Tag: Russian Aggression

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.

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

Posted on May 20, 2024 | Policy Brief

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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.

Sanctions on Russia: Getting the Facts Right

Posted on March 14, 2024 | Policy Brief

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The important strategic role that sanctions play in the efforts to constrain Russia’s geopolitical ambitions and end its brutal war on Ukraine is often questioned and diminished in the public debate. This policy brief, authored by a collective of experts from various countries, shares insights on the complexities surrounding the use of sanctions against Russia, in light of its illegal aggression towards Ukraine. The aim is to facilitate a public discussion based on facts and reduce the risk that the debate falls prey to the information war.

Sanctions are a pivotal component in the array of strategies deployed to address the threat posed by Russia to the rule-based international order. Contrary to views minimizing their impact, evidence and research suggest that sanctions, particularly those targeting Russian energy exports, have significantly affected Russia’s macroeconomic stability [1,2,3]. Between 2022 and 2023:

  • merchandise exports fell by 28 percent,
  • the trade surplus decreased by 62 percent,
  • and the current account surplus dropped by 79 percent (see the Bank of Russia’s external sector statistics here).

Although 2022 represents an extraordinarily high baseline due to the delayed impacts of energy sanctions, the $190 billion decrease in foreign currency inflows during this time has already made a significant difference for Russia. This amount is equivalent to about two years of Russia’s current military spending, or around 10 percent of Russia’s yearly GDP, depending on the figures. Our estimates suggest that Russia’s losses due to the oil price cap and import embargo alone amount to several percent of its GDP [3,4]. These losses have contributed to the ruble’s continued weakness and have forced Russian authorities to sharply increase interest rates, which will have painful ripple effects throughout the economy in the coming months and years. Furthermore, the international sanctions coalition’s freezing of about $300 billion of the Bank of Russia’s reserves has significantly curtailed the central bank’s ability to manage the Russian economy in this era of war and sanctions.

Sanctions Enforcement

Addressing the enforcement of sanctions, it is crucial to acknowledge the extensive and continuous work undertaken by governments, think tanks, and the private sector to identify and close loopholes that facilitate sanctions evasion. Suggesting that such efforts are futile, often with arguments that lack solid evidence, potentially undermines these contributions, and furthermore provides (perhaps unintended) support to those advocating for a dismantling of the sanctions regime. We do not deny that several key aspects are facing challenges, from the oil price cap to export controls on military and dual-use goods. However, the path forward is to step up efforts and strengthen the implementation and enforcement – not to abandon the strategy altogether. Yes, Russia’s shadow fleet threatens the fundamental mechanism of the oil sanctions and, namely its reliance on Western services [4,5,6]. However, recent actions by the U.S. Treasury Department have shown that the sanctioning coalition can in fact weaken Russia’s ability to work around the energy sanctions. Specifically, the approach to designate (i.e., sanction) individual tankers has effectively removed them from the Russian oil trade. More vessels could be targeted in a similar way to gradually step-up the pressure on Russia [7]. While Russia continues to have access to many products identified as critical for the military industry (for instance semiconductors) [8], it has been shown that Russia pays significant mark-ups for these goods to compensate for the many layers of intermediaries involved in circumvention schemes. Sanctions, even when imperfect, thus still work as trade barriers. In addition to existing efforts and undertakings, companies which help Russia evade export controls can be sanctioned, even when registered in countries outside of the sanctioning coalition. Furthermore, compliance efforts within, and against, western companies, who remain extremely important for Russia, can be stepped up.

The Russian Economy

Many recent newspaper articles have been centered around the theme of Russia’s surprisingly resilient economy. We find these articles to generally be superficial and missing a key point: Russia is transitioning to a war economy, driven by massive and unsustainable public spending. In 2024, military spending is projected to boost Russia’s GDP growth by at least 2.5 percentage points, driven by a planned $100 billion in defense expenditures [9]. However, seeing this for what it is, namely war-spending, raises significant concerns about the sustainability of this growth, as it eats into existing reserves and crowds out investments in areas with a larger long-term growth potential. The massive spending also feeds inflation in consumer prices and wages, in particular as private investment levels are low and the labor market is short on competent labor. This puts pressure on monetary policy causing the central bank to increase interest rates even further, to compensate for the overly stimulating fiscal policy.

Further, it is important to bear in mind that, beyond this stimulus, the Russian economy is characterised by fundamental weaknesses. Russia has for many years dealt with anaemic growth due to low productivity gains and unfavourable demographics. Since the first round of sanctions was imposed on Russia, following its illegal annexation of Crimea in 2014, growth has hovered at around 1 percent per year on average – abysmal for an emerging market with catch-up potential. More recently, current sanctions and war expenditures have made Russia dramatically underperform compared to other oil-exporting countries [10]. Moreover, none of the normal (non-war related) growth fundamentals is likely to improve. Rather, the military aggression and the ensuing sanctions have made things worse. Hundreds of thousands of Russians have been killed or wounded in the war; many more have left the country to either escape the Putin regime or mobilization. Those leaving are often the younger and better educated, worsening the already dire demographic situation, and reinforcing the labor market inefficiencies. Additionally, with the country largely cut off from the world’s most important financial markets, investments in the Russian economy are completely insufficient [11].

As a result, Russia will be increasingly dependent on fossil fuel extraction and exports, a strategy that holds limited promise as considerations related to climate change continue to gain importance. With the loss of the European market, either due to sanctions or Putin’s failed attempt to weaponize gas flows to Europe, Russia finds itself dependent on a limited number of buyers for its oil and gas. Such dependency compels Russia to accept painful discounts and increases its exposure to market risks and price fluctuations [12].

The Cost of Sanctions

Sanctions have not been without costs for the countries imposing them. Nonetheless, the sanctioning countries are in a much better position than Russia. Any sanction strategy is necessarily a tradeoff between maximizing the sanctioned country’s economic loss while minimizing the loss to the sanctioning countries [9], but there are at least two qualifications to bear in mind. The first is that some sanctions imply very low losses – if any – while others may carry limited short term losses but longer term gains. This includes the oil-price cap that allows many importing countries to buy Russian oil at a discount [3], and policies to reduce energy demand, which squeezes Russia’s oil-income [13]. These policies may also initially hurt sanctioning countries, but in the long term facilitate an investment in energy self-sufficiency. Similarly, trade sanctions also imply some protection of one’s own industry, meaning that such sanctions may in fact bring benefits to the sanctioning countries – at least in the short run. The second qualification is that, in cases where sanctions do imply a cost to the sanctioning countries, the question is what cost is reasonable. Russia’s economy is many times smaller than, for instance, the EU’s economy. This gives the EU a strategic advantage akin to that in Texas hold’em poker: going dollar for dollar and euro for euro, Russia is bound to go bankrupt. Currently, Russia allocates a significantly larger portion of its GDP to its war machine than most sanctioning countries spend on their defense. That alone suggests sanctioning countries may want to go beyond dollar for dollar as it is cheaper to stop Russia economically today than on a future battlefield. This points to the bigger question: what would be the future cost of not sanctioning Russia today? Many accredit the weak response from the West to the annexation of Crimea in 2014 as part of the explanation behind Putin’s decision to pursue the current full-scale invasion of Ukraine. Similarly, an unwillingness to bear limited costs today may entail much more substantial costs tomorrow.

When discussing the cost of sanctions, one must also take into account Russia’s counter moves and whether they are credible [14]. Often, they are not [3, 15]. Fear-inducing platitudes, such that China and Russia will reshape the global financial system to insulate themselves from the West’s economic statecraft tools, circulate broadly. We do not deny that these countries are undertaking measures in this direction, but it is much harder to do so in practice than in political speeches. For instance, moving away from the U.S. dollar (and the Euro) in international trade (aside from in bilateral trade relations that are roughly balanced) is highly challenging. In such a trade, conducted without the U.S. dollar, one side of the bargain will end up with a large amount of currency that it does not need and cannot exchange, at scale, for hard currency. As long as a transaction is conducted in U.S. dollar, the U.S. financial system is involved via corresponding accounts, and the threat of secondary sanctions remains powerful. We have seen examples of this in recent months, following President Biden’s executive order on December 22, 2023.

One of Many Tools

Finally, we and other proponents of sanctions do not view them as a panacea, or an alternative to the essential military and financial support that Ukraine requires. Rather, we maintain that sanctions are a critical component of a multi-pronged strategy aimed at halting Putin’s unlawful and aggressive war against Ukraine, a war that threatens not only Ukraine, but peace, liberty, and prosperity across Europe. The necessity for sanctions becomes clear when considering the alternative: a Russian regime with access to $300 billion in the central bank’s reserves, the ability to earn billions more from fossil fuel exports, and to freely acquire advanced Western technology for its military operations against Ukrainian civilians. In fact, the less successful the economic statecraft measures are, the greater the need for military and financial aid to Ukraine becomes, alongside broader indirect costs such as increased defense spending, higher interest rates, and inflation in sanctioning countries. A case in point is the West’s provision of vital – yet expensive – air defense systems to Ukraine, required to counteract Russian missiles and drones, which in turn are enabled by access to Western technology. Abandoning sanctions would only exacerbate this type of challenges.

Conclusion

The discourse on sanctions against Russia necessitates a nuanced understanding of their role within the context of the broader strategy against Russia. It is critical to understand that shallow statements and misinformed opinions become part of the information war, and that the effectiveness of sanctions also depends on all stakeholders’ perceptions about the sanctioning regime’s effectiveness and long run sustainability. Supporting Ukraine in its struggle against the Russian aggression is not a matter of choosing between material support and sanctions; rather, Ukraine’s allies must employ all available tools to ensure Ukraine’s victory. While sanctions alone are not a cure-all, they are indispensable in the concerted effort to support Ukraine and restore peace and stability in the region. The way forward is thus to make the sanctions even more effective and to strengthen the enforcement, not to abandon them.

References

[1] “Russia Chartbook”. KSE Institute, February 2024

[2] “One year of sanctions: Russia’s oil export revenues cut by EUR 34 bn”. Center for Research on Energy and Clean Air, December 2023

[3] “The Price Cap on Russian Oil: A Quantitative Analysis”. Wachtmeister, H., Gars, J. and Spiro, D, July 2023

[4] Spiro, D. Gars, J, and Wachtmeister, H. (2023). “The effects of an EU import and shipping embargo on Russian oil income,” mimeo

[5] “Energy Sanctions: Four Key Steps to Constrain Russia in 2024 and Beyond”. International Working Group on Russian Sanctions & KSE Institute, February 2024

[6] “Tracking the impacts of G7 & EU’s sanctions on Russian oil”. Center for Research on Energy and Clean Air

[7] “Russia Oil Tracker”. KSE Institute, February 2024

[8] “Challenges of Export Controls Enforcement: How Russia Continues to Import Components for Its Military Production”. International Working Group on Russian Sanctions & KSE Institute, January 2024

[9] “Russia Plans Huge Defense Spending Hike in 2024 as War Drags”. Bloomberg, September 2023

[10] “Sanctions and Russia’s War: Limiting Putin’s Capabilities”. U.S. Department of the Treasury, December 2023

[11] “World Investment Report 2023”. UNCTAD

[12] “Russia-China energy relations since 24 February: Consequences and options for Europe”. Swedish Institute of International Affairs, June 2023

[13] Gars, J., Spiro, D. and Wachtmeister, H. (2022). “The effect of European fuel-tax cuts on the oil income of Russia”. Nature Energy, 7(10), pp.989-997

[14] Spiro, D. (2023). “Economic Warfare”. Available at SSRN 4445359

[15] Gars, J., Spiro, D. and Wachtmeister, H., (2023). “Were Russia’s threats of reduced oil exports credible?”. Working paper

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.

