Tag: Russo-Ukranian war

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

Posted on May 20, 2024 | Policy Brief

20240519 Navigating Market Exits Image 02

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

Business Withdrawal from Russia

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

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

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

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

The LeaveRussia Project

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

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

Figure 2a. Total number of companies by country.

Figure 2b. Share of withdrawals, by country.

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

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

Withdrawal Determinants

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

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

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

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

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

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

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

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

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

And Those Who Didn’t Leave After All

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

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

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


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

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

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

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

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

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

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

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

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

Discussion

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

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

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

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

References

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

Can Farmland Market Liberalization Help Ukraine in its Reconstruction and Recovery?

Posted on March 20, 2024 | Policy Brief

20240319 Farmland Market Liberalization Ukraine Image 01

The Russian full-scale invasion of Ukraine has inflicted massive damages and losses on Ukraine, already amounting to more than 2.5 times Ukraine’s 2023 GDP. Despite substantial and continuing international political and financial support to help Ukraine in its recovery and reconstruction, it is becoming increasingly clear that it will need to mobilize its own resources and private financing as well – not just for the country’s reconstruction but also for its long-term development. From a government perspective, it is important for Ukraine to leverage scarce public and donor resources and to undertake necessary reforms to facilitate and crowd in private financing. Farmland market liberalization is one of the key reforms in this respect. Its scale, with farmland accounting for more than 70 percent of Ukraine’s territory, and capacity for private financing generation for agriculture and rural areas is, however, often underestimated.  

An Unbearable War Toll and the Need for Private Financing

The raging Russian war on Ukraine enters its third year, imposing an immense toll in terms of human life, economic stability, and regional security. About 20 percent of Ukraine’s territory has been occupied. More than 10 million Ukrainians have left their homes, including 6.45 million refugees that have resettled across Europe (UNHCR, 2024). Ukraine’s military casualties are reported to be approaching 200,000 (The New York Times, 2023) and at least 10,000 civilians have been killed (United Nations, 2023). Ukraine’s GDP plunged by 30 percent in 2022, and the documented total damages to Ukraine’s economy have reached US$ 155 billion, as of January 2024 (KSE, 2024). Similarly, economic losses amount to around US$ 500 billion (as of December 2023). At the same time Ukraine’s reconstruction and recovery needs are estimated at about US$ 486 billion (World Bank, 2024). This immense number make up more than 2.5 times Ukraine’s 2023 GDP.

While there is a substantial and continuing international political and financial support for Ukraine’s defense, recovery, and reconstruction, this will not be enough (World Bank, 2023). Ukraine needs to mobilize its own resources and private financing, not just for its reconstruction but also for its long-term development. The Ukrainian government must leverage scarce public and donor resources and undertake necessary reforms to facilitate and crowd in private investments. One of the crucial reforms in this regard is the ongoing liberalization of the farmland market. The scale of its impact and capacity to generate private financing for agriculture and rural areas is frequently undervalued.

Ukraine’s Farmland Market and Reform

Almost 71 percent of Ukraine’s territory (or 42.7 million ha, including occupied territories) is farmland and 33 million ha is arable. This is far more than in the largest countries in the EU. Ukraine also has one-third of the world’s most fertile black soils. This resource has however been heavily underutilized for agricultural and overall economic development (KSE, 2021). Over the last two decades, Ukraine has turned into an increasingly important global supplier of staple foods (von Cramon-Taubadel and Nivievskyi, 2023), but this has largely happened without a full-fledged farmland market in Ukraine capable of facilitating even further agricultural productivity growth.

The farmland sales market was virtually non-existent for over three decades, instead rental transactions dominated. The farmland sales market began operating only in July 2021, and in a very limited format. Only individuals could purchase farmland plots and with a 100-ha cap per person. The minimum price was set at the normative monetary land value, and tenants had pre-emptive purchase rights while foreigners and legal entities were excluded; state and communal farmland remained under the 2001 sales ban. The farmland sales market opening was part of a large-scale land reform to support an efficient and transparent farmland market. This included a legislation package aimed at preventing land raiding, decentralizing land management, introducing electronic land auctions, establishing tools for land planning and use, creating a national infrastructure for geospatial data, establishing institutions for supporting small scale farmers, and empowering small scale farmers capacity to compete for land (KSE, 2021).

In general, there are two broad benefits of sales and lease transactions. First, the farmland market, via transactions, sorts out more efficient farms from less efficient ones, thus increasing the overall sector value added. Another important benefit, specifically linked to the farmland sales market, is that a functioning farmland sales market makes farmland a collateral which can generate productive investments in increased agricultural and non-agricultural productivity growth (Deininger and Nivievskyi, 2019).

Early Reform Outcomes

Almost two out of the first two and a half years of the reform phase unfolded amidst the profound shock from Russia’s full-scale invasion of Ukraine. Following this, nearly 20 percent of Ukraine’s farmland has been occupied (Mkrtchian and Mueller, 2024), almost a third of the agricultural sector has been ruined – the total damages and losses to the agricultural sector amount to US$ 80 billion (Neyter at al., 2024). As a result, a very restrictive first-phase format of the market, on top of the war challenges, effectively limited the expected benefits of the market liberalization.

The war has put a sizable drag on the farm-land sales market development, effectively slashing the transacted volume almost by half (see Figure 1).

Figure 1. Cumulative market transactions and the effect of the war.

Source: Nivievskyi and Neyter, 2024.

Overall, about 1.1 percent of total farmland area, or about 1.3 percent of Ukraine’s total controlled farmland (equivalent of 200,000 sales transactions or 444,300 ha) has been traded since the opening of the market. Regionally, the outcome is quite diverse (see Figure 2).

This is nonetheless an encouraging outcome as it is quite comparable to developed countries benchmarks where, on average, roughly 1 percent (and up to 5 percent) of the total agricultural land area is transacted annually (Nivievskyi et al., 2016). Another important outcome is that the transacted farmland has remained in agricultural production.

Farmland price development is also positive, especially for commercial farmland (see Figure 3). Since the commencement of the farmland sales market in Ukraine, the capitalization has increased by US$ 5.5 billion (KSE Agrocenter, 2024).

In fact, farmland market capitalization might be even greater. There are indications that the actual market price should be much higher, on average, than the officially registered one, as transacting parties may try and evade fees and taxes (Nivievskyi and Neyter, 2024).

Figure 2. Transacted area as share of total oblast (administrative region) area.

Source: The Center for Food and Land Use Research at Kyiv School of Economics (KSE Agrocenter), 2024.

Continued Farmland Market Liberalization and Associated Expectations

As of January 1, 2024, legal entities gained the right to acquire farmland that had, from 2001, been under sales ban. Also, in this second stage, the farmland accumulation cap per beneficiary increased to 10,000 hectares. Other restrictions remain, including that legal entities with a foreign beneficiary still cannot purchase farmland.

The first results of the second stage are premature, and firm conclusions cannot be drawn, yet the preliminary results are quite encouraging. The new market participants have already increased the volume of transactions and corresponding price by 13 percent, on average (see Figure 3).

Figure 3. Average farmland prices, in thousands UAH.

