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Challenges
238.
March 2022
Kálmán Kalotay
THE WAR IN UKRAINE DEALS A BLOW TO RUSSIA’S
FOREIGN DIRECT INVESTMENT LINKS
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
foreign direct investment links
Centre for Economic and Regional Studies
Institute of World Economics
Eötvös Loránd Research Network
Challenges Nr. 238 (2022) 4 March 2022
The war in Ukraine deals a blow to Russia’s
foreign direct investment links
Author:
Kálmán Kalotay
External Research Fellow
Centre for Economic and Regional Studies
Institute of World Economics
Eötvös Loránd Research Network
email: kalotayk@gmail.com
The views in this paper are those of the author’s and do not necessarily reflect the opinion of the Centre
for Economic and Regional Studies, Institute of World Economics, Eötvös Loránd Research Network
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
foreign direct investment links
IWE CERS
Challenges Nr. 238 (2022) 4 March 2022
The war in Ukraine deals a blow to Russia’s
foreign direct investment links
Kálmán Kalotay
1
Abstract
The war in Ukraine started in February 2022 adds major uncertainties to foreign
direct investment (FDI) to and from the Russian Federation and affects it negatively in
the short, medium and long run. The degree of the hit will depend on the exact contents
of sanctions and counter-sanctions, not fully known yet. However, the severe
consequences of some of them are already visible, adding to the financial strain caused
by the war. FDI to and from Russia is expected to fall drastically in 2022 and, depending
on the length and depth of the conflict, in the subsequent years if no exit strategy is
developed fast to stop the conflict and its eventual escalation. This study concludes that
the fall in FDI will at the end hurt the economic capacities of the Russian Federation
already affected by a previous round of sanctions imposed in 2014. Decoupling of the
Russian economy from FDI partners works, if it works, only partially, and at a relatively
high cost. That in turn could thwart the very economic fundamentals of the war effort.
Background
On the night of 21 to 22 February 2022, President Putin announced that the Russian
Federation would recognize the independence of the self-declared Donetsk and Luhansk
“People’s Republics” and would deploy troops there as “peacekeepers”. Then on the
1
External Research Fellow, Centre for Economic and Regional Studies, Institute of World Economics, Tóth
Kálmán str. 4, H-1097 Budapest, Hungary. Email: kalotayk@gmail.com
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
foreign direct investment links
morning of 24 February 2022, the Russian Armed Forces launched a large-scale invasion
of Ukraine, with the apparent aim of removing the Ukrainian Government and replacing
it with another one more friendly towards the policies of President Putin. With these
steps, hostilities in Eastern Ukraine originated in March 2014 reached a new level.
Indeed, between August 2014 and February 2022, they remained of relatively low-
intensity, though still deadly and devastating. Since 24 February 2022, death and
devastation reached unprecedented levels not just for Ukraine but for the whole
European continent since 1945. At the moment of writing these lines, it is unclear how
the conflict would evolve, how long would it last, how would it end. We do not even
know if it will spill over to other countries or not.
On the first days of the conflict, the initial response of the international community
was relatively limited, mostly a continuation of the counter-measures adopted in 2014,
when the Russian Federation had annexed the Crimea. After the large-scale invasion, the
reaction became more muscled. At this point of time, every day new sanctions are
adopted against the Russian Federation and Russian interests and more and more
countries join them. The list includes mostly the countries that are linked to the North
Atlantic Treaty Organization (NATO) and the European Union (EU) covering the whole
European continent except Belarus, a close ally of the Russian Federation that let the
Russian troops pass, and Serbia, North America, parts of Latin America, Australia and
New Zealand. African and Asian countries and territories are less involved so far, with
some exceptions (e.g., the Republic of Korea, Singapore, Taiwan Province of China). The
list of countries applying sanctions includes surprises such as traditionally neutral
Switzerland that aligned itself to the EU policy minus the one on supplying arms to
Ukraine.
At the Security Council of the United Nations, binding action was blocked by a Russian
veto. As a result, the case was referred to the Eleventh emergency special session of the
United Nations General Assembly convened for 28 February 2022 as requested in a joint
letter by more than 87 countries. On 2 March 2022, the General Assembly adopted a new
Resolution on the ‘Aggression against Ukraine’ that reinforced Resolution 68/262 on the
‘Territorial Integrity of Ukraine’ (March 2014) and went further by demanding an
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
foreign direct investment links
immediate halt to Russia’s use of force and the immediate, complete and unconditional
withdrawal of all Russian forces from Ukraine’s internationally recognized borders.
