Turkish President Recep Tayyip Erdogan and Russian President Vladimir Putin. Turkey, which Turkey gets much of its gas from Russia, has stayed engaged with Moscow despite Western sanctions. Photo: AFP / Sergey Guneev / Sputnik

As sanctions have their intended effect – getting companies from the US and allied countries to leave Russia – there’s also an unintended effect as competitors from countries led by India, Turkey and China pick up the slack.

Despite the bad news, Russians can justify harboring hope based on the actions of some countries that do not support the sanctions and are increasing their involvement in Russia’s economy.

Anecdotal evidence for this includes such hints of ambiguity as a rhetorical question from US national public radio network NPR (April 13, 2022): The West is hammering Russia with sanctions. But, do they work?

Nearly 300 American, European, East Asian and other foreign companies have completely stopped doing business in Russia since the invasion of Ukraine, according to a survey conducted by the Yale School of Management.

More than 470 have suspended or scaled back their operations and more than 110 others have postponed new investments.

Prominent firms that have either abandoned or suspended their businesses in Russia include oil companies BP, Exxon and Shell; aircraft manufacturers Airbus and Boeing; telecom equipment vendors Ericsson and Nokia; and tech companies Alphabet (Google), AMD, Apple, Cisco, Global Foundries, Intel, Nvidia, Samsung, TSMC and Qualcomm.

Will this cripple the Russian economy? Some people think so. Investment Monitor published an article entitled: Taiwan’s semiconductor ban could spell catastrophe for Russia” (March 18, 2022).

More about this later. The Mayor of Moscow, Sergey Sobyanin, blogged that in his city, According to our estimates, about 200,000 people are at risk of losing their jobs.

On April 24, Jeffrey Sonnenfeld and his research team at the Yale School of Management published an updated list of companies that have halted or curtailed their operations in Russia. Sonnenfeld is senior associate dean for leadership programs at the school and president & CEO of the Yale Chief Executive Leadership Institute (CELI). 

Sonnenfeld and CELI Director of Research Steven Tian are openly biased, proclaiming a clear and simple goal: Every corporation with a presence in Russia must publicly commit to a total cessation of business there.”

Apartheid comparison

They compare their effort to the boycott of apartheid South Africa: The corporate exodus contributed to the end of apartheid, and was a remarkable display of the power that companies have. When they’re courageous enough to use that power for good, it can help topple repressive governments.

Their survey ranks companies as follows:

  • Grade A: Withdrawal – Clean break. Companies totally halting Russian engagements or completely exiting Russia (299 companies)
  • Grade B: Suspension – Temporarily curtailing most operations while keeping options open for return (364 companies)
  • Grade C: Scaling Back – Reducing some significant operations but continuing others (112 companies)
  • Grade D: Buying Time – Postponing new investments while continuing substantive business. (143 companies)
  • Grade F: Digging In – Defying demands for exit or reduction of activities. Companies that are continuing business-as-usual in Russia (181 companies)

This points to tough times ahead for Russia. But before seeing it as an unmitigated negative, we need to add another category:

  • Grade E: Eurasia – Indian, Turkish and Chinese companies seeking to take advantage of the mass withdrawal of Western and East Asian competitors from the Russian market.

Where Yale and many other Westerners see moral certitude, the non-Western world tends to see hypocrisy and opportunity. Why?

Conflicting viewpoint

The “Costs of War” research project conducted by the Watson Institute for International and Public Affairs at Brown University concludes that:

  • More than 929,000 people have died in America’s post-9/11 wars due to direct war violence, and several times as many due to the reverberating effects of war.
  • Over 387,000 civilians have been killed as a result of the fighting.
  • The number of war refugees and displaced persons is about 38 million.
  • The wars have been accompanied by violations of human rights and civil liberties, in the US and abroad.

Has this led to a campaign to impose economic sanctions on America? Of course not.

With this double standard and their own interests in mind, the majority of the world’s nations have refused to support sanctions on Russia. The most important of these are China, India and Turkey.

