Russian firms easily sidestep economic sanctions, says new study

On 24 February 2022, after months of intense diplomacy and speculation, Russia invaded Ukraine. In the weeks prior to this invasion, NATO allies, led by US President Joe Biden, warned that any aggression into Ukraine would unleash ‘severe sanctions’ with ‘massive consequences’ for Russia. This threat was echoed by the leaders of the EU and other NATO allies on multiple occasions.

Despite this threat, Russia began a full-blown invasion of Ukraine. The international community led by the USA, NATO, and the EU has further expanded the sanction regime since the February 2022 invasion. While many foreign multinationals have exited Russia, there seems no end in sight for the conflict after more than a year of intense fighting and sanctions. This begs an important question – do sanctions have the desired economic impact on the targeted firms and individuals?

Prior to the 2022 Russian-Ukraine conflict, targeted sanctions allowed the international community to deny access to dual use technology and supplies for the Russian military. This has likely limited Russian firms’ abilities to build military equipment and to source the repair parts. The use of repurposed civilian technology is a clear example of the desperation that targeted sanctions seem to have created for the Russian military establishment.

However, the evidence about the net effect of sanctions is mixed. There is a notable absence of firm-level studies, with most previous studies focusing on aggregate macro-level factors such as GDP growth. A new study published in the Journal of Management Studies has aimed to fill this gap in knowledge by examining the reactions of Russian firms to sanctions imposed by the USA and EU after the 2014 Russian annexation of Crimea, looking at their strategic responses to institutional processes that resulted from the sanctions regime.

The study has shown that the results of targeted economic sanctions have been mixed. There are some short-run negative economic costs to sanctioned firms, but in most cases, sanctions do not have any negative consequence for either turnover or employment in Russian firms. Moreover, the performance of Russian firms improved over time, suggesting that firms were able to develop robust strategies to deal with any potential negative consequences of sanctions.

“Our analysis of a few illustrative examples suggests that Russian firms get robust support from the government and have been quick to adapt and restructure their economic interests to avoid the negative consequences of sanctions. The sanctioned entities have responded to the institutional constraints by restructuring their interactions with international partners and lobbying the Russian government to shield them from the negative impact of these sanctions,” said Ajai Gaur, one of the authors of the study.

The implications of continued and future sanctions targeting Russian individuals and Russian firms associated with the government may include a shift in patterns of investment, the restructuring of ownership and a return of nominal ownership structures that hide Russian ownership, the intervention of Russian oligarchs and Russian firms into US and EU political systems to counter-sanctions, and an overall economic slowdown as Russian multinationals reduce their investment and international business activities.

“We do know that the sanctions did not deter the Russian government from changing its policies. By mid-2022, the sanctions did not achieve the foreign policy goals of settling the Ukrainian–Russian conflict or bringing about a thorough investigation into the death of Magnitsky. Sanctions have added to the anti-American and anti-Russian feelings in each respective country. Moreover, the reaction of the Russian government has been to increase its involvement in working to remove sanctions and put pressure on Russian firms to reformulate their strategies to do business and invest in countries that are not sanctioning Russian firms or individuals. In the future, adaptation mechanisms will be made in anticipation of future sanctions as companies gain significant knowledge of how sanctions work,” said Gaur.

The events of February and March 2022 demonstrated the limitations of targeted economic sanctions to shape the foreign policy of a sovereign state. The increasing tightening of sanctions since the Russian invasion of Ukraine has created economic damage to Russian firms and the departure of many foreign multinationals from the Russian market. However, as of February 2023, sanctions have not led to a cessation of Russian military action or a modification of Russian foreign policy.

Sanctions on Russia over its actions in Ukraine since 2014 have had a limited effect on government policy. The continuing resilience of the Russian economy indicates that Russian firms have adapted to the negative international environment. According to the IMF, the Russian Federation had a lower actual decline in GDP in 2022 than predicted and the IMF's predictions for 2023 indicate slight growth in Russian GDP.

This study builds on the recognition that there are multiple and competing sources of institutional pressure on multinational firms. Russian firms are between a rock of denial of access to international markets and a hard place of being pulled into defending the positions of the Russian government and Putin. The strategic response of Russian firms provides further evidence of firms engaging in an exchange relationship where legitimacy to operate within conflicting institutional environments is based on their degree of political loyalty.

“We found that firms use both non-market and market strategies in their strategic responses to each institutional environment. Russian firms have for decades operated in weak institutional environments and those that have survived have developed strong political connections to the established institutional environment and continue to rely on those connections even in times when those connections lead to international sanctions. These capabilities have allowed Russian firms to survive the onslaught of targeted sanctions since 2014 and to adjust their international presence to conform to multiple institutional environments.”