With no Russian veto power available at the General Assembly, the new Resolution was
adopted by a large majority – the vote of 141 of the 181 countries present, reinforcing
the Russian Federation’s isolation on the scene of world politics (the 2014 Resolution
had been adopted by 100 votes in favour). Of the 35 countries that abstained, there were
some emerging powers such as China, India and South Africa that did so as a ‘matter of
principle’ (not to position themselves in a dispute opposing the United States to Russia),
although these countries, too, agreed with the need to respect the territorial integrity of
Ukraine. The ‘no’ vote of the Russian Federation was supported by only four more
countries: Belarus, the Democratic People’s Republic of Korea, Eritrea, and Syria.
General considerations on the effects of war and sanctions
There is no war without death and destruction. The invasion of Ukraine is no
exception to that rule. The blunt of that blow is falling on Ukraine, where the fighting
goes on. It also has collateral negative effects on the Russian Federation, and not only in
terms of dead soldiers, whose real number was made a top secret on the first days of the
conflict. War is extremely costly for the State budget. It has been speculated that each
day of war could cost various billions of dollars (a much more limited intervention in
Syria had allegedly cost about 4 billion dollars per day). The reserves built up before the
war can evaporate quickly, especially if some of the resources parked outside the
Russian Federation become non-accessible due to their freezing (see also below).
Due to the status of the Russian Federation as a nuclear superpower, the sending of
troops to Ukraine is excluded for third countries. Their reaction is limited to financial
assistance, the sending of military assistance and sanctions against Russian interests.
From the point of view of the economic consequences of the war, sanctions deserve
particular attention. It is to be stressed that the ones that would bind all United Nations
members are excluded as the Russian Federation holds veto power in the Security
Council where they should be adopted. As a ‘second-best’ choice, the ‘Western powers’
mentioned above started their own systems, trying to coordinate between themselves
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
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and convincing others to adhere on their own free will. However, no third country would
be obliged to join them, and the Russian Federation is surely adopting its own counter-
measures to counterbalance them (e.g., exchange controls on export proceeds).
This analysis attempts to ask what the potential impact of sanctions and counter-
sanctions on foreign direct investment (FDI) inflows to, and outflows from, the Russian
Federation would be. Though these measures suffer from many limitations and
inconveniences, there are no real alternatives. The most serious limitation is that
sanctions do not fully stop economic links, rather they result in higher costs for, and less
ease in, doing business. It is also evident from the lessons of the ones imposed after the
annexation of the Crimea in 2014 that they have hurt not only the Russian Federation
but also the issuing countries. Paradoxically, the winners have been the ‘free rider’
countries. When Western firms abstain from doing business with the Russian
Federation, companies from third countries not applying the sanctions (e.g., China or
India) move in and benefit from the departure of competitors. It is also to be noted that
the Russian Federation has managed to increase somewhat its economic independence
and diversification since 2014. As a result, the new wave of sanctions had to be much
more severe to bite.
This however does not mean that the impact of past sanctions would be fully
negligible. It is quite likely that they have contributed to the growing lag of Russian GDP
growth vis-à-vis the rest of the world. In 2009–2013, that difference was 1.1 per cent. In
2014–2018, it more than doubled, to 2.4 per cent (table 1). Sanctions and counter-
sanctions also resulted in a declining share of the Russian Federation in world inward
FDI – from 2.5 per cent in 2009–2013 to 1.4 per cent in 2014–2018, and also in world
outward FDI – from 3.2 per cent to 2.8 per cent (table 2). It is to be added that the
Russian Federation cannot fully replace its FDI links with the West by FDI links in the
emerging countries, as the technological content and the value chain configurations of
the two are different.
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
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Table 1. Annual average growth rate of the real gross domestic product in the
Russian Federation and in the world, 2009–2018 (in per cent)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Russian Federation
-7.8
4.5
4.3
3.7
1.8
0.7
-2.0
0.3
1.8
2.5
World
-1.3
4.4
3.3
2.8
2.8
3.0
3.1
2.7
3.4
3.1
Difference
-6.6
+0.1
+1.0
+0.9
-1.0
-2.3
-5.1
-2.4
-1.6
-0.6
Source: the author’s calculations, based on United Nations data.
