The impact of uncertainty on investment by Russian firms: A parable from 2014

Sumru Altuğ, Sevcan Yesiltas 13 April 2022



Editors' note: This column is part of the Vox debate on the economic consequences of war.

It is now more than a month since the Russian invasion of Ukraine commenced. As tragic as the circumstances of this conflagration are, in this column we would like to turn the clock back to 2014 and draw some parables from the Ukraine crisis of 2014. Our focus is on the uncertainty that this crisis generated and its impact on investment by Russian non-financial firms over the period 2004-2016. We approach the issue of the impact of sanctions on the Russian economy as an incidence of heightened uncertainty for the Russian economy.1 We believe that understanding the earlier episode provides a key to understanding the evolution of the Russian political and economic environment. 

Figure 1 Economic policy uncertainty index

Source: Baker et. al (2016)

Figure 1 plots the Economic Policy Uncertainty index created by Baker et al. (2016). This figure shows that uncertainty in the Russian economy increased rapidly in the runup to the Ukraine crisis of 2014 and remains high and volatile thereafter. Together with the Covid-19 shock of March 2020, the invasion of Ukraine in February 2022 appears as one of the largest single shocks in the period since 2012. Our contention is that such uncertainty reflects underlying factors in the Russian economy that have led to the eruption of the Ukraine crisis into a globally important event. Together with the new and unprecedentedly severe and comprehensive sanctions implemented against the Russian economy, this crisis is now having effects on different economies through a multitude of demand and supply channels.2  

Figure 2 The evolution of investment over the period 2011-2016

Panel A

Panel B

Figure 2 displays investment behaviour over the period 2011-2016 in a comparable fashion, using the official OECD National Accounts Data for the non-financial sector of the Russian economy in Panel A, and using the Ruslana historical disk of the ORBIS database for the non-financial firms operating in Russia in Panel B.3,4 Panel A of Figure 2 shows that gross investment scaled by total economy GDP is increasing up until 2013, when it reverses itself and declines up until 2015. In Panel B, we observe a similar behaviour based on the ratio of the difference of the aggregated fixed tangible capital at the beginning period versus the end of the period to the aggregated value of operating revenue at the end of the period. 

In our paper (Altug and Yesiltas 2021), we investigate the impact of uncertainty on the investment behaviour in the non-financial sector of the Russian economy over the period 2004-2016. For this purpose, we consider the sanctions regime as a quasi-natural experiment and compare investment behaviour in the pre- and post-sanctions regime. Our baseline regression results show that investment declines on average in the non-financial sector of Russian economy during the sanctions regime, supporting our prior regarding the negative impact of heightened uncertainty on investment.

One of the defining features of the sanction regime placed on Russian entities and firms then and now is that they take place in an environment with multiple confounding factors. In 2014, these factors included a decline in the Brent price of crude oil to a historic low of around $30 per barrel together with the large devaluation of the Russian ruble. These confounding factors are in evidence today as well.5 

To test potential mechanisms through which heightened uncertainty during the sanction regime is transmitted among differential firms, we investigate whether the negative effect of uncertainty on investment exhibits heterogeneity in the cross-section. We exploit ex ante sectoral variation in foreign exchange (FX) debt exposure, oil-cost dependence, and exposure of inputs to indirect sanctions that stems from the nature of firms’ financing decisions and production processes.6

Figure 3 Foreign exchange debt exposure by sector

Figure 3 displays a substantial degree of cross-sectoral variation in the exposure to foreign exchange debt. We argue that, all else equal, the negative impact of the same level of uncertainty during the sanctions regime when the ruble devaluated concurrently might be stronger for firms operating in the sectors that are more dependent on external financing needs, mostly in foreign currency. This is because lenders in both domestic and international capital markets are less willing to lend to such firms during times of high uncertainty when rollover risk associated with foreign exchange debt increases. Therefore, if a rise in uncertainty leads to a decline in investment, it should be more pronounced for firms operating in the sectors with higher foreign exchange debt exposure.

Figure 4 Exposure of inputs to indirect sanctions by sector

In Figure 4, we display the exposure of inputs to indirect sanctions by sector. Our hypothesis is that, holding everything else constant, the negative impact of the same level of uncertainty during the sanctions regime might be stronger for firms operating in the sectors that are more dependent on imported intermediate goods, mostly from the sanctioning countries. If a rise in uncertainty causes firms to lower their investment, it should do so more dramatically for firms operating in the sectors with higher exposure of inputs to indirect sanctions.7 

Figure 5 Oil-cost dependence by sector

Figure 5 shows the extent of oil usage in production across different sectors. We hypothesise that, holding everything else constant, the negative impact of the same level of uncertainty during the sanctions regime when oil price declined concurrently might be mitigated for firms operating in the sectors that are more dependent on oil in production. This is because the oil price decline may have a positive effect on their profits and their future investment opportunities. Hence, if a rise in uncertainty causes firms to lower their investment, it should do so less severely for firms operating in the sectors that are more dependent on oil in production.

