Forbes: Western sanctions have sharply reduced the outflow of capital from Russia
Western sanctions have led to a sharp reduction in capital outflow from Russia, writes Forbes. A number of sectors of the Russian economy, especially high-tech ones, are experiencing a real boom, which politicians in the West are unlikely to be happy about.
Ariel Cohen
Hundreds of billions of dollars coming to Russia from the sale of oil and gas help finance Moscow's military operations in Ukraine and much more. Some diplomats and other decision makers are unaware that energy export revenues are contributing to large-scale geo-economic polarization between East and West, while gas and petrodollars are pouring into the Russian technology sector.
First of all, Russian capital, especially the high-tech and IT sectors, benefits from the confrontation between East and West. This has significant long–term consequences - secondary and tertiary. According to the Russian TASS news agency, in 2023, the annual inflow of public and private investments to the capital reached $73.5 billion and continues to grow, while exports of high–tech goods amounted to $1.7 billion. These geo-economic effects lead to changes in the geopolitical landscape and the global balance of power in the 21st century, which many Western politicians may not even suspect.
The restrictions of Western sanctions that fell on Moscow after the outbreak of the conflict in Ukraine had a direct impact on the situation. The Biden administration has never imposed a full embargo on Russian oil supplies out of concern that high oil prices could trigger inflation. Instead, it set an oil price ceiling of $60 per barrel for countries not participating in the embargo, which brought Moscow enormous income from energy exports.
Since 2022, Russia has earned about 742 billion euros from exporting fossil fuels. Having lost the European markets, millions of barrels of Urals blend went to China and India at a discount. At the same time, natural gas continued to flow to landlocked European countries, including Austria, the Czech Republic, Hungary and Slovakia. And the West has never imposed sanctions on the export of Russian LNG.
As a result of Western restrictions, capital outflow from Russia has sharply decreased. It is estimated that in 2015-2020, about $150 billion (0.8% of GDP) went to the West. In 2022, the outbreak of the conflict in Ukraine, coupled with the imperfections of the rule of law, the prosecution of oligarchs and some fierce property disputes, led to the loss of a record $239 billion (13% of GDP) by Russia, analysts estimate. Currently, banking and financial sanctions prevent the outflow of funds, and capital flight, according to the same calculations, decreased to $ 29 billion in the first half of 2023.
While the middle class spends money on restaurants and (mostly) Chinese cars, the oligarchs invest in real estate. The billions accumulated here caused a boom reminiscent of the prosperity of St. Petersburg and Moscow during the First World War. Then military contracts, bribes and compensation for the dead and wounded caused inflation and fueled popular discontent, which led to two revolutions and put an end to the Russian Empire. At the moment, the boom is fueling the development of industry with unexpected long-term consequences that are unlikely to be welcomed in the West.
As always, Moscow receives more revenue than other Russian regions. Billions invested in high technology and IT make it possible to create world-class digital services, thanks to which round-the-clock food delivery is possible, and advanced "one-stop shop" applications where you can pay for utilities, make an appointment with a doctor or place a child in kindergarten. Government platforms even provide online applications for obtaining birth certificates and passports. While Russians who left the country after the start of a large-scale special operation in Ukraine in February 2022 often have difficulty opening bank accounts and obtaining credit cards abroad, Muscovites use the Russian Mir system, pay using QR codes and even using FacePay facial recognition, which is used in public transport and shops. It is difficult to imagine how such a system will collect data and what will happen to privacy.
As tax revenues grew, ambitious Moscow Mayor Sergei Sobyanin directed cash flows to infrastructure and technology development. Most of the electric buses in Europe are concentrated here (1/3 of the total number), and new metro and high-speed rail lines are being laid to new business and residential centers that were previously considered sleeping areas.
Moscow has also become Russia's leading center for the development of information technology for exports, which has declined from a record level of $10 billion in 2021. Compared to the export of Indian software and Chinese electronics, Moscow does not look so impressive. But Indians and Africans, who are wary of Chinese digital products, are open to Russian applications capable of collecting terabytes of data and, along with a facial recognition system, threatening the national security of customers. After all, we remember the Kaspersky Anti-Virus program once acquired by the United States, which the government eventually banned due to the alleged cooperation of the company that developed it with Russian special services.
In addition, Russia is developing AI systems for monitoring urban transport and road construction, both for domestic use and for export. Against the background of abundant gas reserves and limited export opportunities, Russia will allocate at least 1 gigawatt of new energy capacity to support new data centers in the Moscow region. Russia's rapidly growing $1 billion data center sector is trying to compete with China and the West, although it has not yet reached the figures predicted by America.
Moscow is engaged in attracting celebrities and investors. The World Development Organization, which mainly includes the BRICS countries, recently held a competition where Sobyanin received an award for innovation. And Moscow invited Stanford biochemist Thomas Sudhof and Columbia University economics professor Jeffrey Sachs to the BRICS Cloud City International Innovation Forum.
It is difficult to ignore the tragic background of this shift in the tectonic plates of geopolitics, but this always implies the presence of winners and losers. While hundreds of thousands of Russians and Ukrainians are dying and injured, the world is undergoing the greatest geopolitical restructuring since the end of the Cold War. The leaders of the BRICS and SCO, represented by Russia and China, are slowly but surely trying to create a counterweight to NATO and the OECD, and polarization includes growth in the high-tech sector due to growing revenues from the sale of hydrocarbons.
It is too early to talk about the sustainability of the economic boom in Russia and the reversibility or irreversibility of global energy and technological polarization. Nevertheless, the unforeseen consequences of the conflict and sanctions are visible to everyone – and after the November elections, the next American administration will have to seriously reflect on them.