Table 2. Share of the Russian Federation in global FDI inflows and outflows,
2009–2018 (in per cent)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Share in inflows
2.2
2.3
2.3
2.0
3.7
2.1
0.6
1.8
1.6
0.9
Share in outflows
2.9
3.0
3.0
2.2
5.0
4.7
1.6
1.7
2.1
4.1
Source: the author’s calculations, based on UNCTAD data
The effect of sanctions and counter-sanctions adds to the effects of the war. In
general, war situations do dissuade FDI. In general, war is a blow to economic growth
due to its shock on production, even in countries where the economic effects have been
‘planned’ meticulously and preventive measures have been taken to protect the treasury
of all firms, especially the multinational enterprises that have to operate across borders
(in this case the Russian multinational enterprises). If the conflict goes on, or if too many
assets are lost at both at home and abroad, even the best prepared firms can run out of
money. As for firms investing in Russia, sanctions creating obstacles to accessing finance
may be the most severe disincentives.
In the Russian case, the minimum expectation is a drop in GDP at least in 2022, which
would further accentuate the effect of falling behind other leading countries of the
world. IMF estimated that the Russian GDP in 2021 was about $1.7 trillion, which was
14 times less than the GDP of the United States and 10 times less than the Chinese one.
The Russian Federation was a nuclear superpower but with a middle-sized economy,
11th in world ranking, behind the Republic of Korea. The IMF also forecasted before the
war that Brazil’s GDP would exceed that of the Russian Federation in 2022, making the
latter the smallest of the BRIC economies again. Moreover, if we assume that the Russian
GDP falls ‘only’ 10 to 20 per cent in 2022 under a very optimistic scenario, it would still
fall behind that of other nations, namely Australia, Spain and Mexico, in that order. In
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
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other terms, the war is to accentuate the gulf between the political and military
aspirations of the Russian leadership and the economic means to achieve them. As for
inward and outward FDI, which is a powerful tool for augmenting a country’s productive
capacities as discovered by politicians in various emerging powers, such as China, they
risk of drying up for the Russian leadership in the worst moment.
Types of sanctions and their potential impact on FDI
At this stage, some sanctions are already announced, others are still under
consideration. This sections offers a non-comprehensive overview of the main types
with the potential impact on Russian inward and outward FDI.
Prohibition to trade and establish new investment links with the Donbas region
(announced by the United States). At first sight, this measure has a limited
impact, as it applies to American firms only, and not if they do business in the
Russian Federation but in the separatist Ukrainian zones only. However, past
experience shows that ‘American firm’ may mean any company with substantial
presence in the United States independently of its ownership structure, to
prevent a discrimination of corporations that are domiciliated in the country, and
to preclude the temptation for re-domiciliation to escape the constraints. Nor is it
clear in the rules if only direct trade and investment relations count, or also
indirect links via value chains. If the rules are extended to both, non-negligible
parts of the global economy are to be affected. It may for example be a major
issue for firms from ‘neutral’ countries (such as China) that do not wish to lose
their access to the large United States market. To be kept in mind, too, that the
exposure of Russian or other international business to the Donbas region may be
larger than one would think at first sight. The Donbas is a major producer of coal,
iron and steel, machinery and equipment, which can be inputs for production in
the Russian Federation and in the value chains of other countries. These
sanctions may hurt these business links when the region probably needs an
increase in economic activities to satisfy the local population after the
evaporation of the initial euphoria of recognition by the Russian Federation. It
may also create a dilemma for Russian firms. On the one hand, they may be
prompted by the Russian Government to invest in, and trade with, the region to
contribute to prosperity there. On the other hand, they may be hit by U.S.
sanctions for doing so. The same dilemma applies to firms wishing to invest in
Russia: how to avoid being sanctioned in the U.S. when some of the supplies are
best available from Donetsk and Luhansk? For all these reasons, prohibition to do
business with the Donbas is expected to have a major negative impact on both
Russian FDI inflows and outflows.
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
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Stopping business projects in and/or with the Russian Federation by governments
applying the sanctions. The first and best known case is that of the Nord Stream 2
gas pipeline suspended by German authorities. Although in each case, the
economies of the partner countries may be hurt as much as that of the Russian
Federation, other projects may suffer the same fate. And the impact on both types
of FDI flows is negative.
