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Russia is facing a financial meltdown. In response to its invasion of Ukraine, the U.S. and global allies have hit Russia with financial sanctions, isolating the country from the global financial system. In particular, the penalties on Russia’s central bank have effectively frozen the vast majority of its foreign-held assets.

The unprecedented scale and unanimity of these penalties will be crippling to the Russian economy, according to Mark P. Taylor, dean of Olin Business School and the Donald Danforth Jr. Distinguished Professor of Finance.

But what does this all mean? And what affect might these sanctions have on the global economy today and in the future? Taylor, a leading global authority on international finance, answered these questions and more.

What does it mean to freeze a nation’s assets?

According to Taylor, freezing a nation’s assets is very similar to freezing an individual’s bank account. The money is still there and may even earn interest, but the account holder — in this case, the Russian government and wealthy oligarchs — cannot access it.  

While it’s difficult to get a full handle on just how much Russian money is held outside its borders, Taylor said there is evidence that Russia has stockpiled over $600 billion in foreign currency reserves. The vast majority of that is frozen. Among the countries where Russia holds the bulk of its foreign reserves, only China has not imposed sanctions on Russia to date. 

“On top of that, there are other sanctions on individuals and corporations,” Taylor said. “For example, Russian individuals have approximately $11 billion in deposits in Switzerland, a major financial center, right now. And that’s bank deposits. That does not include securities and bonds. The true number could be five times that — like $50 billion — just in Switzerland. That money is frozen.”

‘It’s a new form of economic warfare. No one wants to go to conventional war with Russia, but this will definitely impact them severely.’

Dean Mark P. Taylor

Historically, the government, Russian businesses and wealthy oligarchs have chosen to hold their assets in foreign banks because the currencies are less vulnerable than the ruble, Taylor explained.

Making matters worse for Russia, the country also has been cut off from SWIFT — a platform for facilitating money transfers that is integrated into banking systems worldwide — making international payments difficult.

“Initially, people thought Russia would route payments through China,” Taylor said. “But that’s not happening, interestingly. There’s no evidence that Russians are circumventing sanctions by going through China, possibly because Chinese banks are worried about sanctions as well.”

How have these sanctions impacted Russian, global economies?

The effect of these penalties on the Russian economy has been severe and immediate. The ruble and stock market are down 30-40%, Taylor said. Russians are lining up at banks and ATMs to withdraw their money. And it will be increasingly difficult for Russia to import necessities with a large percent of its assets frozen and no way to make international payments.

Russia’s biggest trading partners, India and China, are still willing to trade with the country, Taylor said. But many companies throughout Europe had already stopped purchasing and selling to Russia since the sanctions imposed on the country when it invaded Crimea in 2014.

Globally, the biggest concern is the impact these sanctions will have on energy prices and how that might contribute to inflation.

“Russia is the biggest producer and supplier of oil and natural gas to Europe in particular,” Taylor said. “Prices were already high and have gone up even more since the start of the conflict. This will have an impact on global energy prices and so have a ripple effect beyond Europe and will also be felt in the U.S., for example.”

If the energy price hikes are sustained, it could exacerbate inflation. Faced with higher energy bills, households will have less money to spend elsewhere. And businesses will be forced to raise prices in response to the higher energy costs. But we’re not there yet, Taylor said.

“People are panicking at the moment. A lot of the energy price hikes depends on what happens in the conflict. If the price increases do not last for long, it will not have a significant impact on trade and inflation. The pain will be tolerable,” Taylor said.

A new form of economic warfare

Financial sanctions are not new, of course. In recent years, the EU and U.S. have imposed financial sanctions on Myanmar and Belarus, for example. What makes this situation different, though, is the near global unanimity in which they have been applied, Taylor said. The G7 — the U.S., Canada, Germany, France, Italy, the U.K. and Japan — plus Switzerland and the EU more broadly have acted in unison to isolate and punish Russia.

While many were surprised that Switzerland broke its neutrality, Taylor sees the situation differently. “What does it mean to be neutral? If virtually the whole world is lining up to say this act of aggression is wrong, then agreeing with that doesn’t necessarily mean you’ve broken neutrality,” he said.

According to Taylor, the unprecedented unanimity in these financial sanctions on Russia is one of the few positive things to come out of the conflict. And it could change the way global powers respond to threats in the future. China, for example, will be keeping a close eye on the situation.

“These types of sanctions would not have been effective during the Cold War because the Russia and the whole Soviet bloc was largely a sealed, communist economic area. Today, however, Russia is a capitalist economy that relies on global trade and international finance, making them more vulnerable to sanctions,” Taylor said.