Source: KSE Agrocenter (2024). Note: Demonstration and estimations are based on the State GeoCadaster Data.

Another encouraging result highlights that legal entities bring further transparency into the market. For half of the transactions involving individuals, the sales price did not exceed the minimum price by more than 1.5 percent, while in half of the farmland transactions with legal entities, the price exceeded the minimum one by more than 44 percent.

These early results provide insight into the market’s direction and the associated benefits. The expected economic benefits from liberalizing the farmland market for legal entities could amount to an annual increase of 1-2.7 percent of GDP over the next three years.  The scale depends on many factors, including the availability of financing and financial support for small farmers (KSE Agrocenter, 2023).

Rural and agricultural financing is of particular interest as land is generally considered a high-quality collateral which could be utilized to attract loans and investments. This is particularly important during the current wartime period, as agricultural producers are facing significant collateral damage and severe financial difficulties for the third consecutive year. Currently, despite its potential, only a meager share of all farming loans is secured by farmland – far below global benchmarks.

Under current registered farmland prices, the total farmland market capitalization is equivalent to roughly US$ 35.5 billion. This could potentially generate an additional US$ 12.4 billion of loans (under the current low liquidity risk ratio of 0.35), already much greater than the current agricultural debt of about US$ 3.5 billion. Adding legal entities to the pool of farmland buyers (as of January 2024), is expected to increase farmland prices by an additional 40 percent. Thus, the farmland market will grow to almost US$ 50 billion, and the volume of land-secured financing could amount to US$ 17.5 billion. Further liberalization of the farmland market, such as a strengthening of its transparency, boosting the market liquidity, and accumulating necessary market statistics, may allow the National Bank of Ukraine to reconsider the liquidity risk ratio for farmland – potentially considering it as collateral similar to other types of real-estate (see the National Bank of Ukraine Resolution #351, June 30, 2016). A liquidity risk ratio at the level of developed countries (0.6-0.8) could further increase the volume of potential land-secured financing available to agriculture and rural areas/landowners to at least US$ 35 billion. This would, in turn, close the more than US$ 20 billion current financing gap for agricultural reconstruction, recovery and development. It would also contribute to Ukraine’s nearly US$ 500 billion reconstruction and recovery needs.

Further significant strides toward liberalizing Ukraine’s farmland sales market are anticipated as part of the country’s journey towards EU membership (European Commission, 2024), aligning with Chapter 4 ‘Free Movement of Capital’. Specifically, this pertains to allowing foreigners (EU citizens and legal entities) the right to purchase Ukrainian farmland (Nivievskyi and Neyter, 2024).

Conclusion

Russia’s full-scale invasion of Ukraine have inflicted massive damages and losses to Ukraine, already amounting to more than 2.5 times Ukraine’s 2023 GDP. The recently estimated reconstruction and recovery needs measure at nearly US$ 500 billion. This is an unbearable burden for Ukraine alone. Despite substantial and continuing support from international partners and donors, Ukraine will need to heavily draw on its own resources and capacity to generate private financing, not just for the country’s reconstruction, but also for its long-term development. It is therefore essential, from the Ukrainians government’s perspective, to focus on necessary reforms and optimize policy decisions to leverage the scarce public and donor resources and facilitate and crowd in private investments. Continued farmland market liberalization is one such critical reform, providing hope to generate substantial private investment in the agricultural sector and rural areas.

The size of the farmland market is immense (with farmland accounting for more than 70 percent of Ukraine’s territory). The first two years following the opening of the farmland sales market demonstrate a substantial potential for private financing generation for agriculture and rural areas. The results from regular market monitoring and the early findings, as discussed above, suggest that further farmland market liberalization and increased transparency could generate about US$ 35 billion of financing for agricultural producers and rural areas/landowners. That could, in turn, close the current agricultural financing gap of more than US$ 20 billion for rebuilding and recovery, as well as partially close the nearly US$ 500 billion financing gap for Ukraine’s overall reconstruction and recovery. The expected economic benefits from liberalizing the farmland market for legal entities are estimated at 1-2.7 percent of GDP annually, over the next three years. A further liberalization of the farmland market, and a step towards EU membership, would include granting foreigners (EU citizens and legal entities) the right to buy Ukrainian farmland – expected to bring even further benefits.

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

20240314 Sanctions on Russia Image 03

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 from 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.

Russian Wheat Policies and Georgia’s Strategic Trade Policies

Posted on March 11, 2024 | Policy Brief

20240310 Wheat Policies Trade Policies Image 01

Russia is known for periodically halting its grain exports to impact global wheat prices. This has become a significant policy concern in recent years, most notably during the Covid-19 pandemic and in the wake of Russia’s war in Ukraine. Georgia heavily depends on wheat imports, and over 95 percent of its wheat has historically been sourced from Russia. Despite Russia’s periodic bans and restrictions on wheat exports occurring every 2-3 years, Georgia is yet to effectively diversify its sources of wheat imports. This policy brief analyses the impact of Russia’s most recent wheat policies on Georgia’s wheat market, examines Georgia’s response, and provides policy recommendations in this regard.

In June 2023, the Georgian government introduced a temporary import duty on wheat flour imported from Russia in response to requests from the Georgian Flour Producers Association. The association began advocating for an import duty after Russia, in 2021, imposed a so-called “floating tariff” on wheat which made it relatively more expensive to import wheat in comparison to wheat flour. As a result of the “floating tariff” on wheat, wheat flour imports skyrocketed and almost fully substituted wheat imports. Eventually, many Georgian mills shut down and local wheat producers struggled to sell domestically produced wheat. Such an increase in flour imports raises the risk of completely replacing domestically produced flour with flour imported from Russia.

To address the above, the government has implemented a temporary import duty of 200 GEL (75 USD) per ton on wheat flour imported from Russia (the average import price ranges between 225 USD/ton and 435 USD/ton). In turn, millers have agreed to purchase 1 kilogram of wheat from Georgian farmers for 0.7 GEL (0.3 USD). This policy measure is in effect until March 1, 2024.

The Georgian Flour Producers Association advocates for an extension of the temporary import duty beyond March 1, 2024, to uphold fair competition in the wheat and flour market. According to the Georgian Flour Producers Association, an extension is desirable due to the following (Resonance daily, 2024):

  • Under the import duty, fair competition between wheat flour and wheat has been restored, and Georgian mills have resumed their operations.
  • Following the government intervention, farmers have successfully sold over 50,000 tons (on average half of the annual production) of domestically produced wheat. The Ministry of Environmental Protection and Agriculture has reported a 60 percent increase in local wheat production over the past two years, with expectations of sustained growth.
  • Wheat imports have resumed, with Georgia importing 20,000 to 25,000 tons of wheat monthly, while prior to the government intervention, the average monthly wheat imports amounted to 15,337 tons (in 2022). Additionally, 8,000 to 12,000 tons of wheat flour, on average, are also imported monthly, while in the absence of government intervention, wheat flour imports surged to over 15,000 tons (in 2022).
  • Post-intervention, the price of 100 kilograms of first-quality flour has remained stable, ranging from 45 to 49 GEL. Consequently, the price of bread has not increased but remains steady.
  • The import duty has generated an additional 20 million GEL in government revenue.
  • Through the efforts of the mills, the country now enjoys a steady and strategically managed supply of wheat, in accordance with UN recommendations. Coupled with the seasonal harvest of Georgian wheat, this ensures complete food security in any unforeseen critical scenario.