Trending? Social Media Attention on Russia’s War in Ukraine

Posted on February 19, 2024 | Policy Brief

20240218 Social Media Attention on Russia Image 01

Russia’s invasion of Ukraine is one of the most important geopolitical events of the 21st century. For almost two years, international news outlets have been covering the war, often providing daily or even hourly updates. But what is the level of public interest and public engagement in countries around the world? When does the war capture an international audience’s attention and what are the events that supplant it? This brief uses data on X (formerly Twitter) trends in 62 countries to address these questions.

The competition for attention is a defining feature of our information landscape. From the relentless stream of social media updates to the myriad of news articles vying for our clicks, individuals are constantly bombarded with information, each competing for a slice of their limited attention. Amidst this cacophony of voices, certain topics rise to the forefront, capturing the collective consciousness and dominating public discourse.

Russia’s war in Ukraine has, for obvious reasons, commanded significant media coverage over the past two years. It has been described as a hybrid war, where conventional military tactics are increasingly combined with non-traditional methods. This includes an information war, fought with narratives to manipulate people’s perceptions, spread falsehoods, or enlist support. To a large extent, this information war has taken place on social media. On the one hand, social media platforms have been used to spread disinformation and propaganda. For example, we’ve seen the spread of false narratives about the causes of the war, the actions of the different parties involved, and the suffering of the Ukrainian people. But on the other hand, social media has also been used to counter this disinformation, with fact-checking initiatives and grassroots efforts to promote accurate information.

This policy brief analyses the prominence of the war in social media discourse. While the content on traditional media outlets provides a snapshot of the supply of information, platforms like X/Twitter offer a unique window into the broader population’s demand for that information and how they evolve over time. Whether or not hashtags related to Russia’s war in Ukraine are trending in a given country, depends not just on the public’s interest in the war relative to other events in the news, but also on the level of interest relative to sport, music, television, and cats. By tracking the prevalence of trending hashtags, we can gain insights into the public’s engagement with Russia’s war in Ukraine, going beyond traditional media narratives and high-level governmental discussions to uncover the conversations and sentiments that shape broader public opinion.

The X/Twitter data suggest that in most countries, social media attention in the Russian war on Ukraine has been short-lived and sporadic. On February 24, 2022, Ukraine-related hashtags were trending in 100 percent of the countries in our dataset. Two weeks later, on March 9, 2022, they were trending in only 3 percent of the countries. We find that geographical proximity to the conflict is a strong predictor of social media interest. Related hashtags trend most frequently in Eastern, Central and Northern Europe. We also document spikes in interest around events that link a country to the war in Ukraine: announcements of military assistance or visits by Ukraine’s President Volodymyr Zelenskyj. Finally, we compare the hashtags trending in NATO countries to those trending in countries that either sided with Russia or abstained from voting in a critical UN resolution and show significant differences between the two groups.

Data and Methodology

The source for our dataset is archive.twitter-trending.com – a website that records trending hashtags on X/Twitter across countries and over time. We scrape this website to collect (i) the five highest volume topics in each country on each day and (ii) the five longest-trending topics in each country on each day (these two categories can overlap). Our sample consists of the 62 countries available on the website and covers the timeframe July 2021 to December 2023. From this, we construct a country-by-day panel dataset with 55,862 observations.

We identify 11 topic categories that collectively account for the overwhelming majority of trending topics related to Russia’s war in Ukraine. These topics and their relative frequency are shown in Figure 1. The three dominant categories are “Ukraine”, “Russia” and ”Putin”. We use Google’s translation software to translate non-English tweets which account for a significant fraction of the dataset.

Figure 1. Frequency of hashtags in 11 category topics.

Note: This chart shows the number of times topics assigned to our 11 war-related categories were among the top five longest trending topics (in orange) or the top five highest volume topics (in blue) in any country on any day in our dataset. The source are data scraped from archive.twitter-trending.com

Figure 1 shows that it is more common for war-related topics to be among the highest volume topics on a given day than among the longest trending topics. This suggests that these topics attract a lot of interest in a narrow timeframe (e.g. when news breaks) but are relatively less likely to remain prominent over a whole day. Despite this difference, we find that the distinction between highest-volume and longest-trending does not affect any of the patterns we observe when comparing across countries or time. For simplicity, the results shown below all use the highest-volume measure.

It is important to acknowledge the limitations of the X/Twitter data. Firstly, the population actively using X/Twitter is not representative of the overall population. Secondly, the composition of users may differ across countries which complicates cross-country comparisons. Trending hashtags provide an indicator of public interest that is informative only because we do not have high frequency, nationally representative surveys that are comparable across countries. Finally, we are only able to observe the top-five hashtags in a country on any given day. In principle, a war-related topic could increase in absolute volume from one day to the next, while still being crowded out of the top five.

Geographic Variation in Attention

Social media attention to the war in Ukraine varies greatly across countries. The map in Figure 2 shows the proportion of days when any hashtag from the considered categories was among the top-five most tweeted, for each country in the database since the start of the war. Interest has, on average, been higher in Europe as well as in Anglo-Saxon countries. In contrast, other regions of the world exhibited less sustained interest, as indicated by the lower frequency of related hashtags among the top-five most tweeted topics.

Figure 2. Prevalence of war-related hashtags.

Note: The map shows the share of days on which war-related hashtags (in our 11 categories) were among the top five highest volume topics on X/Twitter between 24/02/2022 and 18/12/2023. Countries in white are not among the 62 countries in the dataset. The source are data scraped from archive.twitter-trending.com

To some extent, this heterogeneity is explained by distance. Figure 3 plots the frequency of war-related trends against geographical proximity to the conflict zone (represented by the distance from each country’s capital to the city of Kharkiv in eastern Ukraine, a major point of focus during the ongoing war). The relationship is clearly negative, suggesting that physical distance from the crisis reduces the intensity of online discourse and public interest. Unsurprisingly, the number of related trends is highest in countries directly or indirectly involved in the conflict – Ukraine, Russia, and Belarus – as well as in Latvia which borders both Russia and Belarus.

Figure 3. Frequency of war-related hashtags and distance from Kharkiv.

Note: The chart shows the log of the distance from each country’s capital city to the city of Kharkiv in km on the x-axis and the logged frequency of war-related topics among the top five highest volume topics in that country between 24/02/2022 and 18/12/2023 on the y-axis. The source are data scraped from archive.twitter-trending.com

Variation in Attention Over Time

Over the past two years, the war has sustained a relatively high intensity. By contrast, global attention on X/Twitter has been more sporadic, spiking around specific events. This is shown in Figure 4, which plots the day-to-day variation in the number of battle events as recorded by the Armed Conflict Location & Event Data Project (ACLED) (in blue) as well as the share of countries where war-related tweets are trending (in orange). Attention was highest at the time of the invasion in February 2022 and the days of the Wagner Group rebellion in June 2023. Overall, the correlation between twitter trends and conflict intensity is positive but relatively weak.

Figure 4. Frequency of war-related hashtags and intensity of conflict.

Note: The chart shows the number of daily battle events in Ukraine as classified by ACLED on the left axis (in blue) and the share of countries where war-related topics were trending on the respective day on the right axis (in orange). The sources are ACLED’s Ukraine conflict monitor and data scraped from archive.twitter-trending.com

Attention also reacts to other major global events. Figure 5 compares the number of top-five trending hashtags related to the categories of interest in each country on two specific dates: February 24, 2022, the day of Russia’s full-scale invasion of Ukraine, and October 7, 2023, the day of a Hamas terror attack on Israel. On the day of the Russian invasion, the majority of countries in our sample exhibited the highest value. In contrast, on the day of the Hamas attack, related hashtags were trending almost nowhere outside Ukraine and Russia, indicating that global attention and engagement with this new ongoing crisis significantly overshadowed the focus on the situation in Ukraine. This shift in attention demonstrates how breaking news can capture the public’s interest and divert focus from ongoing crises, affecting the level of engagement on social media and potentially influencing the global response and discourse surrounding these events.

Figure 5. Map of prevalence of war-related hashtags on two different dates.

Note: The maps show the share of the top five highest volume topics on twitter related to Russia’s war on Ukraine. The map on the left shows 24/02/2022 – the day of Russia’s invasion. The map on the right shows 07/10/2023 – the day of a Hamas terror attack on Israel. Countries in white are not among the 62 countries in the dataset. The source are data scraped from archive.twitter-trending.com

While some events impact attention globally, others affect the salience of the conflict for a specific country. Figure 6 shows that people pay more attention to the war when there is a tangible connection to their own country. The panel on the left shows that war-related topics were more likely to trend in a country around the days where the country announced an aid package for Ukraine (military, financial or humanitarian). It shows an increasing trend in the preceding days and a peak on the day of the announcement. The panel on the right shows that war-related topics were more likely to trend in a country around the days of a visit from President Zelenskyj. This effect is large in magnitude but only lasts for around three days.

Figure 6. Likelihood of hashtags trending in relation to country-specific event.

Note: The charts show variation in the share of countries where at least one war-related topic was among the top five highest volume topics on days relative to a specific event. In the left chart, day 0 represents the day on which a country’s government announces an aid package for Ukraine. In the right chart, day 0 represents the day on which President Zelenskyj arrived in a country for an official visit. The source for these charts are: (i) the Kiel Institute’s Ukraine Support Tracker (Trebesch et al., 2023), (ii) Wikipedia’s list of official visits by President Zelenskyj and (iii) data scraped from archive.twitter-trending.com

While the events above act as drivers of attention, it is also interesting to consider what causes war-related topics to drop out of the top five trending topics. We distinguish between two reasons why war-related hashtags could stop trending: (i) a loss of interest that results in a reduction in the absolute number of related tweets (ii) the rise of other topics that displace war-related tweets from the top five. Figure 7 focuses on days where war-related topics dropped out and compares the volume of tweets on the last day where they were in the top five, to the threshold they would have had to surpass in order to make the top five on the subsequent day. In cases where the threshold is lower than the previously observed volume of tweets (a ratio of less than 1), the topic would have kept trending had it sustained its volumes, and one can conclude there was an absolute loss of interest. In cases where the ratio is greater than one, it is possible that the topic sustained its previous volume of tweets but was crowded-out by the rise of a new trending topic. Figure 7plots the histogram of this ratio. 73 percent of the cases are in the first category (loss of attention) and 27 percent are in the possible crowding out category. This provides further evidence to suggest that attention to the war on social media is typically fleeting.

Figure 7. Loss of attention vs crowding out.

Note: The sample are country-days where war-related topics were among the top five highest-volume topics but then dropped out of the top five the next day. The chart provides a histogram of the ratio of the threshold for making the top five on the subsequent day to the highest volume of tweets of a war-related topic. Values below 1 (in blue) indicate that the volume was above the next day’s threshold and the topic declined in absolute terms. Values above 1 (in orange) indicate that the volume was below the next day’s threshold. The source are data scraped from archive.twitter-trending.com

We also examine the content of discussions on the first day after war-related hashtags drop out of the top five. The word cloud in Figure 8 suggests that on such days, people primarily discuss entertainment topics like music and football.

Figure 8. Word cloud of hashtags trending on days war-related categories drop out.

Note: The figure provides a word cloud of trending topics on country-days where no war-related topic was among the top five highest volume topics, but at least one war-related topic had been in the top five on the previous day. The source are data scraped from archive.twitter-trending.com

Content and Context of War-Related Discourse

In addition to providing insight into the level of engagement, hashtag analysis can also reveal the content and context of popular discourse surrounding the war. By examining words trending on the same days as those from our 11 categories, we can gain a better understanding of the topics people are discussing and how the conversation varies across different regions. Figure 9 illustrates this through word clouds, showing the language used in NATO countries on the left and in countries that abstained or voted against the United Nations General Assembly Resolution ES-11/1 on the right. This resolution, dated March 2, 2022, condemned the brutal invasion of Ukraine and demanded that Russia immediately withdraw its forces and comply with international law.