“It’s a new form of economic warfare. No one wants to go to conventional war with Russia, but this will definitely impact them severely.”

During the 2020 election cycle, presidential candidates spent nearly $3 billion on television, radio and digital ads—shattering records and demonstrating how important advertising is to campaign strategy. Given the amount of resources dedicated to advertising, understanding how messages influence voter behavior is critical to campaigns.

New research from Olin Business School is shedding light on how slant—the extremeness of the message—and consistency with the candidate’s primary campaign messaging in national television advertisements affected voter behavior during the 2016 presidential election, specifically online word-of-mouth chatter and candidate preference in daily polls.

More than 800 national ads

With the help of recent advancements in text analysis methods, researchers conducted an extensive review of more than 800 national television ads that ran from June through November 2016. The study results were published on Jan. 28 in Quantitative Marketing and Economics by Raphael Thomadsen, professor of marketing at Olin; Donggwan Kin, a PhD candidate at Olin; Beth L. Fossen, at Indiana University; and David A. Schweidel, at Emory University.

“Slant and consistency are two vital dimensions related to the branding of political candidates, with slant representing what the candidate stands for, and consistency representing the extent to which the candidate creates a clear and repeated message of what they represent, which creates the branding of the candidate,” Thomadsen said. 

Their findings challenge conventional campaign wisdom, which suggests that candidates should moderate their positions and become more centrist after winning the party’s nomination. 

Looking specifically at Twitter trends, the researchers observed that both candidates, on average, experienced a 30% increase in online word-of-mouth chatter between the five-minute window before an ad was shown and the five-minute window after an ad was shown. However, political ads with messages that were extremely Republican or extremely Democratic decreased the volume of candidate-related word of mouth, especially in earlier stages of the campaign.

There’s a caveat to that finding, though: Centrist messages in political ads did generate more online word-of-mouth and higher daily poll ratings, but the benefit of centrism was lost if those same messages were inconsistent with the candidate’s primary election platform.

“We find that consistency with the primary message, which is generally more partisan, is also important,” Thomadsen said.  “What that means, to me, is that the branding is important and that the benefit of moving to the center can be offset — or even more than offset — by the loss of the consistency of the message that such a move necessitates.

“It also demonstrates why candidates who have stuck with more extreme messaging have not suffered as much as political scientists focused on the median voter theories would believe they would.”

‘This goes against the advice that some consultants give, which is that no one pays attention until late in the race.’

Raphael Thomadsen

The importance of both centrism and message consistency were largest in the early stages of the general election, which seems to suggest that people may be more responsive to a candidate’s messages in political ads early in the campaign, Thomadsen said

“This goes against the advice that some consultants give, which is that no one pays attention until late in the race. Our analysis suggests the opposite — the candidate’s brand is built early in the race, and then at the end things become more of a scrum for voters,” Thomadsen said.

According to Thomadsen, slant and consistency have traditionally been difficult to study on a large scale because the research was labor intensive, but new text analytics tools make the research more efficient. In the present study, authors were able to dig deeper — beyond the traditional focus on tone, source and volume of advertising — for a more nuanced understanding of how political ads impact voter behavior.‘This goes against the advice that some consultants give, which is that no one pays attention until late in the race. Our analysis suggests the opposite — the candidate’s brand is built early in the race, and then at the end things become more of a scrum for voters.’

What makes political ads effective

“This research is among the first in marketing to use text analysis to derive message-related metrics that are linked to the performance of television commercials,” Thomadsen said. “Similar approaches could be used outside of political marketing, by product and service marketers, to assess the importance of message consistency in an efficient and automated way.”

In total, the analysis included 824 ad airings for 60 unique ad creatives aired by 11 political advertisers, including campaigns, political parties and seven PACs. National television advertising buys account for more than 25% of all campaign television spending — a share that is expected to increase as the rising cost of local ad inventory in battleground markets increases, according to Thomadsen.

Slant was measured by analyzing the language used in the ad, including topics and specific word choice. Ads that featured language primarily used by one party were labeled extreme, while ads that included language used by both parties were labeled centrist. Examples of extreme messaging included ads that focused on national security, immigration, gender equality and health care. The technology also captured other dimensions, such as attack phrases frequently used by a candidate and other phases that set the tenor of their campaign.

To study message consistency, the team compared ad content to primary campaign speeches. Daily poll data on voter preferences and online chatter about the candidates on Twitter provided measures for voter behavior impact.

Clinton and Trump

Altogether, Hillary Clinton had more ad airings, while ads supporting Donald Trump had larger audience sizes. Ads supporting the two candidates were comparable in tone, length and ad position.