While many arguments support the decision to preserve the import duty on wheat flour, in order to make an informed decision on that matter, it is essential to thoroughly assess production, trade and price dynamics in the wheat market in Georgia. Additionally, to design adequate trade policy measures, one has also to consider the issue in a broader perspective and assess the risks associated with a high dependency on Russian wheat, especially given Russia’s history of imposing wheat export restrictions.

Russian Policy on the Wheat Market

Russia has long been one of the dominant players on the global wheat market, and its periodic decisions to halt grain exports have heavily affected international wheat prices (see Table 1). This concern became especially stringent in recent years, during the Covid-19 pandemic and Russia’s war in Ukraine.

Table 1. Russia’s policy interventions in the wheat market and their estimated impact on wheat prices, 2007-2023.

Source: United States Department of Agriculture, 2022.
The Government of the Russian Federation.
The Kansas City Wheat Futures, The U.S. Wheat Associates.

One of Russia’s most recent interventions in the wheat market is its withdrawal from the Black Sea Grain Initiative – an agreement between Russia, Ukraine, Turkey, and the United Nations (UN) during the Russian invasion of Ukraine on the Safe Transportation of Grain and Foodstuffs from Ukrainian ports. While Georgia doesn’t directly import wheat from Ukraine and isn’t immediately threatened by famine, Russia’s export policies regarding wheat have raised significant food security concerns in the country. Georgia heavily depends on wheat imports from Russia, with over 95 percent of its wheat historically being sourced from there. Despite Russia’s recurrent bans and restrictions on wheat exports every 2-3 years, Georgia is yet to successfully diversify its import sources.

The Georgian Wheat Market in Figures

Domestic Production

Historically, Georgia’s agricultural sector has struggled to achieve a large-scale and sufficient wheat production due to the prevalence of small-sized farms. However, over the past decade, Georgian domestic wheat production has shown significant growth (see Figure 1). This growth has been particularly sizeable in recent years, with production increasing by 32 and 53 percent in 2021 and 2022, respectively, as compared to 2020.

Figure 1. Wheat production in Georgia, 2014-2022.

Source: Geostat, 2024.

Such increase in local production positively contributes to the self-sufficiency ratio, which increased from 7 percent in 2014 to 22 percent in 2022, in turn implying higher food security levels.

Wheat Imports

Before the introduction of Russia’s floating tariff on wheat, wheat flour imports to Georgia were almost non-existent. However, after the floating tariff was imposed on wheat, imports of wheat flour increased more than 20 times – from 743 tons in January 2021 to 15,086 tons in May 2023 – peaking at 23,651 tons in August 2022 (see Figure 2). At the same time wheat imports declined by almost 60 percent, from 29,397 tons in January 2021 to 12,133 tons in May 2023, with the smallest import quantity being 2,743 tons in May 2022 (as depicted in Figure 2).

Figure 2. Georgian wheat and wheat flour imports, 2021-2023.

Source: Geostat, 2024. Note: Imports include meslin (a mixture of wheat and rye grains).

After the introduction of the temporary import duty on wheat flour in June 2023, wheat imports have picked up, although not reaching the levels seen in 2021. Similarly, wheat flour imports have declined while remaining at higher levels than in 2021. This indicates a change in Georgia’s wheat market dynamics. Historically, Georgia predominantly imported wheat; now it imports both wheat and wheat flour. This shift must be considered in future policy design, as it has implications for domestic wheat farmers and mills.

The continued wheat flour imports, despite the temporary import duty imposed by the Georgian Government can likely be attributed to a smaller price gap between wheat and wheat flour import prices (see Table 2).

Table 2. Average import prices of wheat and wheat flour in Georgia, 2021-2023.

Source: Geostat, 2024.

In 2021, prior to Russia’s introduction of a floating tariff on wheat, the import price of wheat flour in Georgia was 24 percent higher than the import price of wheat. After the introduction of the floating tariff, importing wheat became more expensive, and the import price gap between wheat flour and wheat decreased to 22 percent by the end of 2021. Subsequently, in 2022, this gap further narrowed, and by the first half of 2023, the import price of wheat flour was 5 percent lower than the import price of wheat. This significant decrease in the price gap resulted in nearly full substitution of wheat imports with wheat flour imports. After the introduction of the import duty on wheat flour and as international wheat prices declined, a marginal positive price gap has reappeared, amounting to just 1 percent. As it stands, importing wheat flour remains more advantageous than importing wheat.

Price Effects

Russia’s floating tariff on wheat led to increased bread and wheat flour prices in 2021-2022. In June 2022, bread prices experienced the most significant surge, increasing by 36 percent, while wheat flour prices reached their peak in September 2022 with a year-on-year increase of 41 percent (see Figure 3). The primary reason for this was the record increase in wheat prices, leading to a corresponding surge in wheat flour prices in 2022. This spike occurred as the world price of wheat reached its highest point in five years.

Figure 3. Annual change in bread and wheat flour prices, 2021-2023.

Source: Geostat, 2024.

Nevertheless, in 2023 bread and wheat flour prices decreased, indicating that the import duty on wheat flour did not lead to increased prices. This could partially be explained by the fact that mills pay farmers 0.5 GEL/kg, which is lower than agreed price of 0.7 GEL/kg. Another and more crucial factor is the decline in global wheat prices. They began their descent in June 2022 and have since maintained a downward trajectory. This decrease, combined with increased local production, has so far acted as a barrier to any new bread and wheat flour price increases.

The Way Forward

The question that must be addressed is whether the import duty on wheat flour imported from Russia should be extended.

The import duty may have contributed to increased local production as higher import duties can incentivize local businesses to invest in expanding their production capacity or improving their technology to meet an increased demand. It is however essential to note that the impact of import duties on local production varies depending on the level of domestic competition, the availability of inputs (high quality seed, fertilizer etc.), technological capabilities, and government policies beyond import duties (such as investment incentives, infrastructure development, and regulatory environment). Additionally, import duties can also lead to retaliatory measures from trading partners, affecting overall trade dynamics – potentially incurring unintended consequences. Therefore, while import duties can contribute to an increased local production under certain conditions, it is just one of many factors influencing production dynamics.

Secondly, as previously detailed, the import duty has so far not resulted in increased bread prices. However, the effect of an import tariff on retail prices depends on various factors, including elasticity of demand and supply, market, competitiveness, and the extent to which the tariff is passed on to consumers by importers and retailers. Since demand for bread is inelastic, one has to keep in mind that the importers and retailers can fully pass on the increased cost from an import tariff to consumers.

Given that the floating tariff and the import duty make wheat and wheat flour imports to Georgia more expensive, one should expect future bread price increases. This unless international wheat prices continue to decline and/or producers agree to reduce their profit margins or make supply chain changes. Therefore, an extension of the import duty might be a suitable solution in the short and medium-term, but it should not be seen as a permanent solution.

