Russia-Ukraine: When Western Companies Become Sources of War Funding

2023-05-30 09:13:00

Will the Russian authorities make international taxpayers whose capital is based in the country pay the cost of the war started by Moscow?

The current tax on capital withdrawals from foreign companies wishing to leave the country, which can go up to 5%, could be increased by at least 10 points, or even more, in view of the growing needs of the Russian war economy.

Since the beginning of the conflict in February 2022, Western companies have quickly been faced with a dilemma: stay in the country at the risk of being singled out, or exit the emerging Russian market with more than 140 million consumers. For those who did not want to give up the Russian manna and who, oriented towards the end consumer who continues to buy despite the war on the borders, the situation could originally evolve in a favorable light. Hope? Have strong backs at first to benefit from a market cleared of competitors who will have packed up.

Bad bet for these actors. The Russian Federation is facing a deleterious situation for its public finances : Moscow’s economic projection called for a month-long war effort that eventually dragged on. And even if the situation on the hydrocarbons market remains correct, thanks to the reorientation towards China and India, this is not enough to meet financial needs. On the field of operations, inefficient or technically obsolete military equipment calls for ever more spending so as not to see the Ukrainian counter-attack send troops from Moscow back to the pre-2014 borders.

For the Russian government, the equation is delicate: Moscow does not want to depend solely on support from Beijing to retain some diplomatic leeway, but most sanctions-hit Russian companies can no longer contribute to the common pot. There remains the financial manna of international companies. The Russian state budget is still expected to run a deficit of 2% of gross domestic product this year. If the volume of asset sales by foreign companies approaches the $15-20 billion total as it did in 2023, the state could expect to recoup at least $2 billion. An unexpected burst of financial air on the backs of foreign companies to cover expenses that are not fully known since about a third are considered classified information by the Russian state.

These economic actors who thought that Russia could, despite the war, guarantee business security fall from above. And the tax blow comes to vindicate the companies that quickly left the territory, sinking a little more those who did not want to see what might be at stake for them. One of the main ongoing blockages is that of the Austrian bank Raiffeisen, which had made more than half of its profits in Russia in 2022, and which now finds itself under the crossfire of an American investigation and Russian financial pressure pushing it to consider costly arrangements to get out of the rut. At best, but too late to escape the Kremlin’s desire to acquire greater financial leeway vis-à-vis Xi Jinping. And a lesson for all companies that decide to stay: they will lose on two counts, once because of new Russian taxes, once because of international sanctions.

The Russian government believes that the West, and the European Union in particular, use “absurd” or “futile and thoughtless” sanctions against economic interests present on its territory. It is, however, for Western companies, at least as much from Moscow as from outside, that economic insecurity is now posing a threat.