This exercise allows us to compare the dominant themes and narratives in these two groups of countries and observe any differences in public perception and discourse regarding the conflict. The prevalence of cryptocurrency and NFT (non-fungible tokens) references in the word cloud on the right is suggestive of how economic interests and alternative financial systems could be relevant for the positions of countries that abstained or voted against the resolution, and how this might affect their involvement or response to the conflict. On the left, words like “NATO”, ”Biden”,  and ”Trump” clearly stand out, suggesting that these topics are central to the discourse on the war in NATO countries. This could indicate a focus on geopolitical alliances, international cooperation, and the role of key political figures in shaping the response to the conflict. Interestingly, “Putin” is very prominent in the left word cloud while “Russia” and “Russian” are more prominent on the right. This could indicate that Putin is seen and discussed as the primary antagonist in NATO countries.

Figure 9. Word cloud of hashtags in NATO countries vs Russia-friendly countries.

Note: These word clouds represent topics that trend on days where at least one war-related topic is trending in the respective country. The cloud on the left shows NATO countries. The cloud on the right shows countries that either abstained or voted against United Nations General Assembly Resolution ES-11/1. The source are data scraped from archive.twitter-trending.com

Conclusion

This brief uses X/Twitter trends as a barometer of public interest in Russia’s war in Ukraine. We show how attention fluctuates over time in response to developments in the conflict, to other breaking news, and to local events that make the conflict salient for a domestic audience. We also provide descriptive evidence on the variation across geographical regions and among different groups of countries. Additionally, we analyse the instance where Ukraine-related topics stop trending and find suggestive evidence that this is typically due to a gradual loss of interest rather than crowding out by new distracting trends.

Public attention and engagement drive policy in democratic countries, and the sustained support of its democratic allies is vital for Ukraine during this critical time. Understanding the patterns and influences of public attention is crucial for developing effective strategies to sustain engagement and support. This can be achieved for example by regularly highlighting the ongoing significance and bearing of Russia’s war against Ukraine, even as other events dominate the headlines. Emphasizing the impact of the conflict on individuals and communities, as well as its broader implications for international relations and global security, can help sustain public interest and engagement.

References

  • ACLED. Ukraine Conflict Monitor. https://acleddata.com/ukraine-conflict-monitor/
  • Trebesch, C., Antezza, A., Bushnell, K., Bomprezzi, P., Dyussimbinov, Y., Frank, A., Frank, P., Franz, L., Kharitonov, I., Kumar, B., Rebinskaya, E., Schade, C., Schramm, S., and Weiser, L. (2023). The Ukraine Support Tracker: Which countries help Ukraine and how? Kiel Working Paper, 2218, 1-75.
  • Twitter Trending Archive. Scraped on ##/12/2023. https://archive.twitter-trending.com/

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.

Ukrainian Refugees: Who Returns and Why?

Posted on January, 2024 | Policy Brief

Image depicting Ukrainian refugees, including a child holding a teddy bear, eagerly awaiting their return to Ukraine

Of the 17 million Ukrainians who have fled the country since the full-scale Russian invasion in spring 2022, over 60 percent have returned to the country. Based on survey data of Ukrainians who were previously abroad but have returned and those who have remained abroad, we look at the factors that impact their respective decisions to return or to stay. We find that having family in Ukraine is an important factor, but so is missing one’s home, a wish for children to study in Ukraine and a desire to participate in the reconstruction of Ukraine. People who emigrated with their spouse, and those who had planned to emigrate prior to the full-scale war, are more likely to stay abroad. We also find that those staying in a host country are highly involved in Ukrainian affairs and argue that the Ukrainian government should consider them a resource rather than lost human capital.

One of the major consequences of the Russian war on Ukraine has been the mass exodus of Ukrainians fleeing the war. As of February 2022, the Ukrainian statistical agency has ceased publishing population data for both technical and security reasons, so the exact number of Ukrainians that have left the country is unknown. However, on the basis of  mirror statistics from other countries, data from international organizations or surveys, it can be estimated that about 17 million people have fled the country since February 2022. Out of those, over 60 percent have returned to Ukraine, while 6 million Ukrainians have remained abroad.

As people are key in the future reconstruction and development of Ukraine, it is of great importance to understand what factors drive people to return (or not to return) to Ukraine. A recent paper (Sologoub, 2024) aims at addressing this question using a representative survey implemented by the Factum Group in July-August 2023. The survey includes 1400 people who, since early 2022, have fled Ukraine.  Half of the respondents had returned to Ukraine at the time of the survey while the other half remained abroad. The first group is from here on referred to as returnees and the latter as refugees.

To look at the factors that determine individual’s decisions to return or stay abroad, the paper specifically considers the factors that impact three probabilities:

  • the probability that a person stays abroad;
  • the probability that a person who stays abroad plans to return (64 percent of the refugees);
  • and the probability that a person who returned plans to stay in Ukraine (56 percent of the returnees).

This policy brief briefly describes the survey data, summarizes the key findings and concludes with policy implications and recommendations.

Main Characteristics of the Survey Respondents

The survey data shows that out of the entire sample of people who have returned to Ukraine and who have remained abroad, over 80 percent are women, and out of these 44 percent emigrated from Ukraine with children. About a quarter of our respondents stay or have stayed in Poland or Germany, 7 percent in the Czech Republic, while other countries have accommodated up to 4 percent of the Ukrainian migrants in our sample. The main reason for emigration is safety – almost half of the respondents reported it being the main reason for leaving Ukraine (see Figure 1).

Figure 1. Stated reasons for migration choices.

Source: Factum Group survey, own calculations. Note: Blue bars are for returnees, orange bars are for refugees (i.e. individuals who have stayed in host country). A dark color denotes the main reason, and a light color denotes other reasons.

Half of the respondents who had a job in Ukraine prior to the war lost their jobs at onset of the full-scale invasion, 18 percent quit their jobs and 30 percent continued to work remotely. 53 percent of the refugees had a job at the time of the survey, and 9 percent of those who remained abroad worked online for a Ukrainian organization. Of those who worked abroad at the time of the survey, 61 percent remained on the same qualification level, while 37 percent changed their qualification level – the majority of those changed to a lower qualification level.

39 percent of all respondents had school-aged children. A quarter of them reported that their children studied only online in Ukrainian schools in 2022/23. Over 60 percent stated that their children studied in a host country, but most of these children took additional classes within the Ukrainian school program – in an online or offline environment, with tutors or on their own.

When asked to compare different aspects of their life abroad and in Ukraine, approximately equal shares of the respondents reported an improvement or a worsening of these aspects. Worsening aspects was mainly reported to concern relations with friends, psychological state, and healthcare. The respondents also stated reasons for their return to Ukraine (or willingness to return), which allowed for estimation of the significance of these reasons. Generally, we found that pull factors (factors attracting people to return to Ukraine) are much more powerful than push factors (factors that force people out of host countries).

Main Results from the Probability Models

Demographic factors (age, education, family status, or income group) are non-significant across all models with the exception of marital status. People who are single are more likely to return to Ukraine, while those who migrated together with their spouse and those who do not have children are more likely to stay abroad.

Significantly positive for the probability that a person had returned at the time of the survey were pull factors such as missing family or home, the wish for children to study in Ukraine, better job opportunities in Ukraine, having property in Ukraine, and returning friends. Some significant push factors were loneliness or integration hardship, as well as feeling humiliated for living on subsidies/state support.

Among respondents who lived abroad at the time of the survey, 64 percent planned to return to Ukraine someday, 13 percent did not plan to return to Ukraine and the rest were undecided. One should however keep in mind that peoples’ intentions can change rather quickly – in the qualitative part of the survey, some respondents explained that their decision to return was spontaneous.

The probability that a person plans to return was lower for people who had planned to emigrate prior to 2022, for people who hadn’t been to Ukraine since they fled, and for people with refugee status (in some countries, people may lose refugee protection status if they exit the host country and travel to Ukraine).

Safety improvements and better job prospects increase the probability that a refugee plans to return, as well as a wish for children to study in Ukraine and a desire to participate in Ukraine’s reconstruction. Over 70 percent of the respondents believe that their experiences from abroad will be useful for the reconstruction and over 50 percent state that the new skills they’ve gained abroad can be applied during the reconstruction of Ukraine.

Significant push factors are lacking integration into the local community and an inferior social life abroad compared to life in Ukraine. Higher levels of general well-being and life satisfaction abroad expectedly reduce the probability that a person plans to return.

Lastly, those who had returned to Ukraine at the time of the survey were asked whether or not they planned to stay in Ukraine. 56 percent said yes, 7 percent plan to emigrate again, while the rest will consider the circumstances. The main factors that keep a person in Ukraine are family, the wish for one’s children to study in Ukraine and a willingness to participate in the reconstruction of the country. Improved safety is also a significant factor – which might explain why people who are originally from the Western part of Ukraine are more likely to stay (the regional factor is significant only in this third probability model). Finally, people who planned to emigrate prior to 2022, or those whose life in Ukraine is considerably inferior to that abroad, are less likely to stay.

Ukrainians’ Liaison with Their Country

60 percent of the refugees read Ukrainian news daily, and over 90 percent read them at least several times a week. The majority of the readers spread these news in their local communities and/or in their social networks. Generally, Ukrainian refugees are quite active, over 40 percent attend rallies in support of Ukraine, almost 40 percent participate in volunteer projects, over 70 percent donate to Ukrainian organizations (and the same share help their relatives in Ukraine) and 15 percent work at a non-governmental organization.

Not surprisingly, the opinion among Ukrainian refugees on reforms in Ukraine is very similar to the opinion among returnees: anti-corruption and judicial reform have the highest priority. In line with this, the fear of corruption derailing the reconstruction of Ukraine is greater than the fear that Russia will continue with their missile attacks on Ukraine. Therefore, the determination of the Ukrainian government to fight corruption will likely not only improve life for people in Ukraine but also increase the probability that refugees return to Ukraine.

Conclusion

Most of the Ukrainians who initially fled the war have already returned to Ukraine, with the majority planning on staying in the country. For those who are still abroad, the majority wish to return when safety improves. When analysing the factors behind such wishes, it is evident that among the pull factors lie not only personal drivers, such as missing one’s home or family, but also civic factors such as a willingness to participate in the reconstruction of Ukraine or a wish for one’s children to study in Ukraine, thus contributing to preserving their identity. Moreover, Ukrainians who are living abroad are highly involved in Ukrainian affairs.

Therefore, we suggest that the Ukrainian government consider refugees as a valuable resource rather than as a loss. For example, government representatives could ask refugees to donate to Ukraine, and engage in individual or collective actions (e.g. inform their local friends about the situation in Ukraine, join rallies or flashmobs in support of Ukraine etc.). Such “people’s diplomacy” is important to ensure continued support for Ukraine.

We also recommend that the governments of host countries make it easier for refugees to stay connected with Ukraine. Specifically, refugees should be allowed to travel to Ukraine without losing their protection status.

Lastly, the strongest precondition for refugees’ return to Ukraine is supplying the country with weapons and other crucial support to win the war. A Ukrainian victory will not only bring about reconstruction and development of Ukraine but also promote and enforce global democracy.

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.

How to Undermine Russia’s War Capacity: Insights from Development Day 2023

Posted on January 15, 2024 | Policy Brief

Image from SITE Development Day conference

As Russia’s full-scale invasion of Ukraine continues, the future of the country is challenged by wavering Western financial and military support and weak implementation of the sanction’s regime. At the same time, Russia fights an information war, affecting sentiments for Western powers and values across the world. With these challenges in mind, the Stockholm Institute for Transition Economics (SITE) invited researchers and stakeholders to the 2023 Development Day Conference to discuss how to undermine Russia’s capacity to wage war. This policy brief shortly summarizes the featured presentations and discussions.