Export ban on, or control of, strategic inputs. Such measures are currently under
consideration. The United States wishes to negotiate such measures with the
Asian exporters of semiconductors/microchips. It is unclear at this stage if they
will be accepted by the partners, and what the real impact on the Russian
economy would be. To be noted that Ukraine is a key supplier of semiconductor-
grade neon. If the Russian Armed Forces occupy the country and manage to
control the Ukrainian suppliers, the Russian Federation can try to use them to
develop its own semiconductor industry (the Russian Federation produces
another raw material, palladium). The problem is that such capacity building
requires lots of time and know how. In the meantime, stopping supplies from
Asia may affect the business links of those Russian firms that use those
semiconductors/microchips. To be noted that such a measure would prompt
Russian authorities seek local solutions (import substitution) to replace them.
The measure is very uncertain; so is its impact.
Sanctions against Russian (and Belarusian) individuals linked with the recognition
of the breakaway “republics” and the war, mostly in the form of freezing their
assets possessed in their personal capacity or in their firms. This is more than a
symbolic list. Its effect naturally depends on how long the list is and how many
people with business interests figure on them. Already the first lists included
persons linked with Promsvyazbank, VTB Bank and the VKontakte media group.
As the list lengthens, the effect of the measure may increase.
Freezing of Russian banking assets abroad. This is a very severe measure affecting
both inward and outward FDI. To be noted that the group of the largest Russian
banks includes various State-owned entities (such as Sberbank, VTB Bank,
Gazprombank, Promsvyazbank, the State Development Corporation
Vneshekonombank or VEB, the Otkritie Financial Corporation, the Russian
Agricultural Bank and Novikombank, to mention the largest), therefore sanctions
are straightforward to justify due to their direct links with the power centre.
There are also entities that are on paper privately owned but are so close to the
Government that already on 2014 they were put on the sanctions list, such as the
Rossiya Bank. The freezing of the assets of these financial institutions (it has
already happened to most of the ones listed, others may be added later on) has a
double negative effect on FDI. On the one hand, it results in the stopping or
bankruptcy of the affiliates of these banks operating abroad, as it happened very
early on with the Vienna-based Sberbank Europe AG, with affiliates also in seven
other markets (Bosnia and Herzegovina, Croatia, Czechia, Germany, Hungary,
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
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Slovenia and Serbia). To be noted that already in November 2021 the bank had
initiated the selling of its affiliates in other countries except in Czechia and
Germany. With that transaction not yet fully completed, the bankruptcy of the
Vienna-based parent may affect all this network. Other Russian banks may face
the same fate if sanctions last for a long time. On the other hand, this freezing
assets means and impossibility of financing the transactions of Russian
multinationals abroad. It also has an impact on access to finance by foreign
investors located in the Russian Federation. The country may be prompted to
apply restrictive measures to stop the outflow of resources, including an
obligation to surrender export receipts or prohibition of the repatriation of
profits. These circumstances could make the life of foreign investors close to
impossible. These measures may become inevitable considering that the part of
the foreign assets of the Central Bank of Russia has been frozen, meaning that the
institution cannot access those reserves that is piled up before the war but
located abroad. Because of this measures, foreign exchange controls have to be
instituted earlier and in a more drastic manner.
The exclusion of Russian (State-owned) banks from the SWIFT payment system. The
decision has been taken by the EU to exclude seven large Russian banks, with the
exception of Sberbank and Gazprombank so far. This measure makes all business
transactions involving the Russian and foreign clients of these banks more costly
and more cumbersome. Alternatives do exist on paper, such as using China’s
Cross-border Interbank Payment System (CIPS). However, developing this
alternative may be not so easy and would not prevent the problem of increasing
the cost of doing business. Moreover, the use of that system may result in ‘side
effects’ such as the need to rely heavily on the Chinese yuan as the currency of
payment/clearing, which may not be desirable for some businesses. As another
alternative, within the Russian Federation, the Financial Message Transfer
System of the Bank of Russia (SPFS) has been launched with about 400 users,
which may be a solution for purely domestic payments. However, this system in
not yet linked with other systems abroad; therefore, it does not attenuate the
obstacles to international payments, which is a major problem for both foreign
investors in Russia and Russian firms abroad. In sum, the exclusions from SWIFT
creates major inconveniences, hurting both inward and outward FDI
significantly.
Restricting the financing of the Russian sovereign debt from Western (U.S.) capital
markets. If implemented, this measure would make the refinancing of the debt
more costly and more difficult. It would however have only an indirect impact on
the operations of State-owned Russian multinationals, financed by the Russian
State.