To limit the risks of food scarcity in Georgia in the long run, it is essential to design strategies helping the country to reduce its dependency on Russian wheat and wheat flour. Some measures to achieve this objective may include:

Further supporting local production. Encourage investment in domestic agriculture to increase the productivity and quality of wheat production in Georgia. This can be achieved through subsidies, incentives for modern farming techniques, and access to credit for farmers.

Improving the quality of local production. Currently, most of the domestically produced wheat is unsuitable for milling into wheat flour. A significant portion of domestically produced wheat is of poor quality and instead used for feeding livestock. It is essential to invest in research and development to improve the quality of domestically produced wheat. This includes developing wheat varieties that are resistant to diseases and better suited for local growing conditions.

Seeking alternative markets for import diversification. One alternative for Georgia may be to focus on the Kazakh and Ukrainian markets (once the war is over) and negotiate possible ways to decrease the cost of transporting wheat to Georgia with state and private sector representatives.

Reducing the Georgian dependence on Russian wheat imports requires a multifaceted approach that addresses various aspects of agricultural policy, trade diversification, and domestic production capacity.

References

Resonance daily. (2024). The Association of Wheat and Flour Producers of Georgia requests an extension of the import tax on imported flour. https://www.resonancedaily.com/index.php?id_rub=4&id_artc=197847

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.

Cognitive Dissonance on Belarus: Recovery and Adaptation or Stalemate?

Posted on January 8, 2024 | Policy Brief

20240107 Cognitive Dissonance on Belarus Image 02

A closer look at the Belarusian economy over the recent year, produces two initially competing narratives. The first one emphasizes that tough sanctions have led to a deadlock for the Belarusian economy. The second one stresses that output losses have turned out to be much lower than expected, and that the economy has displayed a rather high degree of adaptability – securing an early and rapid recovery. This policy brief shows that these narratives are not mutually exclusive but rather elements of the same bigger picture. A short-term focus gives the impression that the current stance is ‘more good than bad’. This reflects the fact that output has recovered and almost reached historically high levels, made possible due to a combination of exports protection mechanisms and compensatory effects on output. However, this does not eliminate the disappointing medium- and long-term prospects for the country. On the flip side of the immediate survival of the Belarusian economy is the country’s economic and political stalemate. This includes the lack of opportunities for future sustainable growth and Belarus’ enormous and continuously growing dependence on Russia. Within this stalemate, stagnation is the best plausible scenario. At the same time, much worse scenarios, both economically and politically, are also highly likely. Ultimately, breaking the deadlock is the only way to a better future for Belarus.

The Belarusian Economy and the Changing Narratives

About 1.5 years ago, Western countries introduced tough sanctions against Belarus, punishing the Lukashenka regime for its role in Russia’s invasion of Ukraine. This gave rise to a huge uncertainty regarding Belarus’ economic prospects. A FREE policy brief published about a year ago (Kruk & Lvovskiy, 2022) presented a model-based estimate of a potential rock-bottom for the Belarusian economy in the new environment, which amounted to 20 percent of output losses. The authors however argued that actual output losses might be significantly lower given Russia’s support and policy responses, which were unaccounted for in the model. At the same time, downside risks and a lack of output consistency seem to have become permanent traits of the Belarusian economy.

Expectations of a large and prolonged recession in Belarus prevailed into mid-2023. International institutions (IMF, World Bank) and rating agencies (S&P, Fitch Ratings) mainly expected a recession in Belarus up to 10 percent 2022-2023.  The reality has however turned out to be quite different with the recession being relatively contained and short-lived. The output losses between the peak (Q2-2021) trough Q3-2022 amounted to 6.8 percent. In Q4-2022 a recovery began, and in Q3-2023 the economy had almost fully recovered, reaching nearly the same levels as in Q2-2021 (see Figure 1). Further, in terms of average real wages and household consumption, the situation appears to be even more positive. The real average wage reached its pre-war level in Q1-2023 and has since displayed record high levels, and household consumption follow a similar trend (see Figure 1).

These dynamics have given rise to a new narrative. As of lately, the Belarusian economic situation is at times treated as ‘more good than bad’. Further, most international financial institutions currently forecast a continued weak recovery growth in the coming years (EBRD, 2023; IMF, 2023; Izvorski et al., 2023).

Figure 1. Real GDP, Average Real Wages, and Real Household Consumption (index, seasonally adjusted, 2018=100).

Source: Author’s estimations based on Belstat data.

Factors Behind the Recent Recovery Growth

The underlying reasons for the recovery growth can be divided into two groups: (i) export protection mechanisms under sanctions and (ii) positive shocks and compensatory effects on output.

Export protection mechanisms under sanctions are twofold. Firstly, the Belarusian regime turned out to be somewhat successful in adjusting to the new sanctions-environment. This partly due to a somewhat geographical U-turn of Belarusian exports, underpinned by new logistics and payment schemes. The best example of this turn is the re-orientation of oil product exports from the EU and Ukraine to Russia (Kharitonchik, 2023). Moreover, some exports to traditional markets, which were challenged by logistics and payment barriers rather than sanctions, were secured by crossing these barriers. The best such example is the recovery of potash fertilizer exports to China, Brazil and India. Since early 2023 these displayed a rapid recovery due to Belarus finding logistic solutions through Russian sea ports instead of EU ports, and by using railway transportation.

Secondly, the practices of sanctions evasion may also have played a significant role. The scope of sanctions evasion is however difficult to assess due to its secretive nature. Moreover, the difference between avoiding and evading sanctions is not always clear.

Export protection mechanisms allowed Belarus to cushion actual export losses, making them transitory (see Figure 2). Actual losses in exports were close to the rock-bottom scenario estimates for only a couple of months. Instead of an expected level shift in exports by roughly 40 percent (from the pre-war level), exports displayed a recovery trajectory. Hence, what was modelled as a permanent shock in Kruk & Lvovskiy (2022), turned out to be transitory.

Figure 2. Physical Volume of Exports (index, seasonally adjusted, 2018=100).

Source: Author’s estimations based on Belstat data.

One important aspect to mention is that part of this recovery is due to oil-product exports taking place already in 2022 (Kharitonchik, 2023). In Kruk & Panasevich (2023) the authors show that the oil-refinery industry is of extreme importance for the entire Belarusian economy. Due to inter-industrial linkages, the oil-refinery industry indirectly accounts for about 11 percent of Belarus’ output, despite its modest direct contribution to the GDP (slightly more than 1 percent). Hence, due to protecting these exports (and the corresponding production of oil products), a large amount of output losses was avoided. A similar situation unfolded also for potash fertilizer exports and the chemical industry producing them (although inter-industrial linkages and effects on output are much weaker for that industry).

Besides export protection mechanisms, the recovery of exports and output stem largely from various positive and compensatory effects on output Some of them arose from Belarus’ and Russia’s respective regimes responses to sanctions, and from Russia’s readiness to support Belarus. Others are classical external positive shocks (to no degree related to sanctions) while some are a combination of both. They include: (i) increasing energy (gas) subsidies from Russia, (ii) a prolonged period of extra-high price competitiveness, especially in the Russian market, (iii) expanded access to the Russian market, (iv) other forms of Russian support (debt restructuring, budget transfers, new loans), (v) favorable trade conditions and export prices (apart from on the Russian market), (vi) a (macro)economic environment that allow for more  room for domestic economic policy interventions.

