The Washington PostDemocracy Dies in Darkness

Russia’s business ties to the West took 30 years to build and one week to shatter

Economists and entrepreneurs say the Ukraine invasion could force Russia into an economic isolation not seen since the Cold War

British Prime Minister Tony Blair chats with Russian President Vladimir Putin at an energy conference in London in 2003. (Ivan Sekretarev/AFP/Getty Images)
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In the summer of 2003, Vladimir Putin flew to London on a special mission: cementing Russia’s business ties with the West.

He donned a white tie and tails to dine with Queen Elizabeth II. He sipped iced vodka with 700 bankers and business executives. And during an energy conference with Prime Minister Tony Blair, he watched the British company BP sign a commitment to invest $6 billion in a Russian oil and gas venture.

“Our priority is the step-by-step integration of Russia into the European and world economy,” Putin told the conference, stressing Russia’s desire to double its economy and attract investment in high-tech and aerospace sectors, too. Such cooperation, he said, three years into his presidency, would be “a great investment in strengthening Europe’s stability.”

During a 2003 state dinner with Queen Elizabeth II, Russian President Vladimir Putin speaks about a prosperous economic future with the West. (Video: TWP)

Nearly 20 years on, those deals and plans lie in ruins as Western governments and companies isolate Russia over its invasion of Ukraine. BP, Shell and ExxonMobil have said they will abandon multibillion-dollar investments in energy. Banks and insurance companies worldwide are cutting transactions with Russian counterparts.

Computer chip manufacturers, shipping companies and a host of exporters are halting deliveries to Russia to comply with sanctions. Western nations are closing their skies and ports to Russian planes and vessels. European retailers are shuttering shops in Russia, and in one of the biggest blows yet, Microsoft on Friday said it is suspending all new sales in the country.

Russia’s economic integration with the outside world was never smooth and easy. Corruption and lawlessness often throttled industrial development, leaving the country too dependent on exporting its natural resources. The rigged privatization of oil and metals companies in the 1990s left an oligarchic class in charge of the economy.

Still, in the decades since the Soviet collapse, Russia’s economy struggled forward, slowly and imperfectly, forging important trade and investment ties with the outside world.

With alarming speed, the events of the past week have shattered those links.

“It took many years to become part of the world economy. Now most of this is destroyed, just flushed down the toilet in five days. And it cannot be easily undone,” said Konstantin Sonin, a Russian economist at the University of Chicago who is spending a sabbatical year in Moscow.

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The economic splintering is part of a broader rupture that is severing cultural and educational ties, too, as sports leagues, philharmonics and universities scrap dealings with Russian individuals and institutions over the Kremlin’s invasion. The canceling of many flights to and from Russia means even tourism links are breaking down.

The shock is causing tumult at all levels of the Russian economy, from the largest companies to small- and medium-size businesses. Now Russian entrepreneurs with trading partners and bank accounts overseas worry that their assets will be frozen, Sonin said.

The oligarchs or corrupt politicians who will be hurt by sanctions number in the hundreds or thousands, he said. But the upper-middle-class entrepreneurs and professionals who will be “totally devastated by this” number in the millions, he added.

“People cry while talking to each other. … Nobody actually knows what is going to happen,” said Sonin, who was one of hundreds of Russian economists to sign an open letter protesting the war.

For one Russian business executive in Siberia, the impact has been immediate. As banking and other sanctions cause the ruble to plummet in value, his mayonnaise and ketchup factory is facing a huge jump in prices for imported tomatoes and egg yolks, he said in a phone interview, speaking on the condition of anonymity out of fear that Russian authorities will punish critics.

Some foreign suppliers are also declining to deliver cargoes to Russia, further complicating matters, he said.

“The effect is catastrophic. … Even labels are becoming more expensive, because the ink comes from overseas,” he said. “In the space of one week … small business in Russia has half-died.”

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During much of the Cold War, the Soviet Union had limited trade ties with the West, consisting mostly of oil and gas exports to Europe and imports of food and machinery. The collapse of oil prices in the 1980s decimated the nation’s export revenue and exacerbated product shortages at home, helping trigger the 1991 Soviet collapse.

Russia entered a long period of turmoil after the end of the command economy, buffeted by hyperinflation, organized crime and the corrupt auction of state-owned enterprises for a fraction of their worth to President Boris Yeltsin’s political supporters.

In 2003, during a state dinner, Queen Elizabeth II spoke admirably of Russian President Vladimir Putin. (Video: C-Span)

More shocks arrived on Russia’s doorstep in 1998, when financial tumult in Asia triggered a sudden collapse in the price of oil, sparking a sharp devaluation of the ruble and the decimation of many Russians’ savings for the second time in less than a decade.

