On his inaugural day, President Trump saluted Ukrainian President Volodymir Zelensky’s desire for peace and Russian President Vladimir Putin’s unwillingness to end his assault on its peaceful nation. We congratulated Trump for seeing through Putin’s diplomatic propaganda and economic bluffs. From peace negotiations to economic partnership, Trump has reverted to trusting the devil. Now as Putin is dangling business opportunities for US firms in Russia as a part of his US negotiations over Ukraine, Trump seems to be eager to make a deal. What CEOs know, but which Trump misses, is that Putin’s vague offer is much less than meets the eye.
[time-brightcove not-tgx=”true”]
No American companies are eager to return. Russia is an imploding economy, with decayed infrastructure and impossible supply chain gaps. It is a dangerous, unsafe, unreliable place to conduct business.Â
CEOs’ disdain for Putin’s Russia is anchored in their knowledge that Putin is an untrustworthy dictator who might well nationalize their businesses at a moment’s notice. Just this weekend, Putin has admitted his plans to step up the expropriation of private enterprises including the seizure of many western company assets.  Â
Even before the war, doing business in Russia has always been a bad deal for US companies, and few non-Russian companies ever made much money there to be worth the risks. “A lot of people lost a whole lot of money over there in Russia. I think they’re going to be very reticent to want to go back. Once in a while, peace breaks out over there, but not very often,” oilman and Trump ally Harold Hamm recently told the Financial Times.
CEOs resistant to returning to Russia are merely rational capital allocators who perceive Russia to be a bad deal for shareholders. From a pure money perspective, CEOs would face a shareholder revolt if they tried to squander shareholder capital on risky investments in Russia. Even developing Russia’s much-ballyhooed, vast mineral and energy deposits requires significant capital investments which would take many years to realize a return on, and given the volatility of US-Russia relations, no CEO would want to risk having those investments stranded if relations between the two governments were to deteriorate again.
Read More: Column: Donald Trump Is Right to Refuse to Be Bullied by Vladimir Putin
The truth is that Putin is desperate for US businesses to return to stave off his economic collapse. This is desperation masquerading as generosity, and nobody should be fooled. Russian is not remotely a major superpower. Its economy is smaller than that of Chile and produces few finished goods— industrial or consumer—sold into world markets. Like a vassal state in the ancient mercantile system, all Putin has to sell are raw materials in energy, metals, and agriculture. And now, with all these commodities available more cheaply and more safely around the world, Russia is economically irrelevant.Â
Yes, Russia needs US businesses far more than US businesses need Russia. In fact, most US businesses drew little more than 1% of their total global revenues from Russia at their peak, and since most firms have pulled out of Russia, that number is now substantively close to zero. Far from hurting US businesses, shareholders rewarded companies for pulling out, relieved that the overhang of operational, regulatory, and reputation risk lifted, with their stocks realizing an immediate post-exit surge and setting new record high after record high in the weeks and months afterward.Â
In stark contrast, the Russian economy is imploding in plain sight. Food inflation in Russia is around 25%, interest rates on loans is a usurious 25%, and lending has come to a near complete halt, making ordinary life unbearable and unaffordable for normal Russians. Every sector has fallen 60 percent to 95 percent. Putin is running enormous deficits, and no nation is buying his debt–not even China. Millions of skilled tech workers have fled the country and oligarchs have spirited out $300 billion in assets. Foreign direct investment in Russian has fallen from $100 billion a year to zero.
To fund his war machine, Putin has been throwing the living room furniture into the furnace, cannibalizing productive sectors and relying on unsustainable, record deficit spending. Putin’s bluff is being called as Putin is quickly running out of cash, with the value of Russia’s sovereign wealth fund and rainy day reserves having fallen by 50% over the last two years. At this rate, Russia will be out of cash by the end of the year if not sooner.Â
Russia has found out the hard way that it is always easier for consumers to replace an unreliable supplier than it is for a supplier to find new markets, as global supply chains have found alternative sources for every Russian commodity export. Russia has one of the highest breakeven prices of any oil producing nation in the world, at $44 a barrel, nearly double that of Saudi Arabia and other Mideast oil producers – meaning Russia has been exporting oil at close to breakeven prices when supply chain and transport costs are factored in.Â
On natural gas exports, Putin has no such pipelines to Asia and thus flares off most of his natural gas as waste. The EU, by contrast now welcome affordable liquified natural gas (LNG) from the US, Norway, Algeria, and 22 other economic, reliable sources – which in turn is converted back to gas vapor to serve all of Europe, since the EU now has deep water ports with terminals and conversion plants in Germany, Poland, Lithuanian, Spain, and Portugal. Russia is even more desperate for US businesses to return now because they cannot get Arctic oil out of the ground without the help of US technology and brainpower, meaning their production will decline in the years ahead without US help.Â
American CEOs know that doing business with Vladimir Putin is not just wrong, it is bad business. The U.S. President should listen to them: Recognize the opportunity he has and let Russia’s economy fail.