Holes in the Net of Sanctions

In one of the conference’s initial presentations Aage Borchgrevink (see list at the end of the brief for all presenters’ titles and affiliations) painted a rather dark picture of the current sanctions’ situation. According to Borchgrevink, Europe continuously exports war-critical goods to Russia either via neighboring countries (through re-rerouting), or by tampering with goods’ declaration forms. This claim was supported by Benjamin Hilgenstock who not only showed that technology from multinational companies is found in Russian military equipment but also illustrated (Figure 1) the challenges to export control that come from lengthy production and logistics chains and the various jurisdictions this entails.

Figure 1. Trade flows of war-critical goods, Q1-Q3, 2023.

Source: Benjamin Hilgenstock, Kyiv School of Economics Institute.

Offering a central Asian perspective, Eric Livny highlighted how several of the region’s economies have been booming since the enforcement of sanctions against Russia. According to Livny, European exports to Central Asian countries have in many cases skyrocketed (German exports to the Kyrgyzs Republic have for instance increased by 1000 percent since the invasion), just like exports from Central Asian countries to Russia. Further, most of the export increase from central Asian countries to Russia consists of manufactured goods (such as telephones and computers), machinery and transport equipment – some of which are critical for Russia’s war efforts. Russia has evidently made a major pivot towards Asia, Livny concluded.

This narrative was seconded by Michael Koch, Director at the Swedish National Board of Trade, who pointed to data indicating that several European countries have increased their trade with Russia’s neighboring countries in the wake of the decreased direct exports to Russia. It should be noted, though, that data presented by Borchgrevink showed that the increase in trade from neighboring countries to Russia was substantially smaller than the drop in direct trade with Russia from Europe. This suggests that sanctions still have a substantial impact, albeit smaller than its potential.

According to Koch, a key question is how to make companies more responsible for their business? This was a key theme in the discussion that followed. Offering a Swedish government perspective, Håkan Jevrell emphasized the upcoming adoption of a twelfth sanctions package in the EU, and the importance of previous adopted sanctions’ packages. Jevrell also continued by highlighting the urgency of deferring sanctions circumvention – including analyzing the effect of current sanctions. In the subsequent panel Jevrell, alongside Adrian Sadikovic, Anders Leissner, and Nataliia Shapoval keyed in on sanctions circumvention. The panel discussion brought up the challenges associated with typically complicated sanctions legislation and company ownership structures, urging for more streamlined regulation. Another aspect discussed related to the importance of enforcement of sanctions regulation and the fact that we are yet to see any rulings in relation to sanctions jurisdiction. The panelists agreed that the latter is crucial to deter sanctions violations and to legitimize sanctions and reduce Russian government revenues. Although sanctions have not yet worked as well as hoped for, they still have a bite, (for instance, oil sanctions have decreased Russian oil revenues by 30 percent).

Reducing Russia’s Government Revenues

As was emphasized throughout the conference, fossil fuel export revenues form the backbone of the Russian economy, ultimately allowing for the continuation of the war. Accounting for 40 percent of the federal budget, Russian fossil fuels are currently mainly exported to China and India. However, as presented by Petras Katinas, the EU has since the invasion on the 24th of February, paid 182 billion EUR to Russia for oil and gas imports despite the sanctions. In his presentation, Katinas also highlighted the fact that Liquified Natural Gas (LNG) imports for EU have in fact increased since the invasion – due to sanctions not being in place. The EU/G7 imposed price cap on Russian oil at $60 per barrel was initially effective in reducing Russian export revenues, but its effectiveness has over time being eroded through the emergence of a Russia controlled shadow fleet of tankers and sales documentation fraud. In order to further reduce the Russian government’s income from fossil fuels, Katinas concluded that the whitewashing of Russian oil (i.e., third countries import crude oil, refine it and sell it to sanctioning countries) must be halted, and the price cap on Russian oil needs to be lowered from the current $60 to $30 per barrel.

In his research presentation, Daniel Spiro also focused on oil sanctions targeted towards Russia – what he referred to as the “Energy-economic warfare”. According to Spiro, the sanctions regime should aim at minimizing Russia’s revenues, while at the same time minimizing sanctioning countries’ own costs, keeping in mind that the enemy (i.e. Russia) will act in the exact same way. The sanctions on Russian oil pushes Russia to sell oil to China and India and the effects from this are two-fold: firstly, selling to China and India rather than to the EU implies longer shipping routes and secondly, China and India both get a stronger bargaining position for the price they pay for the Russian oil. As such, the profit margins for Russia have decreased due to the price cap and the longer routes, while India and China are winners – buying at low prices. Considering the potential countermoves, Spiro – much like Katinas – emphasized the need to take control of the tanker market, including insurance, sales and repairs. While the oil price cap has proven potential to be an effective sanction, it has to be coupled with an embargo on LNG and preferrable halted access for Russian ships into European ports – potentially shutting down the Danish strait – Spiro concluded.

Chloé Le Coq presented work on Russian nuclear energy, another energy market where Russia is a dominant player. Russia is currently supplying 12 percent of the United States’ uranium, and accounting for as much as 70 percent on the European market. On top of this, several European countries have Russian-built reactors. While the nuclear-related revenues for Russia today are quite small, the associated political and economic influence is much more prominent. The Russian nuclear energy agency, Rosatom, is building reactors in several countries, locking in technology and offering loans (e.g., Bangladesh has a 20-year commitment in which Rosatom lends 70 percent of the production cost). In this way Russia exerts political influence on the rest of the world. Le Coq argued that energy sanctions should not only be about reducing today’s revenues but also about reducing Russian political and economic influence in the long run.

The notion of choke points for Russian vessels, for instance in the Danish strait, was discussed also in the following panel comprising of Yuliia Pavytska, Iikka Korhonen, Aage Borchgrevink, and Lars Schmidt. The panelists largely agreed that while choke points are potentially a good idea, the focus should be on ensuring that existing sanctions are enforced – noting that sanctions don’t work overnight and the need to avoid sanctions fatigue. Further, the panel discussed the fact that although fossil fuels account for a large chunk of federal revenues, a substantial part of the Russian budget come from profit taxes as well as windfall taxes on select companies, and that Russian state-owned companies should in some form be targeted by sanctions in the future. In line with the previous discussion, the panelists also emphasized the importance of getting banks and companies to cooperate when it comes to sanctions and stay out of the Russian market. Aage Borchgrevink highlighted that for companies to adhere to sanctions legislation they could potentially be criminally charged if they are found violating the sanctions, as it can accrue to human rights violations. For instance, if companies’ parts are used for war crimes, these companies may also be part of such war crimes. As such, sanctions can be regarded as a human rights instrument and companies committing sanctions violations can be prosecuted under criminal law.

Frozen Assets and Disinformation

The topic of Russian influence was discussed also in the conference’s last panel, composed of Anders Ahnlid, Kata Fredheim, Torbjörn Becker, Martin Kragh, and Andrii Plakhotniuk. The panelists discussed Russia’s strong presence on social media platforms and how Russia is posting propaganda at a speed unmet by legislators and left unchecked by tech companies. The strategic narrative televised by Russia claims that Ukraine is not a democracy, and that corruption is rampant – despite the major anti-corruption reforms undertaken since 2014. If the facts are not set straight, the propaganda risks undermining popular support for Ukraine, playing into the hands of Russia. Further, the panelists also discussed the aspect of frozen assets and how the these can be used for rebuilding Ukraine. Thinking long-term, the aim is to modify international law, allowing for confiscation, as there are currently about 200 billion EUR in Russian state-owned assets and about 20 billion EUR worth of private-owned assets, currently frozen.

The panel discussion resonated also in the presentation by Vladyslav Vlasiuk who gave an account of the Ukrainian government’s perspective of the situation. Vlasiuk, much like other speakers, pointed out sanctions as one of the main avenues to stop Russia’s continued war, while also emphasizing the need for research to ensure the implications from sanctions are analyzed and subsequently presented to the public and policy makers alike. Understanding the effects of the sanctions on both Russia’s and the sanctioning countries’ economies is crucial to ensure sustained support for the sanction’s regime, Vlasiuk emphasized.

Joining on video-link from Kyiv, Tymofiy Mylovanov, rounded off the conference by again emphasizing the need for continued pressure on Russia in forms of sanctions and sanctions compliance. According to Mylovanov, the Russian narrative off Ukraine struggling must be countered as the truth is rather that Ukraine is holding up with well-trained troops and high morale. However, Mylovanov continued, future funding of Ukraine’s efforts against Russia must be ensured – reminding the audience how Russia poses a threat not only to Ukraine, but to Europe and the world.

Concluding Remarks

The Russian attack on Ukraine is military and deadly, but the wider attack on the liberal world order, through cyber-attacks, migration flows, propaganda, and disinformation, must also be combatted. As discussed throughout the conference, sanctions have the potential for success, but it hinges on the beliefs and the compliance of citizens, companies, and governments around the world. To have sanctions deliver on their long-term potential it is key to include not only more countries but also the banking sector, and to instill a principled behavior among companies – having them refrain from trading with Russia. Varying degrees of enforcement undermine sanctions compliant countries and companies, ultimately making sanctions less effective. Thus, prosecuting those who breach or purposedly evade sanctions should be a top priority, as well as imposing control over the global tanker market, to regain the initial bite of the oil price cap. Lastly, it is crucial that the global community does not forget about Ukraine in the presence of other conflicts and competing agendas. And to ensure success for Ukraine we need to restrain the Russian war effort through stronger enforcement of sanctions, and by winning the information war.

List of Participants

Anders Ahnlid, Director General at the National Board of Trade
Aage Borchgrevink, Senior Advisor at The Norwegian Helsinki Committee
Torbjörn Becker, Director at the Stockholm Institute of Transition Economics
Chloé Le Coq, Professor of Economics, University of Paris-Panthéon-Assas, Economics and Law Research Center (CRED)
Benjamin Hilgenstock, Senior Economist at Kyiv School of Economics Institute
Håkan Jevrell, State Secretary to the Minister for International Development Cooperation and Foreign Trade
Michael Koch, Director at Swedish National Board of Trade
Iikka Korhonen, Head of the Bank of Finland Institute for Emerging Economies (BOFIT)
Martin Kragh, Deputy Centre Director at Stockholm Centre for Eastern European Studies (SCEEUS)
Eric Livny, Lead Regional Economist for Central Asia at European Bank for Reconstruction and Development (EBRD)
Anders Leissner, Lawyer and Expert on sanctions at Advokatfirman Vinge
Tymofiy Mylovanov, President of the Kyiv School of Economics
Vladyslav Vlasiuk, Sanctions Advisor to the Office of the President of Ukraine
Nataliia Shapoval, Chairman of the Kyiv School of Economics Institute
Yuliia Pavytska, Manager of the Sanctions Programme at KSE Institute
Andrii Plakhotniuk, Ambassador Extraordinary and Plenipotentiary of Ukraine to the Kingdom of Sweden
Daniel Spiro, Associate Professor, Uppsala University
Adrian Sadikovic, Journalist at Dagens Nyheter
Kata Fredheim, Executive Vice President of Partnership and Strategy and Associate Professor at SSE Riga
Lars Schmidt, Director and Sanctions Coordinator at the Ministry for Foreign Affairs, Sweden

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.