India

According to the Indian government, about 300 Indian companies are now operating in Russia. According to the Indian press, many more are on the way. The president of the Federation of Indian Export Organizations (FIEO), A Sakthivel, explains:

“Export to Russia is not much, only in agriculture and pharmacy products. Now that the whole of the West is banning Russia, there will be a lot of opportunities for Indian firms to enter Russia.”

Russian President Vladimir Putin and Indian Prime Minister Narendra Modi meet at the SCO summit in Astana, Kazakhstan, on June 9, 2017. Photo: Sputnik via AFP / Alexei Nikolsky / Kremlin

The FIEO is an association established by the Indian Ministry of Commerce and the private sector to assist entrepreneurs and exporters in foreign markets. It represents more than 200,000 Indian exporters.

Susil Dungarwal, founder of Indian retail consultancy Beyond Squarefeet Advisory, says:

“We are seeking to take Indian brands to Russia as most of the American and European brands don’t sell there anymore… Say one guy was running 50 stores of Calvin Klein as a master franchisee in Russia. Now, Calvin Klein is no more there, but that company still has 50 empty stores with him. So, either he closes those 50 stores and exit the business, or he can bring alternative [Indian] brands” (“As global brands take flight, Indian retailers book tickets for Russia.”

Sakthivel was understating the case: Indian business in Russia ranges from tea, coffee and tobacco to seafood, spices and rice, textiles and footwear, pharmaceuticals, IT services, coal, oil and natural gas.

Pricing some or all of this trade in rupees and rubles should help India circumvent Western economic sanctions and reduce its dependence on the US dollar. India already has a rupee-rial trading arrangement with Iran.

A few Indian companies do not like what they see in Ukraine. One, Infosys, is shutting down in Russia (Grade A); and three more – Reliance, Tata Motors and Tata Steel – are suspending operations there (Grade B).

But 13 Indian companies are conducting business as usual (Grade F).

Turkey

“Over 3,000 Turkish businesses are working in different economic sectors in Russia,” Russian Deputy Prime Minister Alexander Novak said at last summer’s Turkish-Russian Business Forum. “We are certainly interested in investments, the input of experience and professionalism to Russia in areas where our Turkish partners have expertise.”

Turkey, which also has (or had) more than 600 companies working in Ukraine, is also interested – in stopping the war and revitalizing its business interests in both countries, not in making the disruption of its economy even worse by implementing sanctions.

Speaking on Turkish television, Foreign Minister Mevlüt Çavuşoğlu said, “As a principle, we didn’t participate in such sanctions in a general sense [in the past]. We have no intention of joining in these sanctions, either.”

Turkish President Recep Tayyip Erdogan explained that,

“We are buying nearly half of the natural gas we use from Russia. Separately, we are making our Akkuyy Nuclear Power Plant with Russia. We cannot set these aside… So there is nothing that can be done here. We must maintain our sensitivity on this issue. Firstly, I can’t leave my people in the cold of the winter. Secondly, I cannot halt our industry. We must defend these.”

Turkish companies are active in the Russian markets for commercial building, transport infrastructure and industrial plant construction, real estate development, machinery, electrical equipment, auto parts, aviation, foods, textiles, metals and minerals, renewable energy and natural gas. The two countries are also working to facilitate trade in Turkish lira and rubles.

Turkish Airlines has not stopped flying to Russia. Image: Facebook

It is notable that the Yale survey mentions only one Turkish company – Turkish Airlines (Grade F), which is still flying to Russia. Not on its radar are more than 3,000 other Turkish companies representing the world’s 11th largest economy in purchasing power parity terms.

A NATO member with a growing industrial economy and a population of 85 million, Turkey is an important economic partner of both Russia and Ukraine. Or perhaps the researchers concluded that trying to lay a guilt trip on Turkey would be an exercise in futility.

