions reflect a longstanding adherence to a realist approach in its foreign policy endeavors. Throughout its trajectory, Russia has consistently prioritized national security and economic interests, frequently leveraging military and economic means to safeguard these interests (Tsygankov and Tsygankov, 2010). Presently, amid mounting pressures from the Western democratic world following the full-scale invasion of Ukraine in February 2022, Russia finds itself increasingly reliant on a realist approach. While the Chinese engagement in Africa is also characterized by realist principles, it’s important to emphasize that the Russian approach diverges from that of China. China is focused on a long-term presence, infrastructure building and investments. It has no interest in democracy and human rights, is efficient and cheap though not always loved (Isaksson and Kotsadam, 2018b). Russia’s interest is more short term and opportunistic, seeking out countries rich in natural resources with unstable governments and weak institutions, such as Libya, Sudan, Mozambique, the Central African Republic, Mali, Burkina Faso and Madagascar. Russia typically targets undemocratic elites or military juntas, offering political support, military equipment sales, and security cooperation (in particular through the Wagner Group) in exchange for access to natural resources, concession rights and influence. State of the art research on a previous period (Berman et al., 2017, spanning 1997 to 2010), although not exclusively focused on Russia, finds that rents from mineral contracts, captured by swings in global mineral prices for a causal interpretation, lead to a higher likelihood of local conflicts, and furthermore that the control of mining areas by rebel groups can escalate violence beyond the local level.

Russia is pursuing a range of strategic goals that include diplomatic legitimization, media influence, military presence, elite influence, arms export, and shaping voting patterns in international organizations (Lindén, 2023). Like China, Russia is uninterested in democracy or human rights. Moreover, what Russia stands for is in stark contrast to the Western model. Russia embodies autocracy and backward revisionist values (for instance in areas such as attitudes to gender equality and the sustainability agenda) while the West generally promotes democracy and progressive inclusive solutions (Lindén, 2023). What also especially characterizes Russia is the particular attraction towards the presence of anti-West sentiment, which it fuels through populistic anti-colonial disinformation and propaganda. This approach has been criticized for potentially weakening democratic norms and sidelining African agency (Akinlolu and Ogunnubi, 2021). Additionally, Russia’s disregard for the socio-political realities in Africa, typically associated with a self-interested realist approach, can lead to ineffective engagement and unintended negative consequences, undermining the long-term sustainability of both social and economic developments in the region.

Conclusion

Many African countries find themselves in a delicate balancing act, as they cannot afford to push away Russia nor displease their historical Western partners. This attempt to balance between actors poses several risks and potentially detrimental consequences, including reduced development cooperation, slower democratization, limited progress on human rights, and increased conflicts. Additionally, Russia’s growing presence in Africa can have implications for the interests and policies of the European Union (EU) and its member states as well as global actors, including impacts on migration, terrorism, the energy sector as well as on trade and aid flows.

In light of the diverse strategies foreign powers use in their relations with African countries and the significant impact these strategies have, it is crucial to deepen our understanding of foreign engagements in Africa. By examining Russia’s distinct approach alongside those of other global actors, we can gain valuable insights into the complex dynamics shaping the continent’s political, economic, and social landscape, both now and in the future. Expanding research in this area is not only desirable but essential for informing policy and development strategies.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Russia’s Shadow Fleet: Sanctions Needed on Core Tankers, KSE Institute Urges

Posted on August 13, 2024 | News

Rusty oil tanker fleet drifting in foggy ocean at dusk, illustrating the shadow fleet of Russia evading sanctions.

A new analysis by the KSE Institute reveals details about Russia’s shadow fleet and urges immediate action. The report, titled “The Core of Russia’s Shadow Fleet: Identifying Targets for Future Tanker Designations,” uncovers 86 tankers evading sanctions. These tankers allow Russia to continue oil exports despite the G7 price cap.

Key Insights into Russia’s Core Shadow Fleet

From January 2023 to June 2024, 307 shadow tankers in the Russia shadow fleet carried Russian crude oil. During the same period, 432 tankers from the fleet transported Russian oil products across various regions. Of these, 45 crude oil tankers and 41 oil product tankers are core parts of the fleet. However, only eight core vessels from the Russia shadow fleet have been sanctioned by the US, EU, or UK. As a result, many critical Russian tankers still operate undetected, evading current sanctions. Although 64 shadow fleet vessels were sanctioned since the fall of 2023, much of the fleet remains active.