Ukraine and NATO – Evidence from Public Opinion Surveys

Posted on October 30, 2023 | Policy Brief

20231030 NATO and Ukraine Image 01

A recent survey on Ukrainians’ attitudes towards a Ukrainian NATO membership shows that 89 percent would support joining the military alliance in a referendum – the highest level of support in the country’s history. Moreover, the convergence of membership attitudes between Western and Eastern regions in Ukraine displays a real loss of trust in Eurasian (pro-Russian) relations as a vector of development for Ukraine. This brief offers some perspectives on how public opinion has changed and what have been the crucial turning points. In particular, the brief digs deeper into the evolution of opinion against a NATO membership, as well as regional differences in attitudes. It also shows how every round of Russian aggression eventually has led to public opinion alignment. These changes not only concern a NATO membership but reflect a deeper transformation of societal values and a consolidation of the Ukrainian national identity, strengthening the grounds for a more democratic society.  

The continued Russian aggression on Ukraine has disclosed several deep-running issues that have for long been undercurrents in Ukraine’s history and whose resolution is a key determinant of the country’s future. One such issue is the relationship with NATO, including a potential accession into the alliance.

The most recent survey on Ukrainians’ attitudes towards Ukrainian NATO membership, conducted in May-June 2023, shows that 89 percent of the respondents would support it in a referendum, 8 percent would not, while 3 percent of the respondents found it difficult to say (KIIS, 2023). The survey (which excludes occupied territories where it was unfeasible to conduct the survey) also shows the lowest ever gap in terms of geographic spread. 93 percent were in favour of membership in the Western regions and 79 percent in the Eastern regions, the traditionally pro-Russian areas where most of the Russian ethnic minority resides. In comparison, in 2017, 71 percent were in support of a NATO membership in the Western regions and 32 percent in the Eastern regions, respectively (Kermach, 2017).

NATO Membership Support in Ukraine Over Time

To gain a deeper understanding of how the public’s opinion on a NATO membership has changed over time, it is suitable to start in 2002, when former President Leonid Kuchma first announced Ukraine’s aspiration to join NATO. At that point the Ukrainian society could be almost equally divided into three categories; those in favour of joining NATO, those against it, and those who refused to take a stance/found it difficult to say/would not vote in a referendum (hereafter referred to as “indecisive respondents”), depicted in Figure 1. This was a very natural consequence of the late 1990s/early 2000s coexisting positive attitudes to both geopolitical directions – towards NATO and the EU, but also towards Eurasian integration.

Figure 1. Attitudes to joining NATO among Ukrainians, 2002-2023.

Source: “30 Years of Independence”, 2021; KIIS, 2023; Rating Group, 2023 and author’s compilations.

One framework for understanding this is the concept of social ambivalence, which has been highlighted as very typical for transitional societies such as Ukraine. For example, Reznik (2022) argues that, in the case of Ukraine the main reason for ambivalent geopolitical orientation is the need for “ideological ‘reconciliation’ of two civilizational directions different in essence and meaning within an unbalanced identity” (Reznik, 2022). Similarly, Golovakha and Panina (2003) suggest that in Ukraine, society simultaneously accepts the old social institutions, which have lost their legality during the transition times but have remained legitimate in the view of the public, and the new social institutions, which have gained legal recognition but have not yet been accepted by society. Ukraine is not unique in this context, similar processes have occurred in many transition countries, for instance in Poland, the Czech Republic, Hungary, Slovakia, Estonia, Lithuania, Latvia and others (see, for instance, Roland, 2000; Murrell, 2003; Gruszewska, 2014; and Becker, 2019). This literature documents a mismatch between old and new institutional structures in transforming countries, strongly associated with low levels of trust in society, resistance to new ideas, strong attachment to traditional behaviors and low social activity levels within society. However, such discordance can change drastically due to shocks facing a society, as illustrated by the change in attitudes towards a NATO membership in Ukraine from the early 2000s and onwards.

In the first decade of the 21st century the Ukrainian society gradually became more aligned against joining NATO. This process intensified after 2010, when Viktor Yanukovych was elected as the President of Ukraine. Soon after the election, the Verkhovna Rada (the Ukrainian Parliament) adopted the law “On the Principles of Internal and Foreign Policy”, establishing the principle of “non-alignment” (Verkhovna Rada of Ukraine, 2010). This implied a Ukrainian commitment not to participate in any military political alliances, including NATO. This decision, alongside successful efforts from pro-Russian authorities in the Eastern regions – including anti-NATO propaganda – resulted in as low as 18 percent support for NATO membership in 2013, and 67 percent of the respondents stating to be against a membership (see Figure 1). Such anti-NATO sentiments can be argued to not only have prepared the grounds for, but also to have been explicitly used as an argument for the Russian aggression in 2014.

However, the illegal annexation of Crimea and the Russian aggression in Donbas in 2014 drastically changed the public’s opinion on the military alliance, increasing the share of NATO membership supporters to close to half of the population and thus exceeding the share of opposing or indecisive respondents for the first time in history. At that point 47,8 percent of Ukrainians were in favor of joining the alliance and 32,4 percent were against it (“30 Years of Independence”, 2021), and in 2014 the “non-alignment” principle was officially repealed. It was even officially stated in the Comment On Amendments to the Law of Ukraine “On Principles of Internal and Foreign Policy”) that the policy had been a decisive factor for the Russian aggression in 2014: “In view of this, the further continuation of the so-called non-alignment policy, which has already led to the loss of Ukraine’s territorial integrity, is contrary to national interests, poses a constant threat to Ukraine’s state sovereignty and territorial integrity, holds back the processes of socio-political and economic reform of the country, and limits Ukraine’s prospects to become a developed European democratic country within the European Union.” (Verkhovna Rada of Ukraine, 2014).

Changes in public opinion in Ukraine is however not only limited to NATO membership attitudes. Naturally, there have been changes in election outcomes and voting patterns as well. Recently, Munroe et al. (2023) found a significant shift in voting patterns in Ukraine after 2014, reporting a dramatic decline in pro-Russian votes in Donetsk, Dnipropetrovsk and Odessa regions that had all traditionally been pro-Russian. Still, about one third of the respondents were continuously negative towards NATO until 2021, when the share of those in opposition of a NATO membership dropped to 24 percent. Potential explanations for the pertaining negative attitudes include a remaining influence from pro-Russian authorities in the Eastern and Southern parts of the country, along with a lack of knowledge and awareness about NATO among the population.

Motives, Regional Variations, and Information Gaps

In this context, it is essential to highlight the Ukrainian’s motives for support, or scepticism towards NATO membership. A nation-wide survey from 2017 shows that among the majority of NATO supporters in Ukraine the dominant motive was the expectation of “security guarantees for Ukraine” (86 percent). On the contrary, those who did not support joining the alliance expressed concerns that a NATO membership might “draw Ukraine into NATO’s military actions” (44 percent) or “provoke Russia to direct military aggression” (28 percent). 27 percent were convinced that “Ukraine, in principle, should be a non-aligned state” (27 percent), and finally, 22 percent were worried that “foreigners and foreign capital will start to rule in Ukraine” (DIF, 2017).

Stereotypes of NATO as either protection or conversely, a threat, for Ukraine are subject to significant regional differences. While in Western and Central Ukraine the perception of NATO as protection clearly prevailed (81 and 68 percent, respectively), attitudes in the Southern and Eastern parts were more uncertain. About the same number of respondents (19 percent) considered NATO as both protection and a threat, while 25 percent of the respondents in the South and 30 percent in Eastern Ukraine didn’t see NATO as either.

The basis for these opinions is most likely a lack of effective information and a lack of understanding of the alliance, as well as the complex geopolitical dynamics involving it. Research has attributed negative attitudes towards NATO to surviving Cold War stereotypes and a lack of information concerning NATO’s specifics, functions, decision-making procedures, and the rights and obligations of member states (Kermach, 2017).

In the 2017 survey, almost every other Ukrainian admitted that they were not well informed about NATO. Only 55 percent of the respondents claimed to “know something about NATO”, while 22 percent said they knew virtually nothing about it. However, a majority of Ukrainians (55 percent) “would like to know more” about NATO, while about a third (36 percent) of the respondents did not express such interest (see Table 1). Also in this regard, regional differences are remarkable. In Western and Central Ukraine, interest in NATO was much higher in 2017 than in the Eastern and Southern parts of the country.

Table 1. Interest in knowing more about NATO among Ukrainians in 2017.

Note: Responses to the question: “Would you like to know more about NATO?”
Source: DIF, 2017.

Public Opinion Consolidation

The most drastic change in attitudes towards a NATO membership has however occurred after the full-scale Russian invasion of Ukraine in February 2022, with the public almost converging in their support of a NATO membership. The ongoing share of NATO supporters exceeds 85 percent, and the increase in this group draws, to an almost equal extent, both from the number of those who previously were against the alliance and those who were previously indecisive. For the majority of those who consistently considered the “non-alignment” policy of Ukraine as optimal (26,6 percent according to Kermach (2017)), it has become obvious that this “non-alignment” strategy has failed to provide effective security guarantees.

Moreover, the perception of a NATO membership as a security guarantee is also changing. In the 2022 Kyiv International Institute of Sociology (KIIS) survey, just below 40 percent of the respondents considered a NATO membership as the ultimate and only security guarantee, while approximately the same number were willing to accept other security guarantees. In the 2023 survey, the share of the former response category increased to 58 percent (with a slight difference within regions – 64 percent in the West and 48 percent in Eastern Ukraine), – while the latter dropped to 25 percent. Furthermore, 76 percent were not willing to accept forgoing a NATO membership as a condition for peace (KIIS, 2023).

Conclusion

Public opinion in Ukraine, including attitudes towards a NATO membership, has been drastically affected by the Russian aggression in 2014, and even more so by the ongoing war. As survey results show, each subsequent round of Russian aggression on Ukraine has only increased the share of NATO membership supporters and decreased the number of respondents indecisive on whether Ukraine should join NATO. Additionally, regional differences in attitudes between the Eastern and Western parts of Ukraine have also smoothened. These changes imply a deep transformation in societal views, where the meaning of living in peace for Ukrainians has transformed from the idea of “non-alignment” into perceiving a NATO membership as a security guarantee and a prerequisite for future peace.

While the transformation of public opinion is important per se, it is only one example of the groundbreaking changes the Ukrainian society has especially undertaken since the invasion in 2022. The necessity to fight the Russian invasion brought about unprecedented consolidation and feelings of a national identity. This, in turn, provides an essential foundation for building trust and active political participation, strengthening the grounds for an effective democratic society.

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. 

Choosing Latvia: Understanding the Decision-Making Factors of Displaced Ukrainians

Posted on June 6, 2023 | Policy Brief

20220317 Ukrainian Refugees in Poland Image 03

This policy brief is based on an empirical examination of the early-stage migration of Ukrainian war asylum seekers to Latvia in 2022, following the Russian invasion. The study highlights the urgent nature of their displacement and identifies the pivotal role of kinship in Latvia in the decision-making. Three categories of refugees emerge based on kinship ties, employment opportunities, and cultural affinity. The study also reveals the substantial influence of the pre-existing Ukrainian diaspora and underlines the significance of network effects in refugees’ location decisions. Contrary to previous studies, refugees didn’t necessarily settle for the first country available. The research underscores the strategy of seeking support from personal networks in acute displacement scenarios, which appears to be the most influential factor for the choice of location in the decision-making process.

Ukrainian Displaced People in Latvia

The Russian invasion of Ukraine in 2022 triggered a geopolitical upheaval in Europe and resulted in a mass exodus that had not been witnessed since World War II. With the war showing no signs of cessation, return for many of these displaced people appears difficult in the near future. Latvia, although not a bordering country, have become a haven for 36 000 Ukrainian refugees.

