These rapid exits are undoubtedly a big shock for Russian President Vladimir Putin and the Russian elite. So why did Putin underestimate the extent of the West’s economic punishment? Research for my recent book on globalization and corruption in Russia offers an explanation.
Autocrats can thrive under globalization
In retrospect, it may seem surprising that as Putin’s regime descended into repressive authoritarianism, Russia’s economy became increasingly globalized. Much of America’s grand strategy of “normalization through globalization” after the end of the Cold War was based on the idea that free markets in countries like China and Russia would lead to democracy.
Consider the Russian oligarchs. They acquired their property by taking advantage of corrupt institutions. But the same weak rule of law that allowed oligarchs to steal their wealth also made it difficult to protect it. Jeffrey A. Winters, a political scientist at Northwestern University, describes the problem: “The assertion ‘all this belongs to me’ will constantly be confronted with the answer ‘says who?’ ”
How Global Finance Transformed Russia
The oligarchs solved this problem by ensuring that Western financial markets were open and accessible. As I detail in my book, Russian industries underwent privatization (1992-1994), reprivatization (1995-1996), and renationalization (2003-2005). Successive cliques of oligarchic interests have relied on Russia’s integration into the global financial system to validate their claims to newly acquired property.
Financial integration ensured access to both liquidity and legitimacy, making it more costly for current and future political enemies to confiscate the wealth of the oligarchs. Moreover, Western financial institutions and big business have helped bring Russian money into the global capital pool – and made handsome profits in the process.
The opening of financial borders was an integral part of the Russian kleptocratic regime from the beginning. In addition to the super-rich of the 1990s, Putin created his own cadre of oligarchs. After this group took control of most of the energy sector, Putin and the oligarchs allowed to stay in Russia largely agreed on the policy of financial integration.
By the end of Putin’s second term, new asset control rules combined with financial openness were widely accepted in the West. As a result, the number of Russian billionaires rose from zero in 2000, when Putin took office, to over 100 in 2012, when he returned for his third presidential term.
The Russian government has become willing to tolerate the risks associated with high levels of exposure to volatile global markets. The Kremlin was ready to deploy its foreign exchange reserves even before considering capital controls after the global financial crisis of 2008, after the Cyprus banking crisis of 2012-2013 and more broadly during the last 10 years of Western sanctions against the Russia.
Russian business giants have benefited greatly from the openness, even as the Kremlin’s aggression towards Russia’s neighbors intensified. After Crimea was annexed in 2014, Russian giants like Gazprom, Rosneft and Sberbank managed to raise capital in the West to finance their expansion. Despite the sanctions, Russia’s main stock exchange (MOEX) has signed agreements with Western clearing houses and securities depositories to make it easier and cheaper for foreigners to buy shares of Moscow-listed companies. Less than a year ago, non-resident investors held around 80% of the “free float” of stocks listed on the now closed stock exchange.
Putin expects lighter sanctions
Notably, Russia’s financially open autocracy could not have been maintained without the willing participation of Western private companies. Only a handful of foreign business leaders and leading Western companies severed ties with their Russian counterparts before February. Overall, until February 24, the sanctions have not significantly changed the calculus of Westerners doing business in Russia – nor have they undermined the ability of wealthy Russians to access Western financial markets and protections. legal.
Although almost all of the Western energy giants withdrew from Russia or suspended their investments after the start of the war in Ukraine, they were doing business with the Kremlin despite corruption, expropriations, violations of human rights man and military aggression for nearly two decades.
In many cases, these companies actually strengthened their footprints in Russia even as Russia was under tougher sanctions. For example, British Petroleum’s stake in Rosneft (led by Putin’s closest ally Igor Sechin, who had been sanctioned since 2014) rose to 22% in 2020. Pension funds like the California Public Employees’ Retirement System were invested in Gazprom from 2020. Rosneft and US energy services giant Schlumberger signed a technology cooperation agreement in June 2021.
This recent history of deepening economic ties explains why Putin and Russia’s business elite must be surprised by the exodus of private business. Years of personalist rule and recent self-imposed isolation likely led Putin to make startling errors of judgment about Russian military capabilities and Ukrainians’ will to fight.
But the history of Russian globalization and Western sanctions suggests that it was entirely reasonable to expect a muted response from Western companies. For 15 years, Russia’s autocracy – deeply integrated into the global economy – has proven durable in the face of major external and internal shocks. Western countries’ lackluster sanctions policies and multinational profiteering reassured Putin that another invasion would go mostly unpunished.