The FDI angle:

• Russia's outward greenfield foreign direct investment (FDI) recovered in 2023.
• In the face of Western sanctions, Russian companies have shifted their FDI plans away from the OECD towards former Soviet countries in its backyard as well as neutral countries like China and the UAE.
• Why does this matter? Russian companies continue to operate business as usual and circumvent Western sanctions by forming greater trade and investment ties with mostly non-democratic countries not part of the sanctions coalition.

Since Russia’s full-scale invasion of Ukraine began in February 2022, global trade and investment has pivoted along geopolitical lines. Greenfield FDI figures provide a glimpse into how Russian companies have shifted in this new world order.

Western sanctions have forced Russian businesses to pull back from OECD members, a group of developed countries that are widely sanctioning Russian entities and shutting them out of their banking systems. 

fDi Markets tracked just 18 greenfield FDI project announcements in OECD countries by Russian businesses between April 2022 and March 2024. That was less than half the 48 such projects in the first two years of the pandemic and barely a fifth the level seen in the two years up until the end of March 2020. At a more granular level, Russian FDI vanished in countries like the US, the UK, Finland and Germany. 

At the same time, Russian companies stepped up their investment commitments in the Commonwealth of Independent States (CIS), a group of former Soviet countries in Russia’s backyard. Russian FDI projects in the CIS jumped to 41 in the two years since the Ukraine war broke out, up from 22 in the two years before the war. The UAE and China, the two countries with the most Russian FDI projects in the two years since the Ukraine war, both recorded a jump in projects over the same period.

Sanctions-hopping

Since Russia’s full-scale invasion of Ukraine in February 2022, more than 18,000 sanctions have been imposed on Russian entities and individuals by the US, EU and UK other countries in their coalition such as Australia and Japan, according to Castellum AI data.

“Sanctions make Russian investment in OECD countries infeasible because sanctioned entities cannot use the banking systems of any of the countries that are participating in the financial sanctions,” explains Sarah Bauerle Danzman, a scholar in residence at the Atlantic Council affiliation and an associate professor at Indiana University. This also applies to unsanctioned Russian companies, she adds, that “may worry they will be subject to asset freezes” if they invest in countries that are part of the sanctions coalition.

In the CIS bloc, Russian investors have been most active in consumer products, logistics and communications sectors. In the UAE, Russian-based tech and business services companies were the most active, while China attracted the most FDI projects from financial services firms.

Seen through the prism of geopolitics, the increase of investment into the UAE, the CIS and China is part of Russia’s efforts to strengthen ties with non-aligned countries. It is a way for Russian entities to continue operating as usual and avoid the net of western sanctions, argues Elina Ribakova, a non-resident senior fellow at the Peterson Institute for International Economics and director of the international programme at the Kyiv School of Economies.

“Russia uses UAE, the CIS and China for sanctions evasion,” she says, in reference to circumnavigation of export controls. This is “particularly for imports of dual use goods”, or those used for military and civilian purposes, she adds.

The effective shutting out of Russia from western economies and their banking systems has led them to divert trade through so-called bridge countries and repatriate assets from offshore jurisdictions. 

They are not the only ones to have done so. European exporters have equally found alternative trade routes to serve the Russian market. 

Central Asia and the Caucasus are a case in point. After trade sanctions were imposed on the Russian economy, EU exports to Central Asia and the Caucasus increased sharply. “There are more countries that have not applied sanctions to Russia than have applied sanctions to Russia. That makes the impact of sanctions limited as Russia can simply divert trade flows to other willing partners,” explains Klisman Murati, the CEO of Pareto Economies, a research consultancy.

In 2023, inflation-adjusted EU exports to Kyrgyzstan jumped 172% year-on-year, compared with a 3% contraction for total EU exports, according to an EBRD analysis of UN Comtrade data. EU exports also jumped in Kazakhstan (+27%), Armenia (+23%) and Georgia (+15%) over the same period. 

“The longer the war drags on, the more Russia will invest in new patterns of trade and investment connections,” says Ms Bauerle Danzman.

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