UAE and Turkey Fuel Shadow Fleet Growth

The report highlights how UAE and Turkish companies are central to Russia’s shadow fleet operations. UAE-based Stream Ship Management Fzco manages 28 of the 45 core crude oil tankers. Turkish firms oversee a large share of the core oil product fleet. Frequent changes in vessel management after sanctions make enforcement more difficult, allowing operations to continue under new entities.

Strengthening Sanctions on Core Vessels

The KSE Institute urges governments to apply more pressure by targeting additional shadow fleet vessels. Sanctioning the remaining 45 crude oil and 41 oil product tankers from the core fleet would severely impact Russia’s ability to export oil. This would force reliance on mainstream tankers that are subject to the price cap, tightening existing sanctions.

Conclusion: Immediate Action Needed

Russia’s shadow fleet continues to grow, supported by entities in the UAE and Turkey. Current sanctions are weakening, and the KSE Institute calls for the urgent designation of the core vessels identified in its report. This would strengthen sanctions and reduce Russia’s capacity to fund its war in Ukraine.

Additional Resources

We invite you to view the full KSE Institute report, now available on the KSE Institute website. Additionally, if you wish to explore more policy briefs published by the KSE Institute, you can do so by visiting the Institute’s page on the FREE Network’s website.

Disclaimer: The opinions expressed in policy briefs, news posts, and other publications are those of the authors and do not necessarily reflect the views of the FREE Network and its research institutes.

Navigating Market Exits: Companies’ Responses to the Russian Invasion of Ukraine

Posted on May 20, 2024 | Policy Brief

20240519 Navigating Market Exits Image 02

Russia’s invasion of Ukraine on 24 February 2022 led to widespread international condemnation. As governments imposed sanctions on Russian businesses and individuals tied to the war, international companies doing business in Russia came under increasing pressure to withdraw from Russia voluntarily. In the first part of this policy brief, we show what kind of companies decided to leave the Russian market using data collected by the LeaveRussia project. In the second part, we focus on prominent Swedish businesses which announced a withdrawal from Russia, but whose products were later found available in the country by investigative journalists from Dagens Nyheter (DN). We collect the stock prices for these companies when available and show how investors respond to these news.

Business Withdrawal from Russia

The global economy is highly interconnected, and Russia forms an important part. Prior to the invasion, Russia ranked 13th in the world in terms of global goods exports value and 22nd in terms of imports (Schwarzenberg, 2023). In the months following the full-scale invasion of Ukraine, Russia’s imports dropped sharply (about 50 percent according to Sonnenfeld et al., 2022). Before February 24th, Russia’s main trading partners were China, the European Union (in particular, Germany and the Netherlands) and Belarus (as illustrated in Figure 1). While there is some evidence of Russia shifting away from Western countries and towards China following the annexation of Crimea in 2014 and the resulting sanctions, Western democracies still made up about 60 percent of Russia’s trade  in 2020 (Schwarzenberg, 2023). In the same year, Sweden’s exports to Russia accounted for 1.4 percent of Sweden’s total goods exports, of which 59 percent were in the machinery, transportation and telecommunications sectors. 1.3 percent of Swedish imports were from Russia (Stockholms Handelskammare, 2022).

Figure 1. Changes in trade with Russia, 2013-2020.

Source: IMF Direction of Trade Statistics, data until 2020. From Lehne (2022).

In response to Russia’s invasion of Ukraine in February 2024, Western governments imposed strict trade and financial sanctions on Russian businesses and individuals involved in the war (see S&P Global, 2024). These sanctions are designed to hamper Russia’s war effort by reducing its ability to fight and finance the war. The sanctions make it illegal for, e.g., European companies to sell certain products to Russia as well as to import select Russian goods (Council of the European Union, 2024). Even though sanctions do not cover all trade with Russia, many foreign businesses have been pressured to pull out of Russia in an act of solidarity. The decision by these businesses to leave is voluntary and could reflect their concerns over possible consumer backlash. It is not uncommon for consumers to put pressure on businesses in times of geopolitical conflict. For instance, Pandya and Venkatesan (2016) find that U.S. consumers were less likely to buy French-sounding products when the relationship between both countries deteriorated.

