From Russia with love: Empirical evidence on affiliate profitability under sanctions and capital flight across borders

Abstract

This paper uses unique data on majority-owned foreign manufacturing affiliates doing business in Russia to study the impact of 2014 economic sanctions across profit shifting and real multinational firms. We find that profitability of identified profit shifting affiliates operating in Russia between 2012 and 2019 has been largely unaffected by the introduction of external financial frictions. In fact, we report that, among profitable firms, the recorded profitability of such affiliates has seen a sharp increase up to 27.5 % in the following year after the introduction of sanctions relative to the other real foreign affiliates. For a specific sub-sample of Cyprus-owned firms, we find that the reported profitability has risen up to 29.7 %. Finally, our results indicate that real affiliates have permanently withdrawn a notable portion of fixed assets from the economy.