Trump, despite the faltering sanctions system, intends to engage in negotiations. (Robert Agee)
Rewritten Article:
Let's rewind to '22. The lockup of Russian reserves wasn't exactly a shock, but the stampede of Western companies exiting wasn't foreseen. Did you anticipate a scenario like that back then?
- At the time, it was a surprise for us too. The past year was a rollercoaster ride, reminiscent of the initial pandemic chaos and border shutdowns. Every week saw new sanctions, and we were bombarded with queries from companies.
What were the top questions asked?
- The essential query was whether to leave or hang in there. It was evident that not all companies were ditching ship. We suggested our most nervous clients to chill, take a breather, and avoid rushing into hasty decisions.
Did you have a manual for this chaotic situation?
- Nope, we didn't have a user guide as every scenario was unique. Our focus was on facilitating communication between companies and Russian and American authorities, and fostering communication among the companies themselves. We functioned as a hub for business communication with the Russian and US government and inter-company communication. With the help of consultants, lawyers, and fellow Chamber members, we assisted businesses in addressing the risks they faced in the event of a full exit, reducing operations in Russia, or continuing operations here.
Take, for example, the ban on exporting IT services from the US. These companies had no other option but to decamp. Apart from that, there were counter-sanctions, logistical nightmares, and financial obstacles making it tough to stay afloat. Reputation risk was also a factor for many companies.
Did AmCham profit off this turmoil?
- We're not a money-making machine; we work solely for the membership fees paid by companies. With several companies bailing from Russia, resulting in reduced membership fees, we had to slash expenses without compromising on quality. As we're not lawyers, we routed clients to market players who were part of AmCham. In fact, this period of punishing sanctions was a lucrative time for consultants and lawyers, despite the high-stress levels.
In an interview with RBK, you mentioned three types of corporate responses to sanctions and geopolitical tension: exit with drama, meticulous withdrawal while maintaining presence, and remaining operational in Russia. Does a specific industry pattern young companies' responses?
- Scandinavian companies made the earliest exit, followed by the British and European businesses. Then came the Americans. It wasn't tied to a specific industry; each case was judged based on losses incurred due to leaving or sticking it out. By early '22, our estimation showed that the direct investments by American companies in Russia were roughly $100 billion. Dumping such hefty amounts hurts.
But some firms decided that leaving was the better option, regardless of the losses. For example, one major consulting firm shelled out $15 million to Russian management for transferring the business. One raw materials enterprise invested $4.5 billion in Russian extraction and sold the business to a Russian entrepreneur for $400 million. So, who reaped the benefits?
Essentially, businessmen weighed the pros and cons, striking a balance between losses from leaving or sticking it out. The Russian government's decisions, particularly the imposition of the "exit tax," played a part?
- Yes, it did. When the tax became mandatory, the enthusiasm diminished a bit. By then, the peak exodus had already passed.
Time limits for repurchasing the business from management have expired or continue?
- In the first year under sanctions (2022), the maximum duration of options was 5 years. In 2023, it was trimmed to 3 years. Currently, it's quite difficult to obtain such permissions. We talked it over with our lawyers, and the present situation is that some options are still valid, but 30% have already elapsed. There's been a bit of discussion about whether to go ahead even with those options that are still valid. In our opinion, it'd be smart to honor them. The Russian side's fulfillment of these commitments would send a positive signal to companies wrestling with the return decision.
The white paper you're preparing for the American government discusses the impact of US sanctions on various Russian sectors, including FMCG, pharmaceuticals, Medtech, investment firms, energy, luxury goods, and more. The document assesses the effects of US sanctions, changes since '22, losses, market shifts, long-term prospects, and axes suggestions for easing the strained U.S.-Russia business connection.
What recommendations are planned?
- We'll urge the US government to lift the ban on direct investments in Russia. Companies would like to expand, but thanks to Russian restrictions on investments, they can't. We'll push for the scrapping of restrictions on financial transactions, a resumption of regular payment systems, and the removal of restrictions on specific sectors: aviation, IT, components, accessories, and medical equipment components that have dual-use potential (forinstance, components that can be utilized in both medical imaging devices and rocket production).
What's the connection between the aviation sector and sanctions?
