Sanctions, Exit of Foreign Companiesand Business Activity in the Russian Regions

Abstract

Despite the limited markets now available to entrepreneurs and the disruption of supply chains, many indicators of business activity in Russia did not decrease in 2022. However, there are significant differences between regions in their response to these external shocks. The article evaluates factors that brought about changes in the most pertinent indicator of business activity - the growth in the number of new small and medium-sized businesses. First, in regions where economic ties with the countries that imposed sanctions were weaker, there were more such new businesses. In some regions that produce raw materials, those countries annually accounted for more than 80% of exports and imports. Second, the withdrawal of companies from Russia may open up certain market niches (in trade, IT, other services, and processing). The revenue of enterprises from countries deemed unfriendly by the Russian government was about 16 trillion rubles, or about one tenth of the market. The hypothesis that this amount of revenue had a positive effect on the number of newly created small and medium-sized enterprises because of less competition in certain market niches was confirmed provisionally and with a low degree of significance. Third, just as the online sector provided one way of adapting to a crisis during the pandemic, the ubiquitous reach of online trading platforms along with access to parallel imports came into play. In regions where businesses and the public placed more orders for goods and services via the internet, more new enterprises were created. The hypothesis that proximity to unfriendly countries had a negative impact on business activity in the regions at their borders was confirmed. And vice versa, the proximity to Georgia and Azerbaijan had a positive effect as the flow of goods and tourists was redirected toward the North Caucasus. The scale and diversity of markets due to large economic agglomerations in the regions was also beneficial. These observations bear on a number of recommendations.