Taken together, these positive output drivers largely contributed to curbing the recession in 2022 and to the output recovery in 2023. A straightforward decomposition of the actual output growth path is unfeasible (due to the close interconnection of export protection mechanisms and output drivers, and the lack of available statistics). However, approximating the actual path in a model environment results in the following: between Q2-2021 and Q3-2022, about 12 percent of losses due to sanctions (taking into account the export protection mechanisms) and a deprivation of the Ukrainian market, and 5.2 percent of gains due to output shocks, resulted in actual output losses of 6.8 percent. Later in 2023, due to increasing effects from the export protection mechanisms, the sanctions-related output losses shrank to about 6.6 percent, while output shocks expanded output by roughly the same level. This allowed output losses to be zeroed out, i.e. the level of output in Q3-2023 was almost identical to Q3-2021.

An Economic Stalemate

Is the ‘more good than bad’ economic situation sustainable? Does the recent recovery mean that Belarus has overcome the major challenges to the economy? The short answer is no. Even with short-term thinking, there are still numerous downside risks. Sanctions still form a permanently challenging environment for the Belarusian economy, putting exports and output in jeopardy. The export protection mechanisms are not persistent, and they largely depend on Russia’s political will to support them. Moreover, the updated logistics and payment chains may also be vulnerable and sensitive to changes in the sanctions’ environment, and short-term trends in external prices. The aforementioned positive output effects are short-term by their nature and there are indications of them starting to fade already in 2023 (BEROC, 2023). Hence, even short-term projections for 2024 are challenging: the output growth is expected to weaken significantly or even fade away, while inflation spikes and financial destabilization risks are high (BEROC, 2023). Therefore, a return to a stagnant economic environment appears to be the most plausible short-term outlook.

The medium-term outlook seems even worse. According to Kruk (2023), the Belarusian macroeconomic balance (a) is very fragile, (b) is subject to numerous and huge downside risks, and (c) cannot be secured by macroeconomic policies because of the structural weaknesses in their design and the lack of room for maneuver. This means that even the existing weak long-term growth potential cannot be realized in the medium term, while the likelihood of recessions, inflation spikes and financial destabilization is high.

Re-shifting focus to a long-term and international perspective makes the viewpoint ‘more good than bad’ appear inconsistent. First, the long-term growth potential for Belarus, which was very weak even before the sanctions, keeps on worsening. This as adverse supply shocks and a deterioration of the productivity determinants continue eroding it (Kruk & Lvovskiy, 2022). Estimations of the growth potential (that rely on historical time series) are mainly within the range of 0-1 percent per annum. However, even such disappointing estimates might be optimistic bearing in mind the current political and sanctions-related risks and uncertainty (absent in the historical data). This makes stagnation the best possible long-term outlook, although it cannot be guaranteed.

Second, despite the milder recession and rapid recovery, the well-being gap between Belarus and its EU neighbors keeps on expanding (see Figure 3).

Figure 3. Well-being in Belarus vs the average among its EU neighbors (Latvia, Lithuania, Poland), 1990-2022, in percent.

Note: The GDP per capita PPP in 2017 constant international dollars is considered as well-being. The average well-being for EU Neighbors is the simple average in GDP in Latvia, Lithuania, and Poland.
Source: Author’s estimations based on World Bank data.

The average well-being in Belarus (measured in GDP per capita in constant international dollars) vs. that among its EU neighbors reached an (almost) historically low level in 2022. After attaining a level of well-being of roughly 75 percent of the average in Latvia, Lithuania, and Poland in the early 2010s, the well-being in Belarus has fall to about 52.5 percent, almost as low as in the mid-1990s. Given the economic stagnation as the most likely outlook, this means that the country will, in relative terms, keep on getting poorer in comparison to its EU neighbors.

A Political Stalemate

The hypothetical way out of the economic stalemate is more or less obvious. For instance, there is somewhat of a consensus among Belarusian economists about strengthening the long-term growth and securing macroeconomic stability (see Daneyko & Kruk, 2021; Kruk, 2023, for an overview of a collective view from a group of Belarusian economists). This vision, however, clashes with the views of the Lukashenka regime, which has inhibited its implementation throughout decades. Hence, democratic transition, or at least deprival of power of the Lukashenka regime has long appeared to be a highly likely precondition for moving away from the stalemate.

This, however, has changed in the last couple of years. The Belarusian economy’s dependence on Russia has moved from large to absolute. Prior to 2022, Russia was an important market for Belarusian exports (about 40 percent), the single energy supplier, and de facto the lender of last resort. To date, Russia’s role has expanded dramatically. The share of exports to Russia has increased up to about 65 percent. Moreover, the majority of the remaining 35 percent is exported with the assistance of or through Russia, using Russian infrastructure. Therefore, it would be fair to argue that Russia in some form “controls” roughly 90 percent of Belarusian exports. Further, being Belarus’ sole energy supplier, Russia has increased its significance for Belarus through expanded energy subsidies. The size of the energy subsidies reached a historical high in 2022, and the mechanism of the energy subsidies has become a cornerstone for macroeconomic stability in Belarus. Furthermore, Russia has turned out to be the only effective creditor for Belarus. Overall, Russia has accumulated a significant number of tools to undermine Belarus at any given moment.

A democratic transition or at least deprival of power of the Lukashenka regime might therefore not be sufficient preconditions for breaking the economic deadlock. Even if domestic political will to do so should emerge, the risk that Russia will successfully suppress it using the above outlined economic tools is very high. Hence, apart from a democratic transition, the way out of the economic stalemate requires a way out of the political stalemate. This seems to only be possible through either a politically weakened Russia, and/or an external political force, allied to the Belarusian democratic forces, and strong enough to suppress Russia.

Conclusions

Recently, the narrative on the Belarusian economy has changed. The prevailing expectations of a large and prolonged recession has been substituted by expectations of a gradual recovery. The narrative ‘the jig is up’ has somehow been crowded out by the ‘more good than bad’ viewpoint on the Belarusian economy. However, these narratives are not mutually exclusive. Behind the current ‘more good than bad’ viewpoint on the Belarusian economy, a severe economic and political deadlock prevails. Moreover, future economic and political deadlocks are the actual price being paid for the recent survival and recovery of the Belarusian economy.

From a positive perspective, the economic and political deadlock means that the country is likely to, at least, be bogged down in stagnation. Belarus’ total dependency on Russia makes the country hostage to Russia’s political preferences and country-specific risks. Should Russia decide to exert further economic and/or political influence over Belarus, it is likely to succeed. Consequently, any economic downturn faced by Russia would automatically impact Belarus.

From a normative perspective, breaking the economic and political deadlock might be the only solution, and for this, the order might matter. Prior to 2020 there was a widespread opinion that breaking the economic deadlock must be prioritized, and that it could – in turn – break the political deadlock. As of now, the tables have turned. The current order postulates the political deadlock comes first, as it seems to be the only way of breaking the economic stalemate. However, breaking the political deadlock appears to require external political will.