- Imposing sanctions on the aviation sector appears senseless and economically unwise. This sector is humanitarian, and it was wrong to impose restrictions initially. In Russia, there's a large Boeing fleet that needs maintenance, replacement parts, personnel, and support. In essence, we're imposing sanctions that directly affect airline safety and compromise the safety of citizens who fly on these planes. This is like the issues surrounding medicine or medical equipment distribution. It also contradicts the provisions of the Chicago Convention of 1944.
Beyond safety concerns, the certification issue is critical. Presently, these aircraft can't fly abroad due to their status. Furthermore, Russia is a supplier of components for the US aviation industry. For instance, the joint venture between Boeing and 'VSMPO-AVISMA' - Ural Boeing Manufacturing - in the Sverdlovsk region. Lifting sanctions in this sector would benefit both nations and their citizens.
Does flying on Russian airlines trigger concerns for you?
- No, I'm confident in the safety record of Russian airlines. That said, I do prefer making careful choices when it comes to airlines.
Discussions about flight clearances over US territory for Russian planes are in the works?
- Opening American airspace to Russian flights is a necessary discussion. Yet, the issue of reciprocity arises. If Russia opens its skies, the US gains a shorter route to China. Meanwhile, Russia isn't particularly benefited from US airspace access, as efficient flights generally circumnavigate Europe due to its closed airspace.
With substantial investment in the Russian aviation industry since '22, including funds from the Russian government for the production of new aircraft lines and replacement parts for Russian and foreign fleets, and with one-third of the imported fleet purchased by the Russian government, would this impede the resumption of US component supplies?
- That's up to the Russian government to decide. But I believe the Russian market can accommodate both Boeings and Sukhois. In fact, American businesses can compete with Chinese products in Russia.
The resumption of cross-border dollar transactions is under consideration. But Russian banks have adapted to working without SWIFT and without the dollar. Will they be eager to return to this en masse? And conversely, are American banks willing to transact in rubles? Sounds somewhat absurd.
Some American firms are transacting in rubles for international operations. Overall, it's a chain of currency conversions. Russian banks are facing a dollar shortage despite adapting to the situation. If we reopen the door for some American or Russian bank in this regard, there will still be a demand for dollars.
The white paper focuses on assessing losses suffered by American businesses due to departure. Can you mention a rough estimate?
- The white paper mainly centers on companies that stayed put and continue to operate in Russia in one form or another, seeking ways to improve their circumstances. It offers an insight into how businesses in each sector of the economy have been affected by sanctions and Moscow's countermeasures. Our calculations on losses include direct effects, not indirect ones such as sales of assets below investment values, increased logistics costs, etc. You might be familiar with the $300 billion estimate by the Russian Direct Investment Fund (RDIF). But we believe our estimate is lower - around $100 billion. However, we only evaluated losses of companies that were, or continue to be, members of AmCham.
On one hand, American businesses have been hit. On the other, those that remained and didn't pull back could have benefited because the market's been freed up. Is that true?
- Companies that stayed put are enjoying fantastic profitability, not only because of reduced competition. There's also a paper factor that comes into play. They can't invest, can't advertise, can't pay out dividends, yet their earnings are inflated due to these restrictions.
AmCham isn't maintaining a list of application requests from American businesses yearning to return to Russia for preparing the white paper?
- No, the purpose of the white paper is primarily to assist companies that are part of, or did not leave Russia. However, we organized a webinar in partnership with Melling, Voitishkin & Partners to discuss the return of Western companies. A total of 125 American businesses participated in the session. Intriguingly, the questions came from their Russian representatives, while their upper management merely listened in.
What must happen for American firms to genuinely begin returning to Russia?
- In my view, three conditions must be met: first, a peaceful settlement between Russia and Ukraine. Second, the easing of sanctions. Third, the reinitiation of cross-border banking operations, the lifting of restrictions on investing in the Russian market, and the return of "frozen" dividends from American firms that remain in the market. Once these conditions are met, companies will gradually return to Russia.
Who could be the pioneers in returning?
- I believe that a joint, large-scale investment project between Russia and the United States, discussed at the level of Donald Trump and Vladimir Putin, could serve as an influential signal. In terms of specific companies, the FMCG sector would find it least challenging to regain momentum.
What kind of large-scale investment projects are you referring to?