The LeaveRussia Project

The LeaveRussia project, from the Kyiv School of Economics Institute (KSE Institute), systematically tracks foreign companies’ responses to the Russian invasion. The database covers a selection of companies that have either made statements regarding their operations in Russia, and/or are a large global player (“major companies and world-famous brands”), and/or have been mentioned in relation to leaving/waiting/withdrawing from Russia in major media outlets such as Reuters, Bloomberg, Financial times etc. (LeaveRussia, 2024). As of April 5th, 2024, the list contains 3342 firms, the companies’ decision to leave, exit or remain in the Russian market, the date of their announced action, and company details such as revenue, industry etc. The following chart uses publicly available data from the LeaveRussia project to illustrate patterns in business withdrawals from Russia following the invasion of Ukraine.

Figure 2a shows the number of foreign companies in Russia in the LeaveRussia dataset by their country of headquarters. Figure 2b shows the share of these companies that have announced a withdrawal from Russia by April 2024, by their country of headquarters.

Figure 2a. Total number of companies by country.

Figure 2b. Share of withdrawals, by country.

Source: Authors’ compilation based on data from the LeaveRussia project and global administrative zone boundaries from Runfola et al. (2020).

Some countries (e.g. Canada, the US and the UK) that had a large presence in Russia prior to the war have also seen a large number of withdrawals following the invasion. Other European countries, however, have seen only a modest share of withdrawals (for instance, Italy, Austria, the Netherlands and Slovakia). Companies headquartered in countries that have not imposed any sanctions on Russia following the invasion, such as Belarus, China, India, Iran etc., show no signs of withdrawing from the Russian market. In fact, the share of companies considered by the KSE to be “digging in” (i.e., companies that either declared they’d remain in Russia or who did not announce a withdrawal or downscaling as of 31st of March 2024) is 75 percent for more than 25 countries, including not only the aforementioned, but also countries such as Argentina, Moldova, Serbia and Turkey.

Withdrawal Determinants

The decision for companies to exit the market may range from consumer pressure to act in solidarity with Ukraine, to companies’ perceived risk from operating on the Russian market (Kiesel and Kolaric, 2023). Out of the 3342 companies in the LeaveRussia project’s database, about 42 percent have, as of April 5th, 2024, exited or stated an intention to exit the Russian market. This number increases only slightly to 49 percent when considering only companies headquartered in democratic (an Economist Intelligence Unit Democracy Index score of 7 or higher) countries within the EU. Figure 3 shows the number of companies that announced their exit from the Russian market, by month. A clear majority of companies announce their withdrawal in the first 6 months following the invasion.

Figure 3. Number of foreign companies announcing an exit from the Russian market, 2022-2024.

Source: Authors’ compilation based on data from the LeaveRussia project.

Similarly to the location of companies’ headquarters, the decision to exit the Russian market varies by industry. Figure 4 a depicts the top 15 industries with the highest share of announced withdrawals from the Russian market among industries with at least 10 companies. Most companies with high levels of withdrawals are found in consumer-sensitive industries such as the entertainment sector, tourism and hospitality, advertising etc.

Figure 4a. Top 15 industries in terms of withdrawal shares.

Figure 4b. Bottom 15 industries in terms of withdrawal shares.

Source: Authors’ compilation based on data from the LeaveRussia project.

In contrast, Figure 4b details the industries with the lowest share of companies opting to withdraw from the Russian market. Only around 10 percent of firms in the “Defense” and “Marine Transportation” industries chose to withdraw. Two-thirds of firms within the “Energy, oil and gas” and “Metals and Mining” sectors have chosen to remain in business in Russia following the war in Ukraine.

Several sectors have been identified as crucial in supplying the Russian military with necessary components to sustain their military aggression against Ukraine, mainly electronics, communications, automotives and related categories. We find that many of these sectors are among those with the lowest share of companies withdrawing from Russia. Companies for which Russia constitute a large market share have more to lose from exiting than others. Another reason for not exiting the market relates to the current legal hurdles of corporate withdrawal from Russia (Doherty, 2023). Others may simply not have made public announcements or operate within an industry dominated by smaller companies that are not on the radar of the LeaveRussia project. Nonetheless, Bilousova et al. (2024) detail that products from companies within the sanction’s coalition continue to be found in Russian military equipment destroyed in Ukraine. This is due to insufficient due diligence by companies as well as loopholes in the sanctions regime such as re-exporting via neighboring countries, tampering with declaration forms or challenges in jurisdictional enforcement due to lengthy supply chains, among others. (Olofsgård and Smitt Meyer, 2023).