With these conclusions in mind, the recent Belarusian democratic forces’ manifest regarding Belarus’ EU membership aspiration, deserves attention (BDF, 2023). At first, such aspiration might appear schizophrenic given the actual political situation inside of the country. However, taking a Belarusian EU membership serious (within the EU and among Belarusians) might be the answer to Belarus’ political and economic deadlock. From this perspective, the task for the Belarusian society is thus to convince EU counterparts that this is not madness, but rather a feasible solution. It is rather evident why this solution is both desirable and feasible for the Belarusian society. The main question to be answered is therefore whether, and why it would be desirable and feasible for the EU.

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.

Risks of Russian Business Ownership in Georgia

Posted on November 27, 2023 | Policy Brief

Image of Tbilisi at night representing risks of Russian business ownership in Georgia

This policy brief addresses risks tied to Russian business ownership in Georgia. The concentration of this ownership in critical sectors such as electricity and communications makes Georgia vulnerable to risks of political influence, corruption, economic manipulation, espionage, sabotage, and sanctions evasion. To minimize these risks, it is recommended to establish a Foreign Direct Investment (FDI) screening mechanism for Russia-originating investments, acknowledge the risks in national security documents, and implement a critical infrastructure reform.

Russia exerts substantial influence over Georgia. First and foremost, Russia has annexed 20 percent of Georgia’s internationally recognized territories of Abkhazia and South Ossetia. Further, it employs a variety of hybrid methods to disrupt the Georgian society including disinformation, support for pro-Russian parties and media, trade restrictions, transportation blockades, sabotage incidents, and countless more. These tactics aim to hinder Georgia’s development, weaken the country’s statehood, and negatively affect pro-Western public sentiments (Seskuria, 2021 and Kavtaradze, 2023).

Factors that may also increase Georgia’s economic dependency on Russia concern trade relationships, remittances, increased economic activity driven by the most recent influx of Russian migrants, and private business ownership by Russian entities or citizens (Babych, 2023 and Transparency International Georgia, 2023). This policy brief assesses and systematizes the risks associated with Russian private business ownership in Georgia.

Sectoral Overview of Russian Business Ovnership

Russian business ownership is significant in Georgia. Recent research from the Institute for Development of Freedom of Information (IDFI) has addressed Russian capital accumulation across eight sectors of the Georgian economy: electricity, oil and gas, communications, banking, mining and mineral waters, construction, tourism, and transportation. Of the eight sectors considered by IDFI, Russian business ownership is most visible in Georgia’s electricity sector, followed by oil and natural gas, communications, and mining and mineral waters industries. In the remaining four sectors considered by IDFI, a low to non-existent level of influence was observed (IDFI, 2023).

Figure 1. Overview of Russian Ownership in the Georgian Economy as of June 2023.

Source: IDFI, 2023.

There are several reasons for concern regarding the concentration and distribution of Russian business ownership in the Georgian economy.

First, it is crucial to keep Russia’s history as a hostile state actor in mind. Foreign business ownership is not a threat in itself; However, it may pose a threat if businesses are under control or influence of a state that is hostile to the country in question (see Larson and Marchik, 2006). Business ownership has been a powerful tool for the Kremlin, allowing Russia to influence various countries and raising concerns that such type of foreign ownership might negatively affect national security of the host country (Conley et al., 2016). Similar concerns have become imperative amidst Russia’s full-scale war in Ukraine (as, for instance, reflected in Guidance of the European Commission to member states concerning Russian foreign acquisitions).

Further, Russian business ownership in Georgia is particularly threatening due to the ownership concentration within sectors of critical significance for the overall security and economic resilience of the country. While there is no definition of critical infrastructure or related sectors in Georgia, at least two sectors (energy and communications) correspond to critical sectors, according to international standards (see for instance the list of critical infrastructure sectors for the European Union, Germany, Canada and Australia). Such sectors are inherently susceptible to a range of internal and external threats (a description of threats related to critical infrastructure can be found here). Intentional disruptions to critical infrastructure operations might initiate a chain reaction and paralyze the supply of essential services. This can, in turn, trigger major threats to the social, economic, and ecological security and the defense capacity of a state.

Georgia’s Exposure to Risks

Identifying and assessing the specific dimensions of Georgia’s exposure to risks related to Russian business ownership provides a useful foundation for designing policy responses. This brief identifies six distinct threats in this regard.

Political Influence

Russia’s business and political interests are closely intertwined, making it challenging to differentiate their respective motives. This interconnectedness can act as a channel for exerting political influence in Georgia. Russians that have ownership stakes in Georgian industries (e.g. within electricity, communications, oil and gas, mining and mineral waters) have political ties with the Russian ruling elite facing Western sanctions, or are facing sanctions themselves. For instance, Mikhail Fridman, who owns up to 50 percent of the mineral water company IDS Borjomi, is sanctioned for supporting Russia’s war in Ukraine. Such interlacing raises concerns about indirect Russian influence in Georgia, potentially undermining Georgia’s Western aspirations.

Export of Corrupt Practices

The presence of notable Russian businesses in Georgia poses a significant threat in terms of it nurturing corrupt practices. Concerns include “revolving door” incidents (movement of upper-level public officials into high-level private-sector jobs, or vice versa), tax evasion, and exploitation of the public procurement system.  For instance, Transparency International Georgia (2023) identified a “revolving door” incident concerning the Russian company Inter RAO Georgia LLC, involved in electricity trading, and its regulator, the Georgian state-owned Electricity Market Operator JSC (ESCO). One day after Inter RAO Georgia LLC was registered, the director of ESCO took a managerial position within Inter RAO Georgia LLC. Furthermore, tax evasion inquiries involving Russian-owned companies have been documented in the region, particularly in Armenia, further highlighting corruption risks. We argue that such corrupt practices might harm the business environment and deter future international investments.

Economic Manipulation

A heavy concentration of foreign ownership in critical sectors like energy and telecommunications, also poses a risk of manipulation of economic instruments such as prices. The significant Russian ownership in Armenia’s gas distribution network exemplifies this threat. In fact, Russia utilized a price manipulation strategy for gas prices when Armenia declared its EU aspirations. Prices were then reduced after Armenia joined the Eurasian Economic Union (Terzyan, 2018).

Espionage

Russian-owned businesses within Georgia’s critical sectors also pose espionage risks, including economic and cyber espionage. Owners of such businesses may transfer sensitive information to Russian intelligence agencies, potentially undermining critical infrastructure operations. As an example, in 2022, a Swedish business owner in electronic trading and former Russian resident, was indicted with transferring secret economic information to Russia. Russian cyber-espionage is also known to be used for worldwide disinformation campaigns impacting public opinion and election results, compromising democratic processes.

Sabotage

The presence of Russian-owned businesses in Georgia raises the risk of sabotage and incapacitation of critical assets. Russia has a history of using sabotage to harm other countries, such as when they disrupted Georgia’s energy supply in 2006 and the recent Kakhovka Dam destruction in Ukraine (which had far-reaching consequences, incurring environmental damages, and posing a threat to nuclear plants). These incidents demonstrate the risk of cascading effects, potentially affecting power supply, businesses, and locations strategically important to Georgia’s security.

