Prolonged Russian Sanctions Cited as Having Significant Effect in Disappointing Economic and Earnings Reports

Everyone is feeling the impacts of the highest rate of inflation in decades, with the Consumer Price Index (CPI) still reporting a 8.3% year-over-year rate of inflation. Many pundits are blaming the impact of the Russian sanctions as a primary driver. This month, U.S. companies reporting earnings are repeating the same mantra.

Following Russia’s invasion of Ukraine on February 24, 2022, the U.S., Europe and other countries imposed economic sanctions on Russia that significantly limited the imports and exports to and from Russia. Additionally, many international companies further limited business with Russia beyond any legal requirements based on concerns of reputational costs, potential asset seizures by Russia, or potential further sanctions. As the war has stretched on, additional sanctions against Russia have mounted, and the impact has been felt around the world.

Congressional Research Service reports that in the pre-war year of 2021, Russia exported $490 billion of goods, of which oil and gas products constituted half. An oil embargo by the EU and U.S. (50% of Russian oil exports) and cutting of natural gas imports by the EU (70% of Russian exports) by two-thirds were estimated to decrease the exports by one-fourth. [1] But restrictions have gone much further than just natural resources. Indeed, the current Russia sanctions may be more effective than sanctions imposed in the past due to the scope and collective nature and support of average citizens to support sanctions by their employers and communities. The degree of self-sanctioning behavior by global companies is unprecedented.

With regard to Russia, sanctions will no doubt generate a deep recession in that country that has already started. Defaults on Russian debt have already begun, marking the first time the government has defaulted since the 1917 Bolshevik Revolution. For Russian consumers, reports are rampant that supermarkets are short of essential items including diapers, sanitary pads and sugar. While some Western nations struggle with inflation rates of between 5 and 8% this year, consumer prices in Russia are expected to rise by a staggering 20% this year, two-and-a-half times the rate in 2021, according to estimates from Capital Economics and Raymond James. According to a Bloomberg forecast, Russian GDP will fall by 9.6% in 2022, with a peak quarterly GDP decline reaching -15.7% of annual growth rates. [2] “The current crisis will wipe out 15 years of economic development,” the Institute of International Finance said in a recent report.

Of course, the Russian sanctions are not just a one-way street, and while most consumers have been feeling the impact at the gas pump for several months, recent weeks have shed light on the fact that some major U.S. companies are feeling the same effects. Google’s Russian subsidiary recently reported that it plans to file for bankruptcy after the U.S. tech firm stated that Russian authorities had seized the unit's bank account. JP Morgan reported that its profits fell 42% from a year earlier to $8.28 billion, or $2.63 a share, and the U.S. bank attributed Russia’s war as having a 13 cents-per-share impact. While the bank did not express long-term concerns about its Russian exposure, it still reported that Russia could still cause a billion-dollar loss over time and that there was still roughly $600 million in anticipated losses due to Russia in the near term.

Manufacturers have reported similar effects: Defense company Raytheon Technologies beat quarterly estimates, but the defense company cut its full-year sales forecast, citing sanctions on Russia. On its website, Raytheon states that it has suspended operations in Russia and all sales and support services to Russia’s civil aviation industry. In an earnings call with analysts, Raytheon confirmed that it is not going back to the region, and that its joint venture in the region, a facility that built parts for aerospace companies Boeing and Embraer, is closed.

Indeed, most companies are now reporting that their exit from Russia will be permanent. Therefore, even when the war stops and sanctions are lifted, there will likely not be a quick recovery, and restructuring professionals certainly should take this into account over the next several years.