The War in Ukraine Deals a Blow to Russia’s Foreign Direct Investment Links

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.

Keywords: Foreign direct investment, war, Russia, Ukraine, sanctions

JEL Classification: F21, F23, N44