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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a non-resident senior fellow at the Peterson Institute for International Economics and director of the international affairs programme at the Kyiv School of Economics
Recent discussions in the US focus on potential opportunities for American companies in Russia in the event that relations between the two countries normalise. However, Russia now faces stagnation. And sanctions relief could be shortlived if the US administration changes in four years’ time, while state takeovers of companies and threats to investor rights underscore that investing in the country entails significant risks and uncertain rewards.
Nostalgists remember the glory days of the Russian market, between 1999 and 2008, when commodity prices boomed. Investors achieved extraordinary returns as crude oil prices rose from $11 per barrel in 1998 to a peak of $133 per barrel 10 years later, making the political risks seem worthwhile.
The period coincided with near-record oil consumption in the US, which was a significant oil importer, while Russia produced what it needed and the EU relied on Russian gas. By 2014, however, US oil imports reached a two-decade low due to decreased demand and a technological revolution that enabled domestic access to “tight oil”. Meanwhile, American oil exports soared, and the US surpassed Russia as a gas producer, beginning to compete with it in the European market.
In Russia, booming commodities lifted all boats, filling the coffers of oligarchs and state-owned enterprises (SOEs), while boosting fiscal revenues. The benefits trickled down, with real wage growth averaging double digits for much of the 2000s. As a result, Russia’s emerging middle class developed a strong appetite for western products, with US companies, among others, reaping the rewards.
US banks followed other companies into Russia, cautiously and selectively working with domestic corporations. Portfolio investors benefited from Russia’s booming markets. As oil prices stagnated in 2012, the Russian government granted foreign investors easier access to its local government bond markets. The rouble stabilised, becoming one of the most traded emerging market currencies.
But eventually, emboldened by a long period of strong growth, the Russian authorities became increasingly hostile towards investors. Landmark cases include the Yukos takeover, the Magnitsky murder, extortion from Ikea, TNK-BP bitter conflicts with Russian counterparts, and Telenor’s forced exit — to name just a few. Some foreign banks even found themselves embroiled in Russian corruption. Since 2022, pressure has accelerated, and US companies have lost more than $45bn and international companies all together $170bn.
Economic growth in Russia now depends on war-related sectors, while the rest of its economy remains stagnant. It’s difficult to imagine Russia allowing the US into its defence industrial base. And even there, growth has stalled recently due to high borrowing costs, labour shortages and the collapse of profitable exports. Russia is eager to sell energy to Europe, but it’s unclear how the US can assist.
Sanctions and financial losses leave lasting scars. There’s no guarantee that, if the Democrats return to office in the US in four years’ time, sanctions won’t be fully reinstated, leading to billions in losses once again. Compliance officers and shareholders have long memories, making it difficult for companies to present a return-to-Russia plan after a recent multibillion-dollar write-off. The same challenge applies to US asset managers, who are still having to explain why they lost US pensioners’ money by investing in Putin’s war machine. Additionally, Russia’s countersanctions mean that re-entering the market requires permission from Vladimir Putin.
While some in the US might be concerned about missing investment opportunities due to sanctions, it’s clear that Russia’s leading trading partner, China, does not view these as valuable. China has limited itself to exports, with most investment projects remaining on hold. This could be due to the reluctance to cross red lines imposed by US sanctions, although Chinese companies cite Russia’s complex administrative framework and the absence of the rule of law as major obstacles to investment.
While some companies may slow their departures, and the smartest may use the US-Russia thaw to finalise their exit deals, it is unlikely that there will be a rush of American companies entering Russia. At most we might see a few attempts to operate on the sidelines, supporting Russia’s ailing oil and gas industry or selling to Russian consumers. For the moment, Russia remains a risky oil investment play.