This brief seeks insight into Ukrainian displaced people’s preference for Latvia, using interviews conducted in March 2022, a month after the war began. With no common border between Ukraine and Latvia these refugees had to transit through other countries, making the question about the choice of Latvia as their ultimate destination particularly relevant.

Unlike during the migration crisis in 2015 and during the recent influx of Syrians and other groups, the Ukrainian refugees found themselves being welcomed with open arms, belying Latvia’s typically guarded stance towards immigrants. This unexpected warmth is influenced by a multifaceted kinship rooted in historical connections from the Soviet era, a pre-existing Ukrainian diaspora in Latvia, labor migration, and shared cultural elements.

These factors can also play a role in Ukrainian refugees’ choice of Latvia as their ultimate destination. The study underlying this policy brief seeks to explore these facets and unravel the reasons behind the Ukrainian refugees’ choice to seek safety in Latvia.

Migration Decisions

Two aspects are crucial in the analysis of migration decisions: the factors that influence refugees’ choice of destination and the process underlying this decision.

Traditional assumptions surrounding asylum-seeker migration, as emphasized by Böcker and Havinga (1997), suggest that when people are forced to flee, their primary focus is safety – not destination. However, more nuanced perspectives have evolved in recent studies (see Robinson and Sergott, 2002; Brekke and Aarset, 2009). They highlight the calculated and adaptable nature of refugee destination choices throughout the asylum-seeking migration journey, demonstrating that circumstances and journey stage significantly influence destination choices.

Research indicates that host country policies and economic conditions can both enhance and limit refugee flows (Czaika and de Haas, 2017; Ortega and Peri, 2013; Brekke and Aarset, 2009; Diop-Christensen and Diop, 2021; Kang, 2021; Suzuki,2020; Collyer, 2005). However, another line of research emphasizes that policy and economic factors are secondary to networks, cultural affinity, language, and perceptions in determining destination choices (Robinson and Sergott, 2002). Factors such as social networks (Koser and Pinkerton, 2002; Tucker 2018), kinship (Havinga and Böcker, 1999; Neumayer, 2005; Mallett and Hagen-Zanker, 2018), financial resources (Mallett and Hagen-Zanker, 2018), geography (Neumayer, 2005; Kang, 2021), destination country image (Benzer and Zetter, 2014), culture (Suzuki, 2020), and colonial links (Havinga and Böcker, 1999) have been established to be significant at various stages of migration. Economic and education opportunities are also found to have a marginal influence on destination decision-making compared to the possibility of resolving statelessness (Tucker, 2018).

These varying determinants of destination may also be contingent on the refugee journey stage. Policies may not dominate in acute cases of forced migration (Diop-Christensen and Diop, 2021). For individuals with time to prepare for migration, a cost-benefit analysis often informs their decisions. In contrast, those in urgent circumstances, such as during the Russian invasion of Ukraine, may have to take immediate refuge and put less emphasis on benefits and policies (Robinson and Sergott, 2002). Destination determinants differ by both origin and destination countries (Havinga and Böcker, 1999, Tucker, 2018, Gilbert and Koser, 2006). Thus, research on underexplored regions and countries is valuable for a comprehensive understanding of migration patterns.

Migration, voluntary or forced, involves intricate decision-making. As Mallett and Hagen-Zanker (2018) aptly state, the dynamic experiences ‘on the road’ shape refugees’ journey and destination choices. Robinson and Sergott (2002) and Brekke and Aarset, 2009 have pioneered models for asylum seekers’ decision-making, suggesting that factors such as networks, language, cultural affinity, and perceptions evolve across different stages of the asylum journey. Others, like Gonsalves (1992) and Shultz et al. (2020), have constructed models delineating stages of refugee passage and displacement, highlighting the changing needs and preferences of refugees.

While existing literature mainly focuses on the later stages of forced migration journeys, limited empirical evidence exists on the migration moves during acute displacement. Additionally, further understanding on migration induced by the war on Ukraine is needed. There is also incomplete coverage of asylum seeker and refugee topics in the Baltic countries, making such research particularly relevant. To address these gaps, this brief aims to provide qualitative findings on the decision-making and experiences of Ukrainian displaced people in Latvia.

Understanding the Decision

The research underlying this brief explored the reasons behind Ukrainian displaced people’s choice of Latvia as their migration destination during the early part of the invasion. The study is based on 34 semi-structured, in-depth interviews with displaced people conducted in March 2022. The dataset is part of a larger study that includes continuous interviews to understand Ukrainian displaced people’s lives, plans and needs in Latvia.

From the interviews, it was apparent that the predominant factor in respondents’ decision-making was the presence of kin or acquaintances in Latvia.

All but one participant had some connection to Latvia, whether through distant relatives, friends, or professional contacts. The one participant without such connections arrived from Russia and not from Ukraine, working on a contract. A minority of our participants considered staying in Ukraine. One example is Lidiia, who initially planned to move near Lviv, but redirected to Riga during the journey.

“She found a family that would host us, 100 km from Lviv… We agreed, but then our friends… called us on the way, we were leaving Kyiv under bombardment. Our train was delayed because of the air alarm. When we just arrived there, a shell exploded above the railway station… And on the way, friends from Riga called us and invited us: ‘Come, everyone will help here’. Therefore, everything changed while we were on the train, we decided everything“ (Lidiia).

Proximity of kin was not the primary concern for the interviewees; the mere fact that they had a relative in Latvia appeared more influential in their narratives. Indeed, the majority of participants had distant rather than close kin, though a few had close family in Latvia (grandparents, parents, common-law husband, and sister). As Olena explained, the presence of even distant relatives influenced her choice: “there are distant relatives, very distant… That’s why we came” (Olena). However, ties in Latvia were not the only determinants as many of the participants also had family connections in other parts of Europe.

The speed of decision-making was also striking – most decisions to migrate were not a matter of long-term planning but a reaction to the sudden crisis, often influenced by incoming offers of assistance. Nataliia remembered: “My mother said, ‘You have to leave because everything is so fatally bad. Take the children and leave.’ And literally overnight I packed up, bought the tickets. But first I went to Poland, to my brother” (Nataliia).

Maryana ended up choosing her destination only after leaving home. “At first, we thought to go to Poland, but it is completely crowded, and then we called to whoever we could. There are no relatives in other countries. No, there are relatives in other cities, but these are Luhansk, Donetsk, we are from Slobozhanska Ukraine, so all our relatives are from the side where very heavy fighting is going on now“ (Maryana). Such testimonies illuminate how, owing to the immediacy of the situation, the eventual destination of some displaced Ukrainians was not predetermined but evolved during their respective journeys.

From the interviews with the participants who knew someone in Latvia, one can identify three groups based on the main factor that determined their decision.

Network, First of All

For respondents who did not have family in Latvia, friends, acquaintances, and professional contacts in Latvia acted as anchors. Like family members, such acquaintances often reached out, offering assistance and lodging as soon as they heard the news of the war. The influx of supportive communication from Latvian acquaintances influenced the decision for many participants.

Olha decided to flee with her friend, who had a distant cousin residing in Latvia. Upon the onset of the conflict, the cousin reached out and urged them to come to Latvia. As Olha recalls: “As soon as she heard that there was a bombing in Kharkiv, she said, ‘Come’. My friend, with whom I came, Lesya, does not have a car, so she immediately told me… let’s run away’” (Olha).

Lidiia received an invitation from a Latvian friend she had met through her church, even as she was already in the process of fleeing Ukraine. Similarly, Andrii, who was vacationing abroad at the time of the war’s outbreak, remembered: “On the 25th our best friend wrote to us that, ‘There is housing, come here’ and we began to negotiate with the embassy to fly here” (Andrii).

Even in the absence of explicit messages, displaced individuals recalled having friends and family in Latvia and chose to make their way to Riga. Olena, like Lidiia, initially set off without a clear destination in mind. It wasn’t until she reached the border that she decided to head to Latvia: “Just at the border that you decided where to go?” (Olena).

Existing friendships and ongoing communication also influenced some people’s choice to opt for Latvia. Olha (2) was encouraged by her daughter to relocate to Riga due to her daughter’s friendships with Latvians that she had formed at a camp in Estonia: “Friends appeared, with whom she was in close contact for six months. That’s why for her there was no choice at all ‘Where?’. She immediately said: ‘To Riga’” (Olha (2)).

Opportunities and Realities

The turning point for many respondents was their arrival in Poland as, initially, Latvia was not the principal or only choice of destination. These respondents emphasized that, besides having friends and relatives in Latvia, they also contemplated where they might find better opportunities. Their narratives provide a contrasting perspective of Poland and Latvia. While traversing Poland, their general impression was that the country was already ‘overfilled’, which in turn kindled the notion that Latvia might harbor more possibilities. For this group of displaced individuals, the importance of employment prospects was paramount.

Nataliia took the decision to head for Latvia, choosing to stay with remote kin there rather than with her sibling in Poland, as she believed Poland lacked opportunities for her. In Myroslava’s case, a friend helped secure a job in Latvia: “We didn’t choose Latvia for any particular reason – better or worse, we didn’t care. We needed somewhere to stay, somewhere to work in order to live. Well, that’s why when a job turned up through acquaintances, they said that a person was needed here, we immediately gathered. Could not be found in Poland. In Poland, there was simply no work, no housing” (Myroslava).

Bohdan, too, mentioned the crowdedness and the high cost of living in Poland, hence deciding to move further north to Latvia: “We didn’t have a specific plan because we weren’t at all sure we would succeed. In general, my wife benefits from going to Poland, she works for an IT company operating in Poland. And we thought about getting there at first, but when we got to Poland, everything was already full. There were such expensive options, $1600 a month, we were shocked” (Bohdan).

Anastasiia echoed similar concerns: “We arrived in Warsaw, reunited there and tried to stay in Warsaw and look for a place, but there are a lot of people there, and there is no place to live, very… food, maybe cheaper than in Latvia, but there is no place to live… no place to work. And I would like to work somehow… not to be dependent” (Anastasiia).

These stories illuminate another stratum of decision-making, that beyond familial ties, participants also considered the opportunities available at their chosen destination. They accumulate information on their journey and recalibrate their destination accordingly.

Cultural Kinship, Language, Diaspora

Not all participants had prior personal experience with Latvia, even if they had relatives there. A lot of their understanding about the country stemmed from stories they’d heard or news they’d come across. This third group of participants decided on Latvia not only because they knew someone in the country, but also because they saw value in shared language, culture, and history.

Political and cultural connections played a significant role in their choice. Being able to communicate in Russian and Ukrainian in Latvia was a crucial factor, as it was associated with a smoother integration process and increased job opportunities. Nadiia, who traveled to Latvia via Poland and Budapest, elaborated on this: “And I was in Latvia and here there is an opportunity to communicate in Ukrainian, in Russian” (Nadiia).

The possibility of being accepted and integrated into the local community was also mentioned as a decision-driver. Oksana shared that her father, who had previously worked in Riga, advised her to go to Latvia: “you guys, probably go to Riga, well, because you will be accepted there, accommodated” (Oksana).

Nonetheless, choosing Latvia because of the possibility to communicate in Russian does not come without complications. Nataliia B., for instance, found the topic of language stirring up strong emotions and confessed that she doesn’t wish to speak Russian anymore: “I had such a psychological reaction – I didn’t speak Ukrainian for many years, and when all these events began, I read, I remember well how I woke up in the morning and began to speak Ukrainian. My thoughts have become Ukrainian” (Nataliia B.).

Moreover, having knowledge of the Ukrainian diaspora in the country also proved an important factor. “I also found out that there is a Ukrainian diaspora in Latvia of about 50 000 people, as I heard in the Latvian news. And this also encouraged me, I realised that I could find help from my compatriots” (Nadiia). This observation underlines the role of cultural kinship in the decision-making process regarding destination, and it can indeed be seen as a decisive factor. As the diaspora expands with the influx of more displaced people, this rationale for choosing Latvia may become increasingly common.

