How Russia fell – and dragged us all down with it

If you squint your eyes a bit and cast your mind back about thirty years, these scenes were only slightly more dramatic than when thousands of expat executives, entrepreneurs and investors stormed into Russia following the collapse of the Soviet Union. 

Over the course of three presidents, eleven prime ministers, two financial crashes, two cross-border wars and millions of shots of vodka, Russia went from a mysterious, opaque frontier to a complex-but-manageable place to do deals. It was exhilarating, it was scary; it was never, ever boring. Roughly during a single generation, companies and the people who ran them created, and sometimes destroyed, enormous wealth.

No other market of Russia’s size and consequence has opened and then shut – messily and incompletely – in the space of a generation. The last thirty years of international business in Russia has been one of the greatest experiments in global commerce. 

Maybe the end came gradually and then suddenly, in keeping with the famous line from Hemingway. Few people in business or politics predicted that president Putin would send the Russian army over the border toward Kyiv. When he did, it was as if the world had suddenly started to speak an unfamiliar, new language. All our reference points about how countries and companies interact were suddenly unrecognisable.

Hundreds of international companies have left Russia; early movers did so without suffering the financial and reputational damage of the laggards. Hundreds more companies stayed, either able to withstand international condemnation or not hugely bothered by it. The rest are stuck as if on flypaper – wanting to get out, but unable to wiggle from the regulatory noose of the departure process. 

The story of international investment in Russia is one of careful planning and incautious adventure in equal amounts. It is a story about diligent, deliberate choices and staggering simplification. It is a story about professional dilemmas without easy answers. Some businesses kept up with the evolution of the Russian political and economic landscape; some saw only what they wanted to see. Others never looked too carefully at all.

The collapse of the Soviet Union left little more than economic and political ruin in its wake. The Soviet economy and the state that supported it imploded. It’s difficult to imagine after all these years, but as investors poured into a new state called the Russian Federation, only a handful of Russians had any idea of how companies in a market economy worked. What was left of the Soviet economy traced its origins to a dysfunctional, centrally planned system that functioned only thanks to shortcuts and workarounds. 

What’s more, as the Soviet state collapsed, so did its ability to maintain law and order. Criminality was rampant on the streets and along the corridors of power. In geopolitics, the end of the Cold War almost completely de-magnetised what had been a tense, but largely stable and predictable, bi-polar world. 

But the end of the Soviet Union came at a time when companies were looking at the world much more expansively than before. Markets once considered too distant, too risky or too primitive were suddenly ripe for expansion. It was time to buy a heavy coat and book a flight to Moscow.

Governments around the world supported the move. Across the early 1990s, presidents and prime ministers called Russia an emerging democracy and a nascent market economy. They told their national champions and modern-day, merchant-diplomats to head to Russia and to take their money with them. A Russia integrated into the international economy would be a more cooperative partner and a weaker military threat.

Most investors arrived in Russia with physical and ideological baggage. The physical baggage usually consisted of suitcases stuffed with hard currency, required to do business in a country that in the early days barely had a banking system or a worthwhile currency. The ideological baggage, shared by many if not all businesspeople, was the belief that with enough time and enough money, Russia would develop into a liberal democracy with a functioning market economy.

Over the years, Russia built a sophisticated banking sector that alleviated the need to import stacks of cash. But the hopes that every new McDonald’s or every new Snickers billboard was a step toward a Western economy were mislaid. 

The years of the money-spinning “Wild East” came primarily thanks to a number of factors, including a population starved of Western consumer goods, billions of dollars in foreign aid, and a financial services industry that rewarded investors with voracious risk appetites. Privatisation and joint ventures between Russian and international companies – in sectors from confectionary to hydrocarbons – created platforms for growing the Russian economy. In many cases, though, these deals sowed seeds of tension between partners who would never completely understand each other’s businesses.

The Russian default of 1998 ended the country’s first boom. The ruble collapsed and made Western imports untouchably expensive. Russian assets lost a layer of lustre, too. International investors retreated to lick their wounds; one of the market’s more prominent western players at the time compared investing in Russia to eating nuclear waste. 