And Those Who Didn’t Leave After All

The data from the LeaveRussia project details if and when foreign businesses announce that they will leave Russia. However, products from companies that have announced a departure from the Russian market continue to be found in the country, including in military components (Bilousova, 2024). In autumn 2023, investigative journalists from the Swedish newspaper Dagens Nyheter exposed 14 Swedish companies whose goods were found entering Russia, in most cases contrary to the companies’ public claims (Dagens Nyheter, 2023; Tidningen Näringslivet, 2023). For this series of articles, the journalists used data from Russian customs and verified it with information from numerous Swedish companies, covering the time period up until December 2022. This entailed reviewing thousands of export records from Swedish companies either directly to Russia or via neighboring countries such as Armenia, Kazakhstan, and Uzbekistan. All transactions mentioned in the article series have been confirmed with the respective companies, who were also contacted by DN prior to publication (Dagens Nyheter, 2023b). DNs journalists also acted as businessmen, interacting with intermediaries in Kazakhstan and Uzbekistan, exposing re-routing of Swedish goods from a company stated to have cut all exports to Russia in the wake of the invasion (Dagens Nyheter, 2023d).

For Sweden headquartered companies exposed in DN and that are traded on the Swedish Stock Exchange, we collect their stock prices and trading volume. Our data includes information on each stock’s average price, turnover, number of trades by date from around the date of the DN publications as well as the date of each company’s prior public announcement of exiting Russia. Table 1 details the companies who were exposed of doing direct or indirect business with Russia by DN and who had announced an exit from the Russian market previously. In their article series, DN also shows that goods from the following companies entered Russia; AriVislanda, Assa Abloy, Atlas Copco, Getinge, Scania, Securitas Tetra Pak, and Väderstad. Most of the companies exposed by DN operate within industries displaying low withdrawal shares.

Table 1. Select Swedish companies’, time of exit announcement and exposure in Dagens Nyheter and stock names.


Source: The LeaveRussia project, 2023; Dagens Nyheter, 2023b, 2023c, 2023d. Note: The exit statements have been verified through companies’ press statements and/or reports when available. For Epiroc, the claim has been verified via a previous Dagens Nyheter article (Dagens Nyheter, 2023a).

In Figure 5, we show the average stock price and trades-weighted average stock price of the Swedish companies in Table 1 around the time when the companies announced that they are leaving Russia.

Figure 5. Average stock price of companies in Table 1 around Russian exit announcements.

Source: Author’s compilation based on data from Nasdaq Nordic.

There appears to be an immediate increase in stock prices after firms announced their exit from the Russian market. Stock prices, however, reverse their gains over the next couple of days. In general, stock prices are volatile, and we also see similar-sized movements immediately before the announcement. Due to this volatility and the fact that we cannot rule out other shocks impacting these stock prices at the same time, it is difficult to attribute any movements in the stock prices to the firms’ decisions to leave Russia.

The academic evidence on investors’ reactions to firms divesting from Russia is mixed. Using a sample of less than 300 high-profile firms with operations in Russia compiled by researchers at the Yale Chief Executive Leadership Institute, Glambosky and Peterburgsky (2022) find that firms that divest within 10 days after the invasion experience negative returns, but then recover within a two-week period. Companies announcing divesting at a later stage do not experience initial stock price declines. In contrast, Kiesel and Kolaric (2023) use data from the LeaveRussia project to find positive stock price returns to firms’ announcements of leaving Russia, while there appears to be no significant investor reaction to firms’ decisions to stay in Russia.

When considering the effect from DN’s publications, the picture is almost mirrored, with the simple and trades-weighted average stock prices dipping in the days following the negative media exposure before not only recovering, but actually increasing. Similar caveats apply to the interpretation of this chart. In addition, the DN publication occurred shortly after the Hamas attacks on Israel on October 7 and Israel’s subsequent war on Gaza. While conflict and uncertainty typically dampen the stock market, the events in the Middle East initially caused little reaction on the stock market (Sharma, 2023).

Figure 6. Average stock price for companies listed in Table 1 around the time of DN exposure.

Source: Author’s compilation based on data from Nasdaq Nordic.

