‘A commendable effort’

A widely cited report predicting doom for the Russian economy has come under scrutiny from economists

Story by Margarita Lyutova. Abridged translation by Sam Breazeale.

In late July, a team of researchers from Yale published a report titled “Business Retreats and Sanctions Are Crippling the Russian Economy.” Since Russia launched its full-scale invasion of Ukraine, the same team has maintained a list of international companies that have ceased operations in Russia in response to the war. The project is led by management and corporate responsibility expert Jeffrey Sonnenfeld, a professor at the Yale School of Management and the founder of Yale’s Chief Executive Leadership Institute. The report has been cited widely in recent weeks, but Sonnenfeld is neither an economist nor a Russia specialist, and experts have raised doubts about some of the report's claims. Economic journalist Margarita Lyutova explains why the researchers' conclusions might be worth taking with a grain of salt.

Apples to oranges

In early March, soon after the start of Russia’s full-scale war against Ukraine, international corporations start withdrawing from Russia en masse. Some cited ethical reasons, while others pointed to new logistical difficulties resulting from Russia's sudden economic isolation. On March 6, Yale Professor Jeffrey Sonnenfeld and a team of researchers that included his students published a list of 200 companies that had already announced they would either cease or limit their operations in Russia.

A second list, published alongside the first, contained 30 companies that had “remained in Russia with significant exposure.” But the authors' analysis raised questions. A graph that was meant to compare the companies’ varying levels of involvement in the Russian economy used different data points for different companies: in some cases, it showed the number of branches or franchisees a company still had in Russia, while in others, it showed the total percentage of the company’s revenue that could be attributed to its operations in Russia. Still other companies were marked with notes saying their level of involvement in the Russian economy had “not [been] disclosed,” despite the fact that several of those companies publish public reports online that could have been used to assess their presence in Russia. The authors also didn’t explain why they had chosen these specific companies out of all of the international companies that remained in Russia.

On March 7, two companies on the “remained in Russia” list — EY (Ernst & Young) and Procter & Gamble — announced they were pulling out of the Russian market. Shortly after, Sonnenfeld began telling journalists that his list had been responsible for many companies' departure from Russia, though he didn’t give specific examples. On March 11, the Washington Post published an article in which Sonnenfeld said that “over two dozen” companies had requested to be added to the list in a single day.

On July 22, Sonnenfeld and his coauthors published a report on the consequences of sanctions and the exodus of companies from Russia on the academic paper repository SSRN (formerly the Social Science Research Network). In the weeks since it was published, the report has had a huge impact: according to SSRN, it's been downloaded over 66,000 times. A number of media outlets, including the Financial Times, CNBC, and Deutsche Welle, have cited it.

But even a cursory glance at the report raises some questions about its reliability. SSRN is intended to be a platform for academic articles, but the Yale report falls short of academic standards. For one thing, it's missing a list of references, an appendix with data used by the authors, and a methods section, which would allow other researchers to assess its validity.

The claims made in the report are far-reaching. Its authors assert that “Russian domestic production has come to a complete standstill with no capacity to replace lost businesses, products and talent,” and that “there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia.” Claims that economic sanctions are ineffective, they say, are unfounded.

The paper is based on both the authors’ own list of companies that withdrew from Russia and an analysis of statistics regarding the Russian economy. The authors estimate that “as a result of the business retreat, Russia has lost companies representing ~40 percent of its GDP,” but don’t explain what time period they used to calculate this figure or whether they took into account the businesses that sold their assets to Russian companies.

Additionally, the current version of the list includes only 311 companies that have left Russia completely; another 500, the authors say, have left temporarily and retained the ability to return. Nonetheless, they refer to the economic damage done by the withdrawal of “over 1,000” companies.

The report contains other contradictions that don’t take an economics degree to spot. At one point, for example, the authors write that Putin’s reckless wartime economic policy decisions have “sent his government budget into deficit for the first time in years.” Later in the report, though, they include a table that shows that Russia had a deficit in both 2020 and in 2017.

Those pesky local factors

According to Alexander Isakov, the head of ​​Bloomberg’s economics team, Sonnenfeld and his colleagues also failed to take into account some important factors that are specific to Russia. For example, citing data from Rosstat, the authors write that even official statistics from the first quarter of 2022 indicate a major downturn in a number of sectors of the Russian economy when compared to those from 2021: they calculate a 62 percent decline in the construction sector, a 55 percent decline in the agriculture sector, and a 25 percent decline in the manufacturing sector.

The authors note that the data doesn’t take into account seasonal factors, but according to Isakov, seasonality can’t be discounted: indicators from each year’s first quarter are always significantly lower than those of the preceding year’s last quarter. This is due to a combination of the holiday season (which includes fewer workdays), Russia’s climate (which affects construction), and the fact that there's no harvest in the winter. When all of this is taken into account, Russia actually showed a small GDP increase of 0.5 percent in the year’s first quarter, then a decline in the second quarter.

Isakov was clear that his goal was not to disparage Sonnenfeld and his colleagues; he was simply pointing out their errors in an effort to get closer to the truth. “Understanding conditions on the ground in [Russia] is more important than ever,” he concluded, “and [the] report is a commendable effort to do just that.”