Unrealized opportunities: Exploring Russia’s untapped OFDI potentials amidst economic sanctions

Abstract

The economic sanctions imposed by the United States, Europe, and other countries since 2014 have heightened the unpredictability and turbulence in the business environment for Russian firms, necessitating exploration of new international partners and transformation of economic relationships. This paper aims to examine the redirection of Russian outward foreign direct investment (OFDI) in the context of these economic sanctions, particularly those intensified since 2022. The analysis employs an estimated econometric model to compare actual and potential levels of OFDI, utilizing a comprehensive database covering 74 origin and 102 destination countries from 2010 to 2019. The estimation technique employs Poisson pseudo-maximum likelihood approaches. The findings indicate that Russian firms demonstrated underinvestment in most regions, except for Northern and Western Europe, during the examined period. The 2014 sanctions resulted in a significant decline in Russian OFDI to the countries imposing sanctions, while there was an increase in OFDI to Asia, the Middle East, and the CIS countries. As anticipated, the 2022 sanctions exerted additional pressure on Russian OFDI, leading to a further shift of their outflows towards Asia and the Middle East, which, however, could not compensate for the sharp decline in OFDI to the EU countries and North America. The results highlight the existence of untapped OFDI potential for Russia in African and Latin American countries as well as in the Middle East. These regions emerge as desirable partners for bilateral economic liberalization. From a policy perspective, the findings emphasize the importance for the Russian Federation to pursue deep trade agreements that encompass investment preferences, public procurement, and the protection of intellectual property rights with regions harboring untapped potential for OFDI. Additionally, expanding government support for domestic firms venturing abroad is crucial to sustain and enhance integration into the global economy, especially in the face of sanctions.