Discussion

As discussed in Becker et al. (2024), creating incentives and ensuring companies follow suit with the current sanctions’ regime should be a priority if we want to end Russia’s war on Ukraine and undermine its wider geopolitical ambitions. Nevertheless, Bilousova et al. (2024), and Olofsgård and Smitt Meyer (2023), highlight that there is ample evidence of sanctions evasions, including for products that are directly contributing to Russia’s military capacity. Even in countries that have a strong political commitment to the sanctions’ regime, enforcement is weak. For instance, in Sweden, it is not illegal to try and evade sanctions according to the Swedish Chamber of Commerce (2024). There is little coordination between the numerous law enforcement agencies that are responsible for sanction enforcement and there have been very few investigations into sanctions violations.

Absent effective sanctions enforcement and for the many industries not covered by sanctions, can we rely on businesses to put profits second and voluntarily withdraw from Russia? Immediately after the start of Russia’s invasion of Ukraine, as news stories about the brutality of the war proliferated, many international companies did announce that they will be leaving Russia. However, a more systematic look at data collected by the LeaveRussia project and KSE Institute reveals that more than two years into the war, less than half of companies based in Western democracies intend to distance themselves from the Russian market. A closer look at companies who are continuing operations in Russia reveals that they tend to be in sectors that are crucial for the Russian economy and war effort, such as energy, mining, electronics and industrial equipment. Many of these companies are probably seeing the war as a business opportunity and are reluctant to put human lives before their bottom line (Sonnenfeld and Tian, 2022).

Whether companies who announce that they are leaving Russia actually do leave is difficult to independently verify. A series of articles published in a prominent Swedish newspaper (Dagens Nyheter) last autumn revealed that goods from 14 major Swedish firms continue to be available in Russia, despite most of these firms publicly announcing their withdrawal from the country. The companies’ reactions to the exposé were mixed. A few companies, such as Scania and SSAB, have decided to cut all exports to the intermediaries exposed by the undercover journalists (for instance, in Kazakhstan, Uzbekistan and Kyrgyzstan). Other companies stated that they are currently investigating DN’s claims or that the exports exposed in the DN articles were final or delayed orders that were accepted before the company decided to withdraw from Russia. Another company, Trelleborg – a leading company within polymer solutions for a variety of industry purposes – reacted to the DN exposure by backtracking from its earlier commitment to exit the Russian market (Dagens Nyheter 2023b, 2023d). Wider reaction to these revelations was muted. Looking at changes in stock prices for the exposed companies, we find little evidence that investors are punishing companies for not honoring their public commitment to withdraw from Russia.

In an environment, where businesses themselves withdraw at low rates and investors do not shy away from companies contradicting their own claims, the need for stronger enforcement of sanctions seems more pressing than ever.

References

Disclaimer: Opinions expressed in policy briefs and other publications are those of the authors; they do not necessarily reflect those of the FREE Network and its research institutes.

Using the Financial System to Enforce Export Controls

Posted on May 7, 2024 | News

20240507 Russia Export Controls Image 04

Soon after Russia’s full-scale invasion of Ukraine in mid-2022, Russian imports of battlefield goods subject to export controls have sharply risen, reaching levels close to those prior to Russia’s military intervention. This surge, which includes items from Western producers, highlights ongoing challenges in enforcing export controls and preventing the flow of critical components to Russia’s military industry. Imports are facilitated through channels in mainland China, Hong Kong, Turkey, and the United Arab Emirates. Additionally, countries like Armenia, Georgia, Kazakhstan, and the Kyrgyz Republic have also experienced significant increases in imports from EU and coalition countries, likely destined for Russia.

Benjamin Hilgenstock and Anna Vlasyuk from the KSE Institute, and Elina Ribakova and Guntram B. Wolff from Bruegel have written a working paper that explores how battlefield products banned under the existing sanctions regime continue to reach Russia. A significant portion of these goods originates from companies headquartered in sanctioned countries, and they are often routed through third countries with multiple intermediaries involved in the process. Despite efforts to restrict imports, foreign components in Russian weapons primarily come from Western companies, indicating that substitution is not readily achievable.

Learn more about the role of export controls, the challenges of export control implementation, and the financial system’s role in improving export controls in the latest working paper published by the experts from FREE Network sister institute – KSE Institute and Bruegel (see here).