Sanctions and Sanction Evasion

Russian-owned businesses in Georgia face risks due to Western sanctions as they could be targeted by sanctions or used to evade them. Recent cases, like with IDS Borjomi (as previously outlined) and VTB Bank Georgia – companies affected by Western sanctions given their Russian connections – highlight Georgia’s economic vulnerability in this regard. Industries where these businesses operate play a significant role in Georgia’s economy and job market, and instabilities within such sectors could entail social and political concerns. There’s also a risk that these businesses could help Russia bypass sanctions and gain access to sensitive goods and technologies, going against Georgia’s support for international sanctions against Russia. It is crucial to prevent such sanctions-associated risks for the Georgian economy.

Assessing the Risks

To operationalize the above detailed risks, we conducted interviews with Georgian field experts within security, economics, and energy. The risk assessment highlights political influence through Russian ownership in Georgian businesses as the foremost concern, followed by risks of corruption, risks related to sanctions, espionage, economic manipulation, and sabotage. We asked the experts to assess the severity level for each identified risk and notably, all identified risks carry a high severity level.

Recommendations

Considering the concerns detailed in the previous sections, we argue that Russia poses a threat in the Georgian context. Given the scale and concentration of Russian ownership within critical sectors and infrastructure, a dedicated policy regime might be required to improve regulation and minimize the associated risks. Three recommendations could be efficient in this regard, as outlined below.

Study the Impact of Adopting a Foreign Direct Investment Screening Mechanism

To effectively address ownership-related threats, it’s essential to modify existing investment policies. One approach is to introduce a FDI screening mechanism with specific functionalities. Several jurisdictions implement mechanisms with similar features (see a recent report by UNCTAD for further details). Usually, such mechanisms target FDI’s that have security implications. A dedicated screening authority overviews investment that might be of concern for national security and after assessment, an investment might be approved or suspended. In Georgia, a key consideration for designing such tool includes whether it should selectively target investments from countries like Russia or apply to all incoming FDI. Additionally, there’s a choice between screening all investments or focusing on those concerning critical sectors and infrastructure. Evaluating the investment volume, possibly screening only FDI’s exceeding a predefined monetary value, is also a vital aspect to consider. However, it’s important to acknowledge that FDI screening mechanisms are costly. Therefore, this brief suggests a thorough cost and benefit analysis prior to implementing a FDI screening regime in Georgia.

Consider Russian Ownership-related Threats in the National Security Documents

Several national-level documents address security policy in Georgia, with the National Security Concept – outlining security directions – being a foundational one. Currently, these concepts do not specifically address Russian business ownership-related threats. When designing an FDI screening mechanism, however, acknowledging various risks related to Russian business ownership must be aligned with fundamental national security documents.

Foster the Adoption of a Critical Infrastructural Reform

To successfully implement a FDI screening mechanism unified, nationwide agreement on the legal foundations for identifying and safeguarding critical infrastructure is needed. The current concept for critical infrastructure reform in Georgia envisages a definition of critical infrastructure and an implementation of an FDI screening mechanism. We therefore recommend implementing this reform in the country.

Conclusion

This policy brief has identified six distinct risks related to Russian business ownership in several sectors of the Georgian economy, such as energy, communications, oil and natural gas, and mining and mineral waters. Even though Georgia does not have a unified definition of critical infrastructure, assets concentrated in these sectors are regarded as critical according to international standards. Considering Russia’s track record of hostility and bearing in mind threats related to foreign business ownership by malign states, this brief suggests regulating Russian business ownership in Georgia by introducing a FDI screening instrument. To operationalize this recommendation, it is further recommended to consider Russian business ownership-related threats in Georgia’s fundamental security documents and to foster critical infrastructural reform in the country.

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.

Belarusian Business in Turbulent Times

Posted on October 23, 2023 | Policy Brief

20231023 Belarusian Business Challenges

In the past three years, the Belarusian private sector appears to have been caught between a hammer and an anvil, experiencing domestic repressions and de-liberalization as well as collateral damage from sanctions and a deterioration of the country’s image. This policy brief discusses the challenges that Belarusian businesses have been facing since the onset of the Covid-19 pandemic and argues that the private sector may be the last hope for sovereignty and transformation of the country.

The years that have passed since the onset of the Covid-19 pandemic and the subsequent economic shocks have significantly altered the entrepreneurial landscape in Belarus. This period has seen the emergence of private businesses’ social and political activation during the pandemic, as well as during the 2020 election campaign and post-election protests (Bornukova & Friedrich, 2021). Businesses have also had to adapt to reactionary government policies, cope with sanctions against Belarus and deal with issues related to the Russian invasion of Ukraine. In the face of these challenges, the reactions and responses from small and medium-sized businesses signals that the private sector still has the potential to remain a driving force for socio-economic development in Belarus – despite the current political forces in power.

Private Sector Development; Liberalization and Regulation

The liberalization of the business environment, which lasted more than a decade and ended in 2020, allowed the private sector (enterprises without any state ownership share) to become the most dynamic part of the economy (see Figure 1).

From 2012 through 2020, the share of the private sector in employment increased by 7.7 percentage points. Similarly, the contribution from the private sector to the export of goods and services, as well as to GDP, exceeded the contribution from state-owned commercial enterprises. Moreover, even in the absence of significant privatization and restructuring of state-owned enterprises, the private sector took over the “social” function as an “employer of last resort”, absorbing workers released from the public sector (including from fully and partly state-owned enterprises) (IPM Research Center, 2020).

In addition, the development of the private sector increased the diversification of Belarus’ foreign trade. Private companies in the IT sector, advanced instrument manufacturing, electronics, and other high-value-added industries shifted their focus to developed countries’ markets, which reduced the dependency on Russian resources and markets. This increased Belarus’ economic sovereignty and its resilience to political tensions and other external shocks. The year 2020 however marked the end of the liberalization of entrepreneurial activities, as private businesses and private capital started to be seen as a threat to the political system (Bornukova & Friedrich, 2021).

Figure 1. Contributions from the Belarusian private sector to main economic indicators.

Source: Own elaboration based on Chubrik (2021) and IPM Research Center (2020).

Although there are no uncontestable figures describing business’ attitudes and activities during the political crisis in 2020, several non-academic projects documented that 58 percent of people protesting the fraud elections in 2020 worked within the private business sector (Devby.io, 2020). Dozens of businesses also openly supported the anti-regime strikes (The Village Belarus, 2020). As a consequence, legislation and law enforcement have since been steadily tightened, the tax burden has increased, and the possibility for using simplified taxation and accounting systems by small-scale businesses, in particular for sole proprietors, have been substantially reduced.

Against this backdrop, the government has also suppressed the publication of detailed statistical data including those on entrepreneurial activity. Since 2020, the Belarusian Research and Outreach Center (BEROC)’s quarterly enterprise surveys have become the main source of information and analysis on the business development situation.