After controlling for firm and year fixed effects, we compare the heterogeneous effects of uncertainty on the investment pre- and post-sanctions regime. The main take-aways from our difference-in-differences tests are the following:

  • During the sanctions regime, firms operating in the sectors with higher foreign exchange debt exposure reduce their investment rate by 1.9 percentage points more than firms operating in the sectors with lower foreign exchange debt exposure.
  • The heightened uncertainty during the sanction regime decreases the investment rate by firms that operate in sectors with strong trade linkages with sanctioning countries by 5.6 percentage points more than by firms operating in sectors with weaker trade linkages. 
  • The negative impact induced by uncertainty associated with the sanctions regime on the investment rate of firms operating in high oil-cost dependent sectors is mitigated by 2.9 percentage points relative to those operating in low oil-cost dependent sectors. 

These observations suggest that the uncertainty that has pervaded the Russian economy for several years has, overall, weakened investment by Russian non-financial firms as well as negatively affecting their productivity growth (Wildnerova and Blochliger 2019). Thus, the seeds of the current war in Ukraine may have been laid in the stagnant performance of the Russian economy characterised by weak private investment and declining productivity in the period since 2014. The parable that we draw from these observations is that the absence of constraints exerted by a dynamic private sector integrated with the global economy may have created the economic and political conditions for the tragic conflict we observe in Ukraine today.


Ahn, D P and R D Ludema (2020), “The Sword and the Shield: The Economics of Targeted Sanctions”, European Economic Review 130, 103587.

Altug, S and S Yeşiltaş (2021), “Investment under Stormy Skies: The Case of Russian Firms during 2004-2016”, CEPR Discussion Paper No. 16646

Bachmann, R, D Baqaee, C Bayer, M Kuhn, A Löschel, B Moll, A Peichl, K Pittel and M Schularick (2022), “What if? The Economic Effects for Germany of a Stop of Energy Imports from Russia”, No. 36. ifo Institute-Leibniz Institute for Economic Research at the University of Munich.

Baker, S, N Bloom and S Davis (2016), “Measuring Economic Policy Uncertainty”, The Quarterly Journal of Economics 131(4): 1593–163.

Berner, R, S Cecchetti and K Schoenholtz (2022), “Russian Sanctions: Some Questions and Answers”,, 21 March.

Chaney, E, C Gollier, T Philippon and R Portes (2022), “Economics and Politics of Measures to Stop Financing Russian Aggression against Ukraine”,, 22 March.

Crozet, M and J Hinz (2020), “Friendly Fire: The Trade Impact of the Russia Sanctions and Counter-sanctions”, Economic Policy 35(101): 97–146.

Wildnerova, L and H Blochliger (2019), “What Makes a Productive Russian Firm? A Comparative Analysis using Firm-level Data”, OECD Economic Department Working Papers No. 1592.


1 The more immediate question of whether the current sanctions imposed on individuals and entities in Russia are having the intended effect on the Russian economy and hence, working to halt the war of aggression in Ukraine is addressed by Chaney et al. (2022). On the other hand, Berner et al. (2022) study the question of the viability of sanctions more generally and analyse the vulnerability arising from cross-border financial and economic exposure. 

2 Bachman et al. (2022) find that the effect of a potential disruption of energy imports to Germany from Russia would lead to a GDP decline in range between 0.5% and 3% in the short run.

3 The sample of Russian non-financial firms used in Altug and Yesiltas (2021) covers the period 2004-2016, whereas the National Accounts Data provided by the OECD starts from 2011. Hence, we restrict our comparison exercise to the period starting from 2011.

4 Although the data built on the Ruslana historical disk provides a comprehensive sample of the Russian economy with a coverage that averages almost 70% for gross value added relative to what is reported by the Russian statistical agency Rosstat (see Section 4 of Altug and Yesiltas (2021)), it is not census-based data, failing to contain the giant Russian companies that might drive the values in level. Hence, instead of values, we compare the time series patterns of investment.

5 Russia’s invasion of Ukraine has been accompanied by large gyrations in the Brent price of oil as well as strong fluctuations in its futures price which have seen the Brent price of oil settling to a value of $100 per barrel by mid-March 2022. Likewise, the value of the Russian ruble crashed to a value of 140 to the US dollar before returning to its pre-invasion value of around 85 rubles per US dollar through strong measures taken by the Bank of Russia as well as capital controls on transactions in foreign currency. However, the severity and breadth of sanctions imposed in the current conflict exceed what was observed during the 2014 Ukraine crisis, suggesting much greater difficulty for Russian entities to circumvent the impact of sanctions in this instance. Nevertheless, it is worthwhile noting that similar confounding effects are in operation today as in the past episode.  

6 Using the sector-level data obtained from OECD Inter-Country Input-Output (ICIO) Tables for the period 2005–2013, we construct sector-level measures to proxy foreign debt exposure, oil-cost dependence, and exposure of inputs to indirect sanctions by the fraction of foreign exchange denominated loans in total loans, the fraction of oil inputs used in total, and the fraction of inputs imported from sanctioning countries in total inputs, respectively. The respective percentages reported in Figures 3-5 are aggregated from the two-digit OECD ISIC codes to the one-digit NACE codes using two-digit sector value added values that we obtain from the OECD ICIO Tables. In each figure, the sectors are ranked in an ascending order according to the magnitude of corresponding sector-level measure. 

[1] For some mechanisms through which the sanctioned trade channel could operate, see Crozet and Hinz (2020) or Ahn and Ludema (2020).



Topics:  International trade Politics and economics

Tags:  uncertainty, sanctions, Russia, investment, foreign exchange, Ukraine war

Professor and Chair at the Department of Economics, American University of Beirut

Assistant Professor of Economics and Finance, Koc University


CEPR Policy Research