The sanctions imposed on Russia following the annexation of Crimea in 2014 have prompted some Russian companies to turn to international risk-sharing through partnerships with countries that maintain friendly relations with Russia. Kiet Tuan Duong, Luu Duc Toan Huynh, Anh Dang Bao Phan and Nam Tuan Vu explore how these partnerships have helped Russian firms mitigate the negative impact of sanctions.
Sanctions aim to restrict the economic activities of targeted countries by limiting access to international markets and resources. In Russia’s case, sanctions imposed since the country’s annexation of Crimea in 2014 have targeted industries such as energy and finance. The Kremlin responded by supporting sanctioned firms, offering subsidies and securing contracts to offset the losses caused by the restrictions. However, beyond internal government measures, Russian firms have leveraged international partnerships to reduce the impact of the sanctions.
Empirical evidence shows that Russian firms with strong connections to international markets reduced their investments and stockpiled resources before the sanctions took effect, demonstrating a level of preparedness for economic restrictions. This strategy mirrors the actions taken before Russia’s 2022 invasion of Ukraine, where firms anticipated the conflict and adjusted their financial positions accordingly.
International risk-sharing
In a recent study, we highlight a novel approach by which Russian firms use international risk-sharing to offset the effects of sanctions. Specifically, firms formed indirect business relationships with partners in countries that abstained from sanctioning Russia, such as China and India. These relationships allowed Russian companies to maintain access to essential markets and resources, mitigating the negative effects of sanctions.
Figure 1: How to construct the indirect relationship between Russian firms and partner firms
Note: For more information, see the authors’ accompanying paper.
By examining supply chain data from the FactSet database, we found that Russian firms engaged in risk-sharing with intermediary firms in friendly countries. This strategy helped firms increase their tangible assets and capital expenditures despite the sanctions in Figure 2. For instance, firms with indirect relationships in friendly countries saw on average a 0.44% increase in tangible assets and a 0.67% increase in capital expenditures post-sanctions.
Figure 2: The impact of risk-sharing channels on firm investments
Note: The figure shows the regression coefficients for the interaction between lagged indirect relationships and period dummies, accompanied by 90% (darker) and 95% (lighter) confidence intervals. The standard errors are robust, and the model incorporates all control variables.
The risk-sharing mechanism was most effective when firms partnered with companies in India and China, Russia’s top trading partners. These partnerships helped Russian firms maintain stable business operations and navigate the financial constraints imposed by the sanctions.
We examined how risk-sharing helps mitigate the adverse effects of financial frictions, using low-dividend payouts as a proxy for high financing constraints. Our findings reveal that firms facing more significant financial challenges can leverage risk-sharing to counter the impact of sanctions and boost investments, particularly in the context of Russian firms. Robustness checks, including analyses of the 2022 sanctions and other firm outcomes, as well as a counterfactual exercise, confirm the consistency of these results.
Implications for policymakers
The ability of Russian firms to circumvent sanctions through international risk-sharing presents challenges for policymakers. It is essential to close the loopholes that allow firms to bypass restrictions through indirect business relationships with non-sanctioning countries to make sanctions more effective. A more targeted approach to sanctions, along with better monitoring and enforcement mechanisms, could reduce the ability of firms to exploit these risk-sharing channels.
Policymakers must also consider the unintended consequences of sanctions on the economies of the targeted and sender countries. Sanctions should be designed to minimise collateral damage while maximising their impact on the intended targets. Enhancing international cooperation and strengthening sanctions coalitions will be crucial in ensuring the effectiveness of future sanctions.
For more information, see the authors’ accompanying paper.
Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: fornStudio / Shutterstock.com