- Initially, investment in the energy sector, particularly extraction projects in the Arctic. However, the exploration and implementation of these projects require substantial legwork, the formation of conditions for product sharing, permit applications, drilling, and so on. Buying the Russian stake in "Northern Streams" would offer guarantees and contribute to gas supply stability. I believe Trump would appreciate this idea.
However, the US is also planning to increase LNG supplies to other markets, including the European Union. Won't they have to compete with Russian pipeline gas?
- One can argue competition or control over the gas market.
Recent weeks have seen the ruble strengthening. Deputy Prime Minister Alexander Novak claimed this was due to the influx of foreign capital. Have American firms and banks started preparing to return to the Russian market in terms of purchasing rubles?
- Economists I've consulted attribute the strengthening ruble to a decrease in dollar imports and a reduction in geopolitical risks. Yes, it could be interpreted as a return of carry traders. But large players like Morgan Stanley or Goldman Sachs cannot invest in Russia due to sanctions. There's a compliance process that's practically impossible to circumvent. Besides, there's also criminal responsibility for violating sanctions. Another possibility is that some dollar inflow could originate from funds registered in offshore zones like Cyprus or the British Virgin Islands. But that's not American money.
Vladimir Putin granted permission to the little-known American fund - 683 Capital Partners - to buy shares in Russian firms from foreign investment companies in the US and UK. Experts suggest that this might mark the beginning of an exchange of blocked securities. Is that true?
- The concept is intriguing, but we don't know this fund, and don't have the details.
Are you planning to visit Washington with your white paper? And who will you be discussing it with there? What kind of negotiations can we expect?
- The discussions will be held with the appropriate departments and ministries in the US. We are awaiting confirmation of meetings. As for the level, we anticipate reaching the levels of heads and deputy ministers.
We've discussed the problems faced by American businesses in Russia, potential large deals. Let's move on to more meaningful stuff. Is an ice hockey match between the US and Russia a reality?
- I fully support the idea! In fact, an American business associate deeply involved in this venture says there's forward progress on both sides, so this event could provide a quick boost to diplomatic relations between the two nations.
In general, what's the blueprint for close relations between these two countries? The ice hockey match is a symbolic step. What comes next?
- Dialogue regarding the normalization of diplomatic relations is already underway. This should have occurred a long time ago. The escalation of diplomatic conflicts between the two nations hasn't been since the SVO; it started during Obama's term. The consulate in St. Petersburg was practically shut down. The same was true in the US. The first step should be resolving the issue of consular operations. Then – starting visa issuance, improving consular services. There are numerous opportunities for cultural interaction. The Arctic is yet another area of potential collaboration, not just from a commercial standpoint, but also from an environmental perspective.
Despite the apparent thaw, Donald Trump sometimes advocates for tightening sanctions against Russia. How do you view these fluctuations?
The sanctions mechanism is challenging to stop. Don't regard new sanctions packages as opportunistic, sporadic actions. The sanctions mechanism is like a Titanic; once it was aware of the presence of an enormous iceberg, it couldn't divert due to its size and continued moving forward due to inertia. The same goes for sanctions. Entire departments are dedicated to enforcing sanctions, so new packages were undoubtedly drafted even under Joe Biden. Donald Trump won't implement them, but he's a businessman who thrives on resolving crises quickly and strikes deals. The good news is that he's willing to negotiate and find a compromise.
Do the upcoming Congressional elections in 2027 and Donald Trump's limited term influence the necessity of negotiating now?
- That's precisely why all should be done quickly, before the opportunity passes. I don't believe that even if there's a political shift, there'll be a rollback in the economic relations we can establish today. There's no reason to fear that.
- The discussions in the white paper specifically focus on the impact of sanctions on various industries in Russia, including FMCG, pharmaceuticals, Medtech, investment firms, energy, luxury goods, and more.
- One recommendation in the white paper is for the US government to lift the ban on direct investments in Russia, allowing companies to expand their operations there.
- The imposition of sanctions on the aviation sector is a topic of contention, as it is considered economically unwise and potentially dangerous for airline safety.
- The strengthening ruble has been attributed to a decrease in dollar imports and a reduction in geopolitical risks. However, large American players like Morgan Stanley and Goldman Sachs are currently unable to invest in Russia due to sanctions.
