After years of sanctions, some leaders are calling to welcome Russia back to the community of nations. They point out lost business opportunities that might now be explored.
However, let the investor beware. Despite appearances of resilience, Russia’s economy is not everything it seems to be. Making any new business deals will be fraught with risk. Promises of rare-earth metals investment or oil profits may sound alluring, but the deeper one digs, the more fool’s gold one finds.
At first glance, Russia’s economy appears to be holding up under the strain of war and sanctions. However, its resilience is propped up by unsustainable government military spending and skewed economic priorities.
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For instance, in 2023, Russia spent a record-high 36.6 trillion rubles (around $386 billion) on defense. This influx drove up GDP figures, but it will harm economic integrity in the long term.
Meanwhile, inflation is high at 9.9 percent as of January 2015, nearly double the central bank’s target. Interest rates set post-Soviet high of 21% in October 2024.
The national economy also suffers from the casualties in the war with Ukraine that will never enter the workforce. According to the International Institute for Strategic Studies, the Russians have lost a minimum of 172,000 Russian troops that have been killed and 611,000 wounded, It also faces the exodus of young professionals and a staggering labor shortage of around 5 million Russian workers.
Another red flag for investors is the nightmarish experience of those few foreign businesses foolishly optimistic enough to operate in Russia. These firms have experienced significant losses, while others have suffered outright asset seizures. The site Leave-Russia chronicles the hardships of companies that left and stayed.
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The most glaring example of such theft is Mobil Exxon’s exit from the Sakhalin project. Exxon’s $4 billion stake in the venture was transferred to a government-owned company. This confiscation left a gaping hole not only in Exxon’s portfolio but also in global perceptions of Russia as a country that honors agreements.
For instance, British Petroleum (BP) had to make a $25 billion write-down after exiting Russia. It remains entangled with stakes in Rosneft, a Russian state oil producer. Western brands like McDonald’s, IKEA, and Starbucks not only exited but also witnessed their vacated assets redistributed to Putin loyalists in classic Kremlin style.
The war has created what analysts call “economic lawfare.” Legal compliance and regulations in Russia make it a bureaucratic swamp for foreign investors. Asset nationalization, arbitrary taxation, and a lack of access to Western credit make even thinking about entering the Russian market a recipe for disaster. The remaining European and U.S. companies still operating in Russia face reputational damage, operational loss and chaos.
On paper, joint ventures that concentrate on developing Russia’s resource-rich sectors—oil, gas, and rare-earth metals—appear to be gold mines for international investors. However, they present a set of insurmountable challenges of their own.
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Rare-earth deposits, for example, remain largely untapped due to their location in Siberia’s unforgiving wilderness or the Arctic’s hostile environment. The absence of infrastructure and refining capacity means that even the most valuable resources are inaccessible without significant upfront investments and years or decades of development.
Meanwhile, China has already asserted its claim by purchasing Russian oil and nearly monopolizing entire sectors of the economy. Over half of all new cars sold in Russia are now made in China. Beijing’s deep entrenchment in the Russian market makes operations in the country like stepping into a minefield dominated by the communist Chinese.
Even more troubling, Russia is becoming increasingly isolated from global innovation and high-tech supply chains. Western sanctions have cut it off from critical technologies, forcing it to rely upon low-tech exports or the out dated, cheap technology of Chinese imports.
These elements present a bleak picture of productivity and progress. It is not a good place to invest.
The message for businesses evaluating their next moves is clear—Russia is a swamp, not a marketplace. It is a country weighed down by its hostility to everything Western, its demographic decline and technological stagnation.
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Investors are better off looking elsewhere where there is the honor necessary for agreements, respect for private property, transparency, innovation and long-term stability.
If there’s one lesson to be learned from the bitter experiences of McDonald’s, BP, Mobil Exxon, and others, it is this: no deal is worth the risk of entanglement in this mire. Russian roulette might make for a dramatic metaphor, but it’s not a game you want to play when it comes to business.
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