Sectoral sanctions. Sanctions affecting different sectors of economic and social
activities may have very different impacts on FDI. Two of them, banning Russian
vessels from foreign ports and Russian aircraft from foreign airspace can
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
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seriously hamper business transactions between the Russian Federation and the
rest of the world, and can act as a major disincentive to FDI. To be noted that
these sanctions are not fully ‘water proof’. Trade with the outside world can be
switched to foreign carriers, but naturally at the expense of an increase in
shipping costs and a decline in the Russian freight and shipping sector. Measures
affecting cooperation on the Space Station can also have some negative
consequences for supplying firms. Limitations imposed on science cooperation
may seem to be more symbolic, so could the measures affecting arts, culture and
sports. In those areas, it is mostly the international reputation of the Russian
Federation that is hit, though one should not underestimate the business side of
these activities either.
In sum, certain measures may have a major impact on FDI, others would be more
limited (table 3).
Table 3. Potential impact of sanctions on inward and outward FDI
of the Russian Federation, 2022 and beyond
Measure
Expected impact on FDI
Trade and investment ban on Donbas
Major
Stopping business projects with Russia
Depends on the size of the project stopped
Export ban on, or control of, strategic inputs
Uncertain
Sanctions against Russian individuals linked with
the recognition of the breakaway “republics” and
movement/deployment of Russian troops
At the level of the firms that they are linked with
Freezing of Russian banking assets and exclusion
from SWIFT
Very major
Restricting the financing of the Russian sovereign
debt from Western capital markets
Limited
Sectoral sanctions
Ban on Russian vessels and aircraft may be major
Source: the author’s collection of information
The situation at the war and the Western sanctions all indicate that probably the
Russian Federation is heading towards the deepest and most severe crisis in its history,
destabilizing the war effort itself. Such a crisis could also hamper the attempts of
Russian business to build local capacities to counteract the sanctions. It is also to be
noted that relying on foreign partners such as China and India in mitigating or avoiding
the effects of the sanctions can also have side effects. These countries cooperate with the
Russian Federation under sanctions because of self-interest. Their Governments made it
clear that cooperating with the Russian Federation does not mean a recognition of the
separatist republics of the Donbas or accepting the Russian invasion. There may be also
points in the chain of events when the Chinese and Indian Governments and the firms of
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
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these countries have to choose between keeping Western and Russian business links
and they choose the former. Moreover, with the loss of Western partners, the
dependence of the Russian economy on these partners may increase. It is also to be
taken into consideration that this type of cooperation with China and India can also have
geopolitical consequences. If Russian firms fall into deep crisis, they may be replaced by
Chinese and/or Indian companies in countries that in the past the Russian Federation
perceived as its zone of influence (e.g., in Central Asia).
The ‘haemorrhage’ has already started. FDI is reacting immediately. As mentioned
above, Sberbank Europe is the early bird in a potentially long flow of Russian
bankruptcies abroad. Another case of instant bankruptcy is that of the Switzerland-
based Nord Stream 2 holding company, which was expected to manage the construction
of the gas pipeline stopped by German authorities.
Corporate exodus from Russia?
In the Russian Federation, one of the mainstays of inward FDI, the oil and gas sector
has already experienced the first attempts to leave the country. First, BP announced on
27 February 2022 that it would sell its 20 per cent stake in Russian State-owned oil giant
Rosneft, then the next day Shell expressed its wish to exit its joint ventures with also
State-owned Gazprom, and the day after Exxon announced its exit from the Sakhalin oil
and gas project in the Russian Far East.
Beyond the oil and gas industry, some Western firms started leaving the Russian
Federation or stopping sales to the Russian market. To some degree, this is a change in
corporate philosophies. In the past, business kept more distance with politics, only
complying with the sanctions dictated by public authorities. Examples include:
the transportation industry (Maersk and MSC halting container shipping to and
from Russia, Hapag Lloyd and container carrier Ocean Network Express of Japan
suspending reservations to Russia, DHL suspending services to and from Russia),
major aircraft manufacturers (Boeing suspending the supply of parts,
maintenance and technical support to Russian airlines and the operation of its
training centre in Moscow, Airbus stopping the sending of parts to Russia),
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
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vehicle producers (Ford suspending its participation in its joint venture in Russia,
Daimler Truck suspending cooperation with its Russian joint venture partner
Kamaz, automotive supplier ZF Friedrichshafen stopping deliveries to Russia,
Harley-Davidson stopping sales to Russia, Volvo and General Motors stopping
exporting to Russia),
the tech industry (Apple stopping selling its products in Russia),
financial services (HSBC, Société Générale, Raiffeisen Bank Austria and Shinhan
Bank of the Republic of Korea severing ties with Russian banks, Visa and
Mastercard excluding Russian financial institutions from their networks),
consumer goods producers (Nike stopping sales in Russia), and
the entertainment industry (Spotify with its closure of its Moscow office,
Stonemaier Games with its exclusion of Russian partners, Disney, Warner Bros.,
Sony, Netflix).