Economic stability — and higher oil prices — began to return the next year as Putin rose to power, sparking a “honeymoon period” for foreign investment in the economy, according to Sergey Aleksashenko, a top official in Russia’s Finance Ministry and central bank in the 1990s.

“Many sectors were open, investment was flowing, the economy was growing at 7 percent a year, and many Western companies benefited from that time,” he said in an interview.

Ikea opened its first store in Moscow in 2000, drawing tens of thousands of customers on its first day and quickly adding more stores nationwide. French retailer Auchan began building a chain of supermarkets, and French automaker Renault opened a factory in Moscow.

ExxonMobil began investing in earnest in 2001, leading a consortium of Russian and foreign investors in developing a large oil and gas project off the coast of Sakhalin Island.

In 2003, Shell unveiled a $10 billion investment in another project off Sakhalin Island, and BP signed its joint venture deal.

Shell and ExxonMobil executives, including Rex Tillerson, President Donald Trump’s future secretary of state, occasionally met with Putin and other top officials in a sign that the Russian president remained interested in cultivating relationships with foreign business executives even as he cracked down on homegrown ones like Mikhail Khodorkovsky, whom he saw as a threat to his power.

Foreign investment in Russia was small compared with the huge sums flowing to China, and much of it was limited to oil and mineral extraction and the sale of consumer goods. But the trend was positive and accompanied by higher investment from Russian companies, too.

The conflict in Ukraine will have expected and unexpected consequences - from oil production to the cost of sunflower oil used in food. (Video: Lee Powell/The Washington Post, Photo: Brian Monroe/The Washington Post)

Mikhail Kokorich opened his first retail store in Novosibirsk, Siberia’s largest city, in the early 2000s, eventually building a chain with 100 locations that he likens to Bed Bath & Beyond. At one point, he traveled to the United States to study the retail sector but at the time never thought of immigrating there, he said in an interview.

“I thought, no, Russia is much more interesting,” he said. He was disturbed by many aspects of Putin’s rule, but for business, he said, “the beginning of the 2000s was like a golden age.”

It didn’t last, and Kokorich eventually moved to the United States and then Switzerland.

The global financial crisis of 2008, at the end of George W. Bush’s presidency, hit Russia along with the rest of the world, and recovery was slow. Things took a sharp turn for the worse in 2014, when Putin launched his first invasion of Ukraine and annexation of Crimea. The United States slapped sanctions on a number of Russian banks and companies that it said supported Putin’s regime, helping chill bilateral relations and trade.

After that, many foreign companies already present in Russia continued reinvesting their profits, but few new investments were announced, Aleksashenko said.

The unraveling of remaining ties in recent days has occurred with breathtaking speed. As the United States and European nations unleashed crippling sanctions, many banks and companies stopped doing business with Russian counterparts, concerned about violating sanctions or not getting paid. Many also expressed outrage over the suffering Russia was inflicting on the Ukrainian people.

Danish shipping giant Maersk said it was halting all new ocean, air and rail cargoes to and from Russia until further notice because of sanctions.

Mercedes-Benz, Volkswagen and Renault halted auto production in Russia, while General Motors and Daimler Truck stopped exporting to the country. “We are deeply shocked by the military violence in Ukraine and very concerned about the threats to peace and stability in Europe,” Martin Daum, chairman of Daimler Truck, wrote in a message to employees Monday.

Ikea said it would “pause” all retail and production operations in Russia and halt deliveries to and from the country, leaving 15,000 jobs in question and triggering a run on its stores by consumers fearful they were losing access to Western goods.

Norway’s state-controlled oil company and sovereign wealth fund announced plans to divest their Russian assets. Taiwan Semiconductor Manufacturing Co. and other computer chip manufacturers began halting shipments to Russia, depriving manufacturers of crucial electronics components.

The biggest Western oil companies are also jumping ship after more than two decades of work in Russia.

BP said it would dump its $14 billion stake in Russia’s Rosneft, calling the invasion “an act of aggression which is having tragic consequences across the region.” Shell and ExxonMobil quickly followed, announcing plans to abandon their Sakhalin ventures. It wasn’t clear whether any of the companies would find buyers for their assets or simply walk away.

“Russia will pay an enormous price in the economy. … The future is very dark,” Aleksashenko said.

If new leadership somehow comes to power in Russia and halts the war, it is possible trade ties can be slowly rebuilt, he said.

But “if Putin stays in power another 10 or 15 years,” he said, “I think by that time Russia will be more isolated from the global economy than it was in the time of the Soviet Union.”