Conclusion

The study underlying this brief provided empirical insight into the initial phases of Ukrainian war asylum seekers’ journey to Latvia in 2022, enhancing our understanding of the factors that influenced the choice of Latvia over other destinations.

Ukrainians fleeing the early stage of the 2022 Russian invasion were compelled to make swift and difficult decisions due to the pressing crisis. Leaving behind their familiar lives, properties, and dear ones – often the very individuals facilitating their exodus for safety reasons – was a harrowing reality. The support from kin and acquaintances in Latvia was crucial in endorsing their decision to seek refuge in the country.

Three groups emerged among the Ukrainian refugees in Latvia, all connected by personal relationships to some degree. The factors influencing their migration ranged from the presence of kin and considerations of employment prospects, to shared language, culture, and history. The fact that the initial outreach usually originated from the Latvian side underscores the profound solidarity and active support provided by Latvians to their Ukrainian counterparts. This likely also played a significant role in the refugees’ decisions. The pre-existing Ukrainian diaspora in Latvia, estimated at around 50 000 before the invasion, also significantly influenced the choice of Latvia as a refuge.

Financially-related factors such as seeking benefits were largely absent from the narratives, likely due to the geographic proximity, relatively low costs, and the urgent nature of the displacement. The most significant determinant in choosing Latvia as the destination appeared to be the network effect, contrasting with Robinson and Sergott (2002) findings that acute asylum seekers often settle for the first country available.

Given the emergency nature of the displacement, no unambiguous pattern in the location decision could be established. The narrative varied considerably among respondents with decisions often being made, or altered, on the fly. However, in most cases, personal relationships played a primary role in shaping the choices among Ukrainian refugees in Latvia.

For policy-makers planning and responding to acute migration crises, the study highlights the importance of mapping and understanding multifaceted kinships, as well as culture and history. The mapping can be used to plan support and allocate resources to give displaced people an opportunity of a place where they feel welcomed and connected, with hopes of greater integration.

References

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  • Gonsalves, C. J. (1992). Psychological stages of the refugee process: A model for therapeutic interventions. Professional Psychology: Research and Practice, 23(5), 382.
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  • Robinson, V., and Segrott, J. (2002). Understanding the decision-making of asylum seekers (Vol. 12). London: Home Office.
  • Shultz, C., Barrios, A., Krasnikov, A. V., Becker, I., Bennett, A. M., Emile, R., Hokkinen, M., Pennington, J. R., Santos, M., and Sierra, J. (2020). The Global Refugee Crisis: Pathway for a More Humanitarian Solution. Journal of Macromarketing, 40(1), 128–143.
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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 Bleak Economic Future of Russia

Posted on October 31, 2022 | Policy Brief

20221031 Economic Future of Russia Image 01

Is the Russian economy “surprisingly resilient” to sanctions and actions of the West? The short answer is no. On the contrary, the impact on Russian growth is already very clear while the economic downturn in the EU is small. The main effects from the sanctions are yet to be realized, and the coming sanctions will be even more consequential for the Russian economy. The biggest impacts are however those in the longer run, beyond the sanctions. Mr. Putin’s actions have led to a fundamental shift in the perception of Russia as a market for doing business. The West and especially EU countries are on a track of divesting their economic ties to Russia (in particular in, but not only, energy markets) and the country is simultaneously losing significant shares of its human capital. All these effects mean that the long-term economic outlook for Russia is not just a business cycle type recession but a lasting downward shift.

Introduction

The global economic outlook at the moment seems rather bleak. According to the International Monetary Fund’s (IMF) most recent World Economic Outlook, global growth is expected to slow from above 6 percent in 2021, to 3.2 percent this year, and 2.7 percent in 2023. For the US and the Euro area the corresponding numbers are slightly above a 5 percent growth in 2021, between 2 and 3 percent in 2022, while barely reaching 1 percent in 2023. At the same time inflation is up and central banks are trying to curb this by raising interest rates.

From an EU perspective it is an open question what proportion of the lower growth is caused by the economic consequences of the Russian invasion of Ukraine. Certainly, energy prices are affected as well as issues relating to natural resources and agricultural products (though the consequences of shortages in these goods are far larger for Middle Eastern, North African and Sub-Saharan countries). But it is not the case that all of the economic problems in the EU are due to the changed economic relations with Russia.

In assessing the economic impact of Russia’s war, and in particular the impact of sanctions, it is important to focus on both expectations as well as proportions. A widespread narrative portrays Russia’s relative economic resilience (compared to the expectations of some in March/ April 2022) as the Russian economy being surprisingly unaffected, while the EU is depicted as being badly hit, especially by high energy prices. In a European context, the Swedish daily newspaper Dagens Nyheter claims that “experts are surprised over Russia’s resilience” and the Economist, a British weekly newspaper, recently portrayed recession prospects for Europe as “Russia climbs out”. We argue that such point of view is misleading. To get a more balanced image of what is unfolding it is important to think both about the expected consequences of sanctions, including how long some of them take to have an effect, but also (and maybe most important when thinking about the long run), what economic consequences are now unfolding beyond the impact of sanctions.

Sanctions Against Russia

Let us start with what sanctions are in place, what types of impact these have had so far and what can be expected in the future. There are three types of sanctions currently in place. First, and most impactful in the short run, are limitations on financial transactions, especially those imposed on the Central Bank. In this category there are also the restrictions on other Russian banks disconnecting them from a key part of the global payment system, SWIFT, as well as measures targeting other assets: divestments from funds, investment withdrawals, asset freezes, and other impediments to financial flows. The main short-term aim of these actions was to reduce the Russian government’s alternatives to finance the army and their military operations. Second there are sanctions on trade in goods and services. At the moment these target particularly technology imports and energy and metals exports. These take a longer time to be felt and are potentially more costly to the sanctioning countries as well. They also contribute, in principle, to reduced resources for war. Besides affecting the government’s budget, both financial and trade sanctions disturb ordinary people’s lives as well and might create discontent and protests. A third group of sanctions are so-called sanctions of inconvenience such as limitations to air traffic, closure of air space, exclusion form sport and cultural events, restrictions of movement for both officials and tourists, and others, which aim at disconnecting the target country from the rest of the world. These are partly symbolic in nature, but can also impact popular opinion, including among the elites. However, a potential problem is that such sanctions can push opinion in either of two opposite directions: against the target regime in sympathy with the sanctioning parties; or against what is now perceived as an external enemy in a so-called rally-around-the-flag effect.

Along these dimensions the sanctions have so far had mixed effects in relation to the objectives listed above. We will return to this issue below, but in short, the sanctions on the Central Bank and the financial system, albeit powerful, fell short of causing anything like a collapse of the Russian financial system. Some of the trade restrictions, together with other global economic events, created an environment where lost trade volumes for Russia were compensated by price increases in resources and energy exports. When it comes to restrictions on imports of many high-tech components, these are certainly being felt in the Russian economy although still not fully. Public perceptions in Russia are hard to judge from the outside, especially given the problems of voiced opposition in the country, while public perceptions in sanctioning countries have mainly been favorable as people want to see that their governments are “doing something”.

What Do We Know About Sanctions in General?

A key question when judging whether sanctions “work” is to study what a reasonable benchmark can be. As discussed in a previous FREE Policy Brief (2012), sanctions don’t enjoy a reputation of being very effective. This is true both in the research literature as well as in the public opinion. There are reasons for this that have to do with both how “effectiveness” is intended and the limits that empirical enquiries necessarily face in trying to answer the question of effectiveness. This does not mean, however, that sanctions have no effect. Another FREE Policy Brief (2022) summarizes a selection of the most credible research in this area. In short, a majority of studies find that sanctions affect the population in target countries through shortages of various kind (food, clean water, medicine and healthcare), resulting in lower life expectancy and increased infant mortality. The types of effects are comparable to the consequences of a military conflict. In the cases where it has been possible to credibly quantify the damage to GDP, estimates are in the range of 2 to 4 percent of reduced annual growth over a fairly long period (10 years on average and up to 3 years after the lifting of sanctions). One has to keep in mind that lower growth rates compound over time, so that the total loss at the end of an average period is quite substantial. As a comparison, the latest estimate of the total loss in global GDP from the Covid-19 crisis stands at “just” -3.4 percent. Other studies find similarly significant negative effects on other economic outcomes such as employment rate, international trade, public expenditure, the value of the country’s currency, and inequality. There is of course variation in the effects depending on the type of sanctions and also on the structure of the target economy. Trade sanctions tend to have a negative effect both in the short and long run, while smart sanctions (i.e. sanctions targeting specific individuals or groups) may even have positive effects on the target country’s economy in the long run.

Sanctions and the Current State of the Russian Economy

When it comes to the Russian economy’s performance in these dire straits, the very bleak forecasts from spring 2022 have since been partly revised upwards. Some are surprised that the collective West has not been able to deliver a “knock-out blow” to the Russian economy. In light of what we know about sanctions in general this is perhaps not very surprising. Also, one can recall that even a totally isolated Soviet economy held up for quite some time. This however does not mean that sanctions are not working. There are several explanations for this. As already mentioned, some of the restrictions imply by their very nature some time delay; large countries normally have stocks and reserves of many goods – and on top of this Mr. Putin had been preparing for a while. Also, the undecisive and delayed management of energy trade from the EU reduced the effectiveness of other measures, in particular the impact of financial restrictions. Continued trade in the most valuable resources for the Russian government together with spikes in prices (partly due to the fact that the embargo was announced several months ahead of the intended implementation) flooded the Russian state coffers. This effect was also enlarged by the domestic tax cuts on gasoline prices in many European countries in response to a higher oil price (Gars, Spiro and Wachtmeister, 2022). This is soon coming to an end, but at the moment Russia enjoys the world’s second largest current account surplus.

The phenomenal adaptability of the global economy is also playing in Russia’s favor: banned from Western markets, Russia is finding new suppliers for at least some imports. However, although they are dampening and slowing the blow at the moment, it is difficult to envision how these countries can be substitutes for Western trade partners for many years to come.

The Russian Economy Beyond Sanctions

Given all of this, the impact on the Russian economy is not nearly as small as some commentators claim. Starting with GDP, an earlier FREE Policy Brief (2016) shows how surprisingly well Russia’s GDP growth can be explained by changes in international oil prices. This is true for the most recent period as well, up until the turn of the year 2021-2022 and the start of hostilities, as shown in Figure 1. Besides the clear seasonal pattern, Russian GDP (in Rubles) closely follows the BRENT oil price. This simple model, which performs very well in explaining the GDP series historically, generates a predicted development as shown by the red dotted line. Comparing this with the figures provided by the Russian Federal State Statistics Service, Rosstat, for the first two quarters of 2022 (which might in themselves be exaggeratedly positive) indicates a loss by at least 8 percent in the first and further 9 percent in the second quarter. In other words, GDP predicted by this admittedly simple model would have been 19 percent higher than what reported by Rosstat in the first half of 2022. As a comparison, Saudi Arabia – another highly oil dependent country – saw its fastest growth in a decade during the second quarter, up by almost 12 percent.

Figure 1. Russian GDP against predictions

Source: Authors’ calculations on GDP in rubles based on figures from Rosstat and the BRENT oil price series. Note that GDP is denominated in Rubles to avoid confusion due to the USD/Rubles exchange rates being volatile (given the lack of trade post invasion) and thus hard to interpret.