In general, BEROC’s surveys demonstrate that, despite a reduced safety cushion and the lack of substantial state support during the pandemic, Belarusian businesses had, by the end of 2021,  adapted to the shocks from the post-election crisis and harsh de-liberalization, by realizing  their ability to cope, and finding creative solutions in the turbulent environment (Marozau, Akulava and Panasevich, 2021). Before Russia’s aggression against Ukraine, Belarusian entrepreneurs’ optimism about overcoming external barriers – i.e., factors that are out of a firm’s control such as macroeconomic instability, etc. – was the highest since 2015. However, increased uncertainty forced Belarusian businesses to focus primarily on maintaining the achieved scale of activity, halting investments (Kastrychnicki Economic Forum (KEF) & BEROC, 2022).

Optimism In Challenging Times

In general, the institutional environment for doing business in Belarus has deteriorated in recent years, both due to actions such as changes in tax legislation, price regulation and pressure on disloyal businesses, and due to negligence from the state, such as lack of significant support measures for private business, an outflow of businesses due to sanctions and an increasingly negative image of the country (KEF & BEROC, 2022). The Business Confidence Index (BCI, ranging from 0 – “extremely negative” to 100 – “extremely positive”), developed by BEROC and the Kastrychnicki Economic Forum based on OECD methodology, documented that at the end of 2020, the confidence level of business representatives regarding future developments was in the negative zone – arguably due to the political unrest and the Covid-19 pandemic. As firms accepted a new normality and adjusted their businesses, the BCI steadily grew before comfortably settling in the neutral zone at the end of 2021 (see Figure 2).

In March-April 2022, however, macroeconomic instability, disruption of supply chains, and shortages of raw materials and/or components following the Russian war on Ukraine became serious external barriers for Belarusian businesses. This lowered the BCI and businesses’ perception of their economic situation.

Quite surprisingly, the risks of doing business in Belarus in the second half of 2022, until early 2023, were estimated to be lower than in 2021 (see Figure 3). This may be explained by the fact that (for companies remaining in Belarus) many of the potential risks (inflation, exchange rate instability, sanctions, counter-sanctions, disruption of supply chains, tightening of price regulation, etc.) had already realized (BEROC, 2023).

Figure 2. Business Confidence Index and GDP growth rate, October 2020-March 2023.

Source: KEF & BEROC (2023) and the National Statistical Committee of the Republic of Belarus.

Figure 3. Risk perception by Belarusian Businesses.

Source: BEROC (2023).
Note: Risks were scored on a five-point scale, 1-5, where 1 denotes “very low” and 5 “very high”. Dotted lines denote the 95 percent confidence intervals.

The New Reality

The reaction from most Belarusian businesses to both pandemic- and war-related challenges has manifested in their search for new business models, an introduction of new products/services, and the entry into new export markets. Despite a bundle of powerful shocks to the economy stemming from the Russian war on Ukraine and related sanctions, some factors have dampened the anticipated drop in the economy: in particular, the increase in Russian support, export re-orientation to Russia and developing markets, alongside monetary stimuli, and interference with the activity of state-owned enterprises as well as artificial price controls (Kruk & Lvovskiy, 2022). As a result, the standard of living has remained at pre-war levels: in January-April 2023, real household disposable income and real salary grew by 1.6 percent and 3.8 percent respectively. With sanctions on Belarus being comparatively softer than those on Russian businesses, Belarusian businesses may have gained a comparative advantage and additional opportunities in both the domestic and Russian markets (BEROC, 2022). This caused optimism among entrepreneurs and in March 2023 – for the first time in the considered period – the composite BCI turned out to substantially exceed the neutral zone (see Figure 2). These positive spillovers are however likely to be bound in time – they will end both if the state of the Russian economy worsens (as this would reduce Russian support and decrease export revenues for Belarusian firms), and in the unlikely scenario that Russia’s current isolation is reduced. Whether Belarusian businesses will withstand the current protracted crisis depends on the ability of state authorities (current or new) to restore a constructive dialogue with the business community, return to the rule of law and create a business environment conducive to entrepreneurship.

According to business, the key factor needed to expand business activity is a reduction of external barriers (such as disruptions to supply chains, shortages of raw materials and/or components), rather than government support (e.g., financial, informational, etc.) (KEF & BEROC, 2022). Thus, “We do not need state support, but need the state not to worsen legal conditions for doing business” has become a motto of Belarusian entrepreneurs. Even in the context of war and political instability in the region, it allows looking at the prospects of the private sector in Belarus with some positive expectations.

At the same time, factors such as political repressions, sanctions against Belarus, problems with logistics, and the refusal of business partners to work with Belarusian companies due to the Russian aggression towards Ukraine have forced many Belarusian businesses, especially in high-tech sectors, to relocate. While the scale and direction of Belarusian business emigration is still difficult to assess (Krasko & Daneyko, 2022), these processes devastate entrepreneurship capital in Belarus and jeopardize the prospect of entire sectors such as the IT sector. In addition, the popular opinion about the lack of business opportunities implies that, unless conditions improve in terms of state policy and public confidence in the future, the socio-economic effects (employment, value added, tax revenue, innovations) from entrepreneurial activity in Belarus will diminish (GEM-Belarus 2021/2022). With operations severely affected by external barriers and restrictive legislation, halted investments and limited, if any, commercial contacts with Western countries and individual businesses, Belarusian private enterprises can hardly be seen as a source of stability for the current regime.

Conclusion

To promote an increased role of the private sector in the Belarusian economy, and to ensure high-quality and sustainable growth of the same, two prerequisites are critically necessary.

Firstly, a resolution of the political crisis and a restoration of authorities’ and state institutions’ legitimacy will significantly increase the populations’ confidence in state policy on business and economics. The principle of rule of law must be recognized and public and private actors must be treated equally in all spheres. It is also necessary to ensure the stability of tax legislation and economic law and the mitigation of excessive state control of business activities. All the above would lower external barriers and create stimuli for long-term business investments that, in turn, would facilitate economic transformation.

Although the sanctions’ packages imposed on Belarus by most developed countries due to domestic repressions, and complicity in the aggression against Ukraine, were directed towards the public sector, the private business suffered substantial macroeconomic and reputational consequences in their wake. The refusal of many foreign partners (suppliers, customers, banks, transport companies etc.) to work with Belarusian businesses – regardless of their affiliation with the state and attitude towards Lukashenko’s regime as well as towards the war on Ukraine – also substantially undermine businesses’ potential and Western soft power in Belarus. Such refusal is often driven by the argument that, by paying taxes, private businesses in Belarus support the current regime, when they should instead undermine the regime by halting operations (and thus tax revenues). At the same time, with the complete liquidation of civil society organizations and the termination of international projects and initiatives, the Belarusian private business may serve as the last resort in the hope of achieving independent, decentralized, and autonomous decision-making – all cornerstones of modern democracy (Audretsch & Moog, 2022).

From this perspective, the preservation of the private sector in Belarus may be of decisive importance in the future political processes, necessary to take into account by policymakers and business elites alike in developed countries.

In addition, relocated Belarusian businesses can play an important role in transforming the country by developing social ties between entrepreneurs and civil society, by providing support when solving problems related to doing business outside of Belarus and by investing in the Belarusian economy in the future. In this regard, establishing non-partisan Belarusian business associations abroad creates preconditions for consolidation of the most active part of the Belarusian community and its involvement in the envisaged economic transformation of the country.

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.