But in an economic and political world that seems more cyclical than linear, Russia bounced back. Devalued Russian assets once again became attractive. The start of the “resource supercycle” drove galloping demand for the country’s natural resources. The price of oil, Russia’s most abundant export, soared on the back of global growth and geopolitical instability in the wake of the attacks of 11 September 2001. 

In the early 2000s, Russia generated phenomenal national and personal wealth; Moscow became a world-beating capital city known for its lavish, jet-set excess. Just about every designer brand imaginable had a boutique in the Russian capital. 

It was no longer unusual to bump into Russians on Stellenbosch vineyard tours or on expeditions to Patagonia. London became known as “Londongrad,” as Russian money bought up Knightsbridge mansions while some of Russia’s largest companies listed on the London Stock Exchange.

These trends had a counterbalance. Putin’s ascent to the presidency in 2000 once held so much promise. A law-and-order president (never mind that he was appointed by a Yeltsin family clique) seemed a welcome change from the debauched chaos of Boris Yeltsin’s 1990s. It didn’t seem to matter much that Putin came from state security, not usually seen as a factory of progressive governance. In the early days, Putin surrounded himself with liberal-minded reformers who brought consistency to the Russian economy. For most western investors, it didn’t really matter who was in the Kremlin, as long as the current occupant was sober, healthy and showed up for work every day.

The mood wouldn’t last very long. First, Putin brought the oligarchs to heel. He cautioned them that the wealth they captured via a series of rigged privatisations – the “loans for shares” schemes that funded Yeltsin’s 1996 re-election campaign – would forever be predicated on their staying out of politics. 

To drive the point home, in 2003 he jailed Mikhail Khodorkovsky, the founder of Russia’s Yukos oil company. The move sent international investors spinning: Would their Russian business partner also be arrested? Would they be arrested? By the time the first ten years of the 2000s were over, a majority of Russia’s GDP was generated by state-owned companies. 

The 2008 global financial crisis once again brought Russia low, but this time the triggers were external – the collapse of a hyper-collateralised Wall Street economy triggered a global economic crisis. Russia was more resilient to this crisis as a result of almost a decade of rampant growth. But the 2008 crisis tanked the price of oil, and as decades of experience have now shown, as goes oil, so goes the Russian economy. 

For a while, Russian domestic politics, geopolitics and the business community seemed to travel in almost non-overlapping orbits. Putin invaded and illegally annexed Crimea. The West responded with high-minded rhetoric but tightly drawn sanctions that barely broke the stride of most companies doing business in Russia. One German executive in Moscow at the time said his bosses at home wagged their fingers at Russia, and then asked him to squeeze out a few extra earnings points. “Geopolitics was bad, but business was good,” one observer remarked. 

There were a few – very few – international businesspeople who saw it all coming from early on. In the very first year of Putin’s presidency, he badly mishandled the PR following the sinking of the Kursk submarine. He botched the aftermath of the deadly school siege in Beslan, where hundreds died, including 180 children. 

In 2007, Putin declared he had no interest in the US-led geopolitical consensus during a speech at the Munich Security Conference. Among Russia-watchers, the “Who is Mr Putin?” question arose with frustrating regularity. For those who looked closely enough, the answer was at the very least emerging, if not screaming out loud. He did, after all, declare the end of the Soviet Union the worst geopolitical event of the 20^th century. Very few thought he would at some point try to reconstitute it.

The way countries and companies interact is now firmly on the radar of most of the world’s largest enterprises. After decades languishing as a “nice-to-know” factor for business, geopolitics is now resolutely “need-to-know.” That’s a big step; the next step is doing geopolitics well, and that’s not easy. 

The world appears to be in a constant state of disruption with no particular destination in mind. Whether we knew it or not, the Cold War was our comfort zone – we knew what it was and how to deal with it. As we start Donald Trump’s second term, we are now far adrift from that comfort zone without a safe shore in sight. 

Charles Hecker is the author of Zero Sum, published by Hurst