Other indicators point in the same direction. According to a report published by researchers at Yale University in July this year, Russian imports, on which all sectors and industries in the economy are dependent, fell by no less than ~50 percent; consumer spending and retail sales both plunged by at least ~20 percent; sales of foreign cars – an important indicator of business cycle – plummeted by 95 percent. Further,  domestic production levels show no trace of the effort towards import substitution, a key ingredient in Mr. Putin’s proposed “solution” to the sanctions problem.

Longer Term Trends

There are many reasons to be concerned with the short run impact from sanctions on the Russian economy. Internally in Russia it matters for the public opinion, especially in parts that do not have access to reports about what goes on in the war. Economic growth has always been important for Putin’s popularity during peace time (Becker, 2019a). In Europe it matters mainly because a key objective is to make financing the war as difficult as possible, but also to ensure public support for Ukraine. A perception among Europeans that the Russian economy is doing fine despite sanctions is likely to decrease the support for these measures. However, the more important economic consequences for Russia are the long-run effects. Many large multinational firms have left and started to divest from the country. There has always been a risk premium attached to doing business in Russia, which showed up particularly in terms of reduced investment after the annexation of Crimea in 2014 (Becker, 2019b). But for a long time hopes of a gradual shift and a large market potential kept companies involved in Russia (in some time periods more, in others less). This has however ended for the foreseeable future. Many of the large companies that have left the Russian market are unlikely to return even in the medium term, regardless of what happens to sanctions. Similarly, investments into Russia have been seen as a crucial determinant of its growth and wellbeing (Becker and Olofsgård, 2017), and now this momentum is completely lost.

Energy relations have been Russia’s main leverage against the EU although warnings about this dependency have been raised for a long time. In this relationship, there has also been a hope that Russia would feel a mutual dependence and that over time it would shift its less desirable political course. With the events over the past year, this balancing act has decidedly come to an end, if not permanent, at least for many years to come. The EU will do its utmost not to rely on Russian energy in the future, and regardless of what path it chooses – LNG, more nuclear power, more electricity storage, etc. – the path forward will be to move away from Russia. Of course, there are other markets – approximately 40 percent of global GDP lies outside of the sanctioning countries – so clearly there are alternatives both for selling resources and establishing new trade relationships. However, this will in many cases take a lot of time and require very large infrastructure investments. And perhaps more important, for the most (to Russia) valuable imports in the high-tech sector it will take a very long time before other countries can replace the firms that have now pulled out.

Yet another factor that will have long-term consequences is that many of these aspects are understood by large parts of the Russian population, and those with good prospects in the West have already left or are trying to do so. It has been a long-term goal for those wanting to reform the Russian economy, at least in the past 20 years, to attract and put to fruition the high potential that have been available in terms of human capital and scientific knowledge. However, these attempts have not succeeded and the recent developments have put a permanent end to those dreams.

Conclusion

In the latest IMF forecast, countries in the Euro area will grow by 3.1 percent this year and only 0.5 percent in 2023. In January the corresponding numbers stood at 3.9 percent and 2.5 percent. This drop, caused in large part by the altered relations with Russia, is certainly non negligible, and especially painful coming on the heels of the Covid-19 crisis. However, it is an order of magnitude smaller than the “missed growth” Russia is experiencing. When judging the impact from sanctions on the Russian economy overall, the correct (and historically consistent) counterfactual displays a sizable GDP growth driven by very high energy and commodity prices. Relative to such counterfactual, the sanctions effect is already very noticeable. In the coming months, economic activity will slow down and many European household will feel the consequences. In this climate it will be important that, when assessing the situation with Russia perhaps performing better than expected, the following is kept in mind. Firstly, Russia is still doing much worse compared to the EU as well as to other oil-producing countries. Secondly, and even more important, what matters are the longer run prospects. And these are certainly even worse for the Russian economy.

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.

Sanctions Enforcement and Money Laundering

Posted on October 3, 2022 | Policy Brief

US dollar hang out to dry representing Sanctions Enforcement and Money Laundering

With sanctions becoming an increasingly important tool in ostracising autocratic regimes from western markets, the need for effective enforcement of Anti-Money Laundering (AML) policies is increasing. The global AML regime will be the backbone in detecting evasion of sanctions. This regime has, however, been widely criticised as ineffective. In this brief, we discuss issues with the current AML regime and propose a reward scheme for whistleblowers to enable asset seizures. A powerful feature of our proposal is that it does not rely on the effectiveness of the AML regime.

Introduction

Before Russia’s invasion of Ukraine, we wrote a FREE Policy brief expressing concerns over the ability of the current Anti Money Laundering (AML) regime to keep money launderers out of the international financial system. In the brief, we concluded that “The ease with which criminals have evaded present detection methods should cause concern about the effectiveness of sanctions”. The issue has now received renewed attention as the current sanctions against Russia will only be effective if it is difficult or costly to circumvent them. Sanctions evasions have a lot of similarities with money laundering, and the methods for detecting both is very similar, such that the proposal we discuss in this brief is applicable to both.

While an initial shock due to unexpected sanctions may generate disruptions, prohibited goods can later be imported/exported through third-party intermediaries in non-sanctioned countries to circumvent the sanctions. False labelling of origin, misinvocing, etc., are likely to occur and may be very difficult to detect. Analogously, sanctioned individuals’ assets may shift hands, and be laundered through shell companies without known beneficial owners.

In this brief, we consider a way to enhance enforcement, as outlined in a recent paper (Nyreröd, Andreadakis, and Spagnolo, 2022). The approach builds upon the US Kleptocracy Asset Recovery Rewards Program which offers up to $5 million “for information leading to seizure, restraint, or forfeiture of assets linked to foreign government corruption” (US Treasury, 2022).

The AML Regime

To justify the enforcement mechanism we later propose, some background on the AML regime is necessary. The global standard-setter for AML is the Financial Action Taskforce (FATF), which has since 1989 issued recommendations to countries on how to combat money laundering and terrorist financing. While initially focusing on drug money, the regime expanded in the last decades and has now received increased attention as it will be an important tool in ensuring sanctions against Russian oligarchs are effective.

The regime imposes numerous obligations on financial and other entities as they must assess risks and conduct due diligence along various dimensions, collect documents, and send reports to the national Financial Intelligence Unit. This regime has been widely criticized. Widespread AML non-compliance within banks, lack of rigorous supervision and enforcement by national supervisors and high costs relative to verifiable benefits are some of the issues that have been identified (Spagnolo and Nyreröd 2021; Nyreröd, Andreadakis and Spagnolo, 2022). The World Bank estimates that between 2 and 5 percent of global GDP is laundered annually, and that only around 0.2 percent of the proceeds from crime, laundered via the financial system, are seized and frozen (UNODC, 2011). Researchers have also been critical – for example Pol (2020), cites 22 papers that have “identified gaps between the intentions and results of the modern anti-money laundering effort, including its core capacity to detect and prevent serious profit-motivated crime and terrorism” (p.103).

Recent responses by the European Commission and others have focused on ensuring compliance within covered entities. Yet, increasing compliance with current AML rules may be costly and non-sufficient to stem the flows of illicit money in the international system. Even if widespread compliance within covered entities is obtained, and the AML procedures are effective, this may not be enough – even minimal non-compliance rates may result in major damages. We have seen how Danske Bank Estonia, a relatively small branch, managed to transfer around $230 billions of suspicious funds within the span of a couple of years (Bruun and Hjejle, 2018).

Some have suggested providing whistleblower rewards to those who report significant violations of AML rules by covered institutions (Spagnolo and Nyreröd, 2021; Scarcella, 2021). Yet, such rewards are only desirable if the AML regime is effective in achieving its policy objectives, which is not a given (we elaborate on this in Nyreröd, Andreadakis and Spagnolo, 2022). Enhanced compliance with the AML regime does not necessarily entail increased detection and deterrence of e.g., money laundering.  Numerous laundering methods exist that circumvent the reporting rules required under AML. A better option may be to incentivize facilitators of money laundering to provide information leading directly to asset seizures, as they have the best information that can lead to such forfeitures.

Incentivizing Facilitators

Money laundering is a derivative crime and requires what is called a “predicate offense” (such as human trafficking, drug sales, or corruption) that generates illegal money whose source needs to be obscured. The EU Directive (2018/1673) stipulates 22 categories of criminal activities that constitute predicate offenses.

There is a large infrastructure facilitating money laundering including financial advisers, real estate agents, tax advisors, and lawyers – crucial to criminals seeking to launder money. Bill Browder, famous for his work on advocating the Magnitsky Act, describes how he was aided by Alexander Perepilichnyy, a financial adviser for individuals involved in a large tax theft in Russia. Perepilichnyy helped launder the money for those involved in the tax theft, but eventually turned whistleblower when he provided bank statements to Browder that led to the freezing of $11 million related to this fraud (Browder 2022, p. 39). His information provided a “road-map” to even be able to start investigating where the illegally stolen assets had ended up. Perepilichnyy later died while jogging near London in 2012, which some believe was a murder in retaliation for blowing the whistle. A reward scheme would aim at people like Perepilichnyy, persons who are unrelated to the predicate offense, yet have information on the source and location of illicit funds.

Reward Programs in AML

The US has used whistleblower reward schemes in several regulatory areas including tax, procurement fraud, and securities fraud. These programs offer 10-30 percent of the recoveries or fines to whistleblowers that bring information crucial to issue the fines or recover public funds. Rewards to whistleblowers are therefore paid by the wrongdoing party, not the taxpayer.

These programs have received increased attention as several studies have found that they are effective at uncovering and deterring wrongdoing (Dyck, 2010; Wiedman and Zhu, 2018; Raleigh, 2020; Leder-Luis, 2020; Dey et al., 2021; Berger and Lee, 2022, see Nyreröd and Spagnolo, 2021 for a review). Agencies managing these programs have widely praised them, and studies show they are highly cost effective. More countries are also starting to experiment with offering rewards for information.

A salient feature of the US programs is that some degree of culpability in the wrongdoing does not disqualify an individual from an award. In 2012, Bradley Birkenfeld received $104 million under the Internal Revenue Service’s reward program despite serving a jail sentence for his involvement in facilitating tax evasion. In fact, when one of the most effective and famous whistleblower laws was enacted, the US Senator who tabled the bill argued that the bill aimed at “setting a rogue to catch a rogue” which “is the safest and most expeditious way I have ever discovered of bringing rogues to justice” (Howard, 1863).

Motivated by these experiences, we propose that AML should incorporate a whistleblower reward scheme, targeting those facilitating money laundry, with three central pillars:

Witness protection: aim at shielding whistleblowers and their families from negative consequences, if there are concerns that they might become victims of retaliation, harassment, or mistreatment of any kind. If the whistleblower is based in a hostile country, guaranteed asylum should be granted.

Leniency: offer immunity for any reported offense related to money laundering, but not for any other crime. Without immunity, a whistleblower will have no incentive to turn to authorities as they would immediately incriminate themselves and risk jailtime for money laundering.

Large, scaling, and mandatory rewards:  offer large, mandatory rewards that scale with the level of recoveries. As noted above, successful US programs pay 10-30 percent of the recoveries to whistleblowers. In the money laundering case, this percentage range may be lowered. Also, similarly to whistleblowers’ rewards in other cases, AML rewards would come from confiscated funds.

Numerous other design dimensions are important, but due to space limitations we refer the reader to other lengthier pieces that go into further detail (Nyreröd, Andreadakis and Spagnolo, 2022; Spagnolo and Nyreröd, 2021; Nyreröd and Spagnolo, 2021; Engstrom 2018).

Conclusion

The Russian aggression against Ukraine and the subsequent sanctions have put increased emphasis on the ability and effectiveness of the current AML regime to detect money laundering. Justified concerns about this regime have been raised, and its performance record is still under question. Programs offering whistleblowers witness protection, leniency, and large rewards could be an effective complement to this regime.

References

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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.