In this case, multinationals probably won’t worry too much. My research shows that nationality matters to political risks. This means that Russian investment is vulnerable. However, as long as investment in Ukraine comes from diverse sources, the expropriation of Russian assets probably won’t hurt the broader “investment climate.” Countries as different Zimbabwe, Bolivia, Venezuela, Romania and Russia have expropriated property for foreign policy reasons and gotten away with it. Albeit under vastly different circumstances, Lithuania in 2006 effectively nationalized a key oil refinery claimed by Russia and resold it to Poland. Capital didn’t flee; it stayed put. Indeed, Lithuania got kudos from the European Union for pushing back against Russia.
Ukraine has already used the “creeping” expropriation of multinationals to stay afloat: Throughout the late 2000s, the Ukrainian government generated an income stream and avoided default by withholding Value Added Tax (VAT) refunds from major foreign exporters, who became creditors to the government for over $1 billion. For a country facing economic crisis, redistributing the gains once again from Russian investments in particular could serve both foreign policy and financial goals.
So what does explain the circumstances under which multinationals get worried about expropriation and flee, and the circumstances under which they stay put? One important factor is a multinational’s nationality. Firms with the same national home base share access to Bilateral Investment Treaties, the legal instruments that provide protection from expropriation. Firms with the same nationality may also look to their home countries for diplomatic support. As political scientists have told us, foreign investment flows will get hurt when two countries have security and diplomatic disagreements. This means that firms of the same nationality tend to leave and/or protest together when mutually threatened.
However, firms will be substantially less likely to take action when firms of other nationalities are the ones that are facing the political risks. While political science would suggest that Ukraine’s democratic instability will make all multinationals more worried about political risk, expropriation of Russian assets should not make other firms worried that their property will be expropriated too.
This probably gives Ukraine some space to act adversely toward Russian investment without eroding Ukraine’s broader access to capital – so long as Ukraine hosts sufficiently diverse investment. Luckily for Ukraine, it has investment from multinationals originating in many countries. Russian direct investment in Ukraine accounts for 7 percent of total investment, and it tops 40 percent when combined with investment from Cyprus (where Russian firms often domicile). But firms from 10 other countries invest more than $1 billion in Ukraine, and the United States stands 11th at $990 million. ArcelorMittal owns the dominant asset in Ukraine, the steel mill in Kryvyi Rih. ArcelorMittal’s Ukrainian subsidiary gets capital from Germany, the UK, France and Luxembourg – all of which supported ArcelorMittal when Yanukovych’s government opened criminal investigations against it in 2010. Major banks with Western investment control significant market share in Ukraine. Kraft owns some of the snack brands that even Ukrainians think are domestic.
As they try to help Ukraine, Western governments may generate even more diversity by encouraging their own multinationals to invest in the country. While aid and investment may not always be linked, the United States supported American investment in Ukraine through programs at the Departments of Defense, Agriculture, Commerce and more in the immediate post-Soviet period. European countries pressed their firms’ advantage, too, leading to U.S. congressional testimony accusing Europe of unfairly telling Ukraine to “remember which side your bread is buttered on” (June 28, 2000). That competition could translate into more substitutes for Russian capital in Ukraine.
As more non-Russians invest in Ukraine, the risk of capital flight will fall, making Russian assets more vulnerable to expropriation. Obviously, expropriation would damage Ukraine’s relationship with Russia even further. However, expropriation may still be one of Ukraine’s least costly foreign policy tools, since it will help fill government coffers while probably not deterring investors from other countries. Thus, we should not be surprised if we see Ukraine expropriate Russian multinationals while still retaining access to other sources of international capital.
Past Monkey Cage posts on developments in Ukraine, Russia and Crimea can be found here. Recent posts include:
Kimberly Marten: Crimea: Putin’s Olympic diversion
Timothy Frye: The downsides of Crimea for Russia
Gwendolyn Sasse: Building a federal Ukraine?
Joshua Tucker: What is motivating Putin?
Galymzhan Kirbassov: Why the leaders of Kazakhstan are not (yet) losing sleep over Crimea