China

Yale’s Grade F list includes 41 Chinese companies (including one from Hong Kong and two from Taiwan). These include state-controlled construction, engineering and energy firms, banks, SAIC Motor, and several prominent tech companies including Alibaba, ANT, China Mobile, Oppo, Tencent, Xiaomi and ZTE.

Huawei, which has suspended new orders and furloughed some staff in Russia, is classed Grade D, but its actions may be an attempt to avoid attracting more American attention.

In any case, Huawei is already the largest telecommunications equipment, software and services vendor in Russia. Along with ZTE, it stands to pick up the market share abandoned by Nokia and Ericsson.

It also seems likely that China will do what it can to replace the semiconductors that Russia can no longer import from the West and East Asia. It won’t be a complete replacement, but it should grow with time as China’s own semiconductor industry develops.

It is not clear exactly how many Chinese companies are doing business in Russia, but information from various media and government sources suggests that the number is at least in the hundreds, perhaps in the thousands, and that it is likely to increase.

The Chinese government is helping private Chinese companies “fill the void in the Russian market” with special emphasis on small and medium-sized enterprises that are less likely to attract attention than large state-owned enterprises. The companies concerned, which are already highly motivated, are unlikely to waste the opportunity.

Wang Chuanbao, president of the Federation of Overseas Chinese in Moscow, puts it in a larger context: “We will actively assist incoming Chinese companies in studying and collaborating with the Russian market, as well as explore ways to work with Russian companies under the backdrop of the belt and road strategic development.”

Russia and China are also increasing the amount of trade denominated in rubles and yuan, reducing their reliance on the dollar.

Import substitution

This brings us to import substitution and the erosion of Western technological dominance. In the case of China, this possibility (or threat, depending on your point of view) has received a lot of attention. In the case of Russia, the West seems to be as complacent as it is about Turkish industry.

But the country that was first into space and that graduates more engineers and gets a bigger bang for the military buck than the United States is more capable than many observers seem to think.

Commercial aircraft – as I reported in “China’s jets set to challenge Boeing and Airbus” – is a good example. When imports of composite materials were blocked by American sanctions, Russian industry developed its own. The first flight of a Russian aircraft with composite wings made in Russia was successfully completed last December.

A year before that, Russia’s United Aircraft Corporation (UAC) began flight tests of the first Russian passenger plane equipped with Russian engines since the collapse of the Soviet Union.

Now, with Boeing and Airbus having suspended operations in Russia and sales of aircraft and aircraft parts to Russia having been prohibited, we should assume that if the Soviet Union could make its own passenger aircraft (Ilyushin and Tupolev), Russia (and China) probably can, too.

In March, TASS reported that UAC plans to deliver more than 20 regional and medium-haul passenger jets to domestic customers this year. UAC also says it can ramp up production of Ilyushin and Tupolev aircraft if needed. Limited numbers of these older aircraft are still being produced.

Intended to stifle progress, sanctions actually incentivize technically competent nations such as Russia (and China) to make themselves more competitive.

A Russian ruble with the spires of the Kremlin in the background. Russia is defaulting over a lack of US dollars to pay its debts and the loans don’t permit using rubles instead. Photo: AFP

In summary, a new Russian economy is likely to emerge as Indian, Turkish, Chinese and Russian companies move into markets vacated by Europeans, Americans, Japanese, South Koreans and others opposed to the war in Ukraine.

The adjustments will take time, but they are shaping up to be a serious but temporary inconvenience for Russia while leading to substantial and sometimes permanent losses for America and its allies and a big step forward for the Eurasian economy.

The combined losses of BP, Exxon and Shell from abandoning their businesses and assets in Russia are estimated at about $30 billion. The aggregate losses of all the withdrawals, suspensions and curtailments are yet to be calculated.

The value of future opportunities lost or gained in a country of about 150 million people with enormous quantities of natural resources and a GDP almost as large as Germany’s on a purchasing power parity basis is incalculable.

Scott Foster is an analyst with LightStream Research, Tokyo. Follow him on Twitter: @ScottFo83517667