In most cases, the severing of these links affects trade, with a possibility of a reversal
of decisions if the situation changes. However, the suspension of participation joint
ventures can also lead to divestments. Moreover, the exit of transportation services and
the suspension of supplies are hurting the participation of Russian units in global value
chains, and the decisions of financial institutions further exacerbate the financial
obstacles to doing business in and with Russia.
In response to the exodus, Russian authorities have attempted to declare a ban on
departures. The problem is the effectiveness of such measure if companies prefer
leaving behind their assets but still stopping operations. Moreover, such a ban could risk
prompting a series of investor–State disputes by the foreign companies. The Russian
authorities, if condemned, may risk being ordered extremely high amounts of damages,
further reducing the country’s financial resources.
Impact on Hungary
Hungary occupies a partly special position in the Russia–Ukraine conflict. Though it is
a member of the EU and NATO, over the past decade, its Government has developed very
close links with the Russian Government under the umbrella of a policy called ‘Eastern
Opening’, which covers also China, Turkey, and various Central Asian countries. The
Hungarian Government has attempted to implement a political model similar to the one
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already in place in the Russian Federation. At the fora of the EU and NATO, it used its
vote to protect the interests of the ‘Eastern’ partners. It has also initiated joint projects
with the Russian Federation built not only on economic and financial considerations, of
which the largest is the plan to build phase two of the Paks Nuclear Plant with the help
of State-owned Rosatom and financed by a Russian loan. Hungary also became in 2019
the official headquarters of the multilateral development institution International
Investment Bank (IIB) whose largest shareholder is the Russian State.
After 24 February 2022, the Hungarian Government decided to align its policy to EU
and NATO decisions in a rather radical change of policy line, though it did so with some
reluctance. At the moment of writing these lines, it is unclear if it is a deep change in
policy directions, or more a reluctant alignment.
An overview of the business interests at stake has to factor in that the policy of
‘Eastern Opening’ has not brought about a breakthrough in Hungarian–Russian
economic relations. The two countries are not major business partners for each other,
except in selected sectors such as energy. Indeed, according to official statistics, in 2020,
the share of the Russian Federation reached 17.8 per cent in Hungarian imports,
composed almost exclusively by fuel. In turn, the share of the Russian Federation in
Hungarian exports remained under 1 per cent, composed mostly of processed goods
(typically pharmaceuticals, medical equipment, machinery, vehicles, food and
agricultural products). The dependency of bilateral cooperation on energy supplies is
reflected also by the fact that, just before the outbreak of hostilities, the two countries
started negotiating an increase Russian gas supplies to Hungary. In the new situation, it
is becoming more and more doubtful if it ever becomes reality.
As for inward FDI of Hungary from the Russian Federation, it remains relatively
small. By the ultimate beneficial owner principle, the FDI stock in Hungary originated in
Russia accounted in 2019 about €1 billion, or 1.3 per cent of the total, according to the
data of the National Bank of Hungary. The same year, the FDI stock of Hungarian
investors in Russia by the nationality of the immediate investor (data on ultimate
investors are not available on that direction) amounted to €521 million, or 1.7 per cent
of the total. These data may not fully reflect the real size of bilateral FDI links, especially
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on the side of Hungarian capital in Russia, due to the presence of roundtripped and
transhipped transactions. (Roundtripped deals mean capital leaving a country,
transiting another one, to return to the country of origin. Transhipment means capital
transiting through a third country between the country of origin and the final
destination. Both types of transactions make the accurate counting of FDI difficult.)
Bilateral FDI between the two countries may be both directly and indirectly affected
by the sanctions imposed on Russian business. For example, the majority ultimate
owner of Dunaferr iron and steel company is the VEB bank, under sanctions in the West,
and a minority shareholder seems to be linked with the Industrial Union of Donbas. The
FDI components of the Paks 2 could also be in jeopardy, although the first reaction of
Hungarian authorities was that sanctions would not affect the project. However, not only
the continued participation of the fully State-owned Rosatom may pose problem for
both the EU and NATO, but also its financier, the sanction-ridden VEB bank.
