Strategic Responses to Sanctions: A Quantitative Study of European Firms' Corporate Activity in Russia

With the overwhelming part of scholarly literature on sanctions focused on the macro-political assessment of sanctions effectiveness this study construes of sanctions as an institutional pressure and makes the strategic response of European firms with Russian subsidiaries its focal point. Considering the sanctions episode following the Russia-Ukraine conflict a quasi-experimental setting we apply Propensity-Score Matching (PSM) and logit regression. From this analysis it emerged, that firms tend to go against the spirit of the sanctions and increase their Russian market presence. This seems to be driven by the relative economic importance of their respective subsidiary, the presence of non recoverable assets in Russia as well as the overall firm size. However, due to increased visibility and dependence on reputational cost associated with a greater firm size, we found a turning point in firm size upon which firms are more likely to comply than to challenge. With regards to the effectiveness of the sanctions regime, governments cannot count on firms to automatically act as economic agents to support the sanctions episode. This may undermine the potential effectiveness of the EU-Russian sanctions episode both as a tool to inflict economic pain and as a credible signal of deterrence.