Murphy's Law: The High Cost Of Being Bad

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May 20, 2014: The Russian campaign to seize a large chunk of eastern Ukraine (about nine percent of Ukrainians, 13 percent of the population and 15 percent of the GDP) has generated a huge international backlash. This should have been no surprise since Russia had already seized Crimea (with half the land area of Donbas and a third of the population) and in 2008 seized six percent of Georgian territory. While the Georgian aggression cost Russia relatively little, the Ukrainian land-grab is causing major economic damage, to both Russia and the many foreign nations that have invested in Russia over the last two decades.  

Huge amounts of Russian and foreign cash (several hundred billion dollars’ worth) has already fled the country and most foreign investment plans are dead or on hold. The IMF (International Monetary Fund) believes the Russian economy is now in recession. This is not so much because of the sanctions, but because investors (Russian and foreign) see the Ukrainian adventure ending badly for Russia and until it is clear that the outcome is otherwise, are getting their money to a safer place.

The damage to foreign investors is even larger, with over a trillion dollars’ worth of foreign investments at risk because they consist of land, structures and equipment that cannot be moved as easily as cash. This is similar to the financial bath Western investors took a century ago as Russian entered World War I and eventually fell apart in a civil war and came back to life as the Soviet Union, which repudiated foreign debts and seized most foreign property. It’s déjà vu all over again.

The more financial damage Western investors suffer the more reluctant they will be to return to Russia in the future. Since Russia has lots of development potential but insufficient cash to make the most of it, this lack of foreign investment will be felt for decades.

 

 


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