Transhipment of FDI also means that it is not straightforward to identify all Russian
business interests in Hungary. The number of relatively large companies with Russian
equity over HUF 500 million ($1.5 million) may be around twenty and the list may have
changed over time. For example, the company Panrusgas Gas Trading Plc. importing
natural gas from Gazprom was closed in 2021 and entered liquidation before the onset
of the war as the terms of gas supply from Russia had changed. Sberbank Hungary,
affiliated to the now bankrupt Vienna-based Sberbank Europe is also in liquidation.
It also remains to be confirmed how Russian businessman Ruslan Rahimkulov’s
projects are affected by the war and sanctions. He has his permanent residence in
Hungary and thus his investments should be counted as local investment. He is a 50 per
cent business partner to a big intermodal logistics centre on the Hungarian–Ukrainian
border subsidized by the Hungarian Government. Construction on this container
terminal aimed to become a major gateway for Chinese rail freight transported all along
the ‘New Silk Road’ (now officially called Belt and Road Initiative) started in 2021 and it
is close to completion. However, the future of the project is now in jeopardy mostly due
to the war that tore apart all links passing via Ukraine.
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
foreign direct investment links
Another Russian company subsidized by the Hungarian Government in investing in
Hungary and potentially subject to a halt is Arnest Group, which in January 2022
announced the construction of a new aerosol filling and metal packaging plant in
Hungary. It is unclear if the company retains enough capital to carry out the project or it
has to cancel it.
In principle, all investment involving Russian business interests can fall directly or
indirectly under the EU sanctions, though individual exceptions can be made. For
instance, the construction of a vaccine factory expected to produce the anti-COVID
Russian vaccine Sputnik among others, could claim an exception on health care grounds.
To be noted also that IIB was not an immediate target of the first sanctions, although
Czechia and Romania indicated their withdrawal from the institution claiming that IIB
was connected to Russian spy operations.
As for Hungarian businesses having relatively large-scale operations in the Russian
Federation, their number is limited. Without attempting to be fully exhaustive, the bank
OTP, the oil and gas company MOL Group, the pharmaceutical firm Gedeon Richter are
mentioned as prime examples. One can also mention the medical implant and prosthesis
producer Sanatmetal, the animal and feed supplement producer Agrofeed. Some of these
firms are also present in Ukraine but not in the two breakaway counties, thus not subject
to the ban of doing business there. In turn, doing business in the Russian Federation may
soon become very difficult for all these firms, making their future more uncertain there.
Conclusion
In sum, the war in Ukraine adds major uncertainties to FDI to and from the Russian
Federation and will affect it negatively in the short, medium and long run. The degree of
hit will depend on the exact contents of sanctions and counter-sanctions, not fully
known yet. The paradox of this war is that, if the intention of the planners was to make
the Russian Federation more powerful, the effect is already opposite, and can worsen
over time. Observers may wonder what went wrong with the planning of the economic
consequences. One hypothesis is that the inputs did not reflect the realities of the
outside world correctly. Perhaps realities have been replaced by a wishful image of a
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Kálmán Kalotay / The war in Ukraine deals a blow to Russia’s
foreign direct investment links
weak, divided and paralyzed international community. Sadly enough, one cannot avoid a
feeling of déjà vu as the lessons of European history more than eight decades ago seem
to be by and large forgotten or ignored by today’s planners of the economic
consequences of war.
Right now, the biggest question for Russian authorities is how to get out of an
impasse that hurts all people in the world, in Ukraine, the Russian Federation and other
countries of the world alike. It would require extreme courage to apply the right
solution, namely the implementation of the United Nations Resolution on the immediate
cessation of hostilities and the unconditional withdrawal of troops from Ukraine.
Information closed at 9 a.m. CET on 3 March 2022
Disclaimer: This study has been prepared exclusively on the basis of publicly available
information. While all care has been taken to verify each piece of information,
unintended errors in the facts are not fully excluded in a situation where information
and disinformation are arms used by the warring parties
Note: the author of the study is grateful to András György Deák, Andrea Éltető, Magdolna
Sass and Csaba Weiner for their comments on the first draft of this study. He keeps the
sole responsibility for errors remaining in the text.