While most of the national ads were fairly centrist, Trump’s ads tended to be somewhat more centrist than Clinton’s ads. Some of Trump’s ads leaned toward Democratic ideology, such as his promised support for gender equality, including equal pay and support for child care.

Likewise, some of Clinton’s leaned toward Republican ideology, including ads that discussed threats from nuclear weapons or the Islamic state. Overall, Clinton’s ads had a higher level of consistency than Trump’s.

“Trump’s presidency was more conservative than his 2016 campaign, so we remember those aspects of his messaging more,” Thomadsen said. “His first campaign had a lot of messages for the center, or even the left, of the country. He advocated for family leave, for example.”

Taken together, “the results suggest that it would be advantageous for candidates to adhere close to their primary campaign messages in the early stages of the general election and emphasize moderate or time-specific messages as the election further develops,” the authors wrote.  

“Further, the results suggest that the rising use of extremist messages in political advertising may be a flawed strategy for candidates that could decrease candidate-related word-of-mouth volume and voter preference for the candidate.”

Conspiracy theories about COVID-19 pose a public health risk. They trigger suspicion about scientific recommendations, hurt response efforts to the pandemic and even have led to the burning of 5G cellphone towers.

“Because of their powerful influence in shaping both our narratives about and responses to the pandemic, these conspiracy beliefs receive a great deal of public attention,” said Olin’s Benjamin Dow, a postdoctoral research scholar in organizational behavior.

In a recent study, a review of literature about COVID and the internet, Dow and his coauthors found that the pandemic intensified the spread of conspiracy theories. As COVID disrupted social structures, people turned to the online world, and that led to “increasing contagion,” he said.

They specifically studied social media during the pandemic. “I thought, surely there’s something interesting going on here that could be better understood,” Dow said.

Their study revealed this: “Social media radicalizes beliefs.” Then, “as conspiracy theories are reinforced in online communities, social norms develop, translating conspiracy beliefs into real-world action,” he said. Such actions might include rejecting wearing face masks or flouting rules about social distancing.

When the real-world actions are posted back on social media, they’re further reinforced and amplified, and the cycle continues, Dow writes in “The COVID-19 pandemic and the search for structure: Social media and conspiracy theories,” published in Social and Personality Psychology Compass.

“The attention can drive perceptions that conspiracy beliefs are less fringe and more popular, potentially normalizing such beliefs for the mainstream.”

‘Sudden lack of control and increased uncertainty’

In general, the pandemic increased social media usage. General internet activity rose 25% in the days after lockdown, the authors note.

Specifically, in 2020, global social media use accelerated by 13%, with 330 million new users, resulting in a total of 4.7 billion total users in April 2021.

“We argue that part of the reason people consumed more social media was because of pandemic-related disruptions to their cognitive and social structures. Although this may not have been the only reason for the increase, it is a significant contributing factor.”

In the context of the pandemic, “the sudden lack of control and increased uncertainty may have made people particularly vulnerable to conspiracy theories as a form of alternative structure,” Dow said.

Because social media played a central role in the spread and endurance of COVID-19 conspiracy theories, the question is how to interrupt the cycle. The authors assert “there are several proven options” for reducing the negative influence of online conspiracy theories:

• Content restriction (preventing exposure to and breaking up echo chambers);
• pre-bunking (attempting to inoculate people before they are exposed);
• critical consumption (encouraging cognitive engagement during exposure);
• and, if all else fails, debunking (trying to alter conspiracy beliefs already held and address the problematic downstream attitudes and behavior directly).

Another option is to encourage breaking down group demarcations and to encourage social connections that were lost or weakened in the pandemic.

“One of the things that was surprising to me that I took away was how much the social side matters,” Dow said.

“So how do we reconnect people with friends and family and more diverse groups of people with different kinds of opinions so that their self-worth and identity isn’t tied up in being a permanent believer in a conspiracy theory?”

Small private firms that provide health insurance for their employees have better worker productivity and retention—as well as overall profitability—when compared with small firms that don’t offer health insurance, according to research by Ulya Tsolmon, assistant professor of strategy for Olin Business School.

The results suggest that investments in employee health and well-being provide a competitive edge to firms, especially when labor market competition for workers is high.

Firms have been shifting the costs of health care to employees, but they “might be wise to view employee health benefits as an investment that can yield significant returns,” Tsolmon and coauthor Dan Ariely, of Duke University, write in “Health Insurance Benefits as a Labor Market Friction: Evidence from a Quasi-Experiment,” in Strategic Management Journal.

“The results tell me that firms are gaining financial advantage even with their expenses toward health insurance benefits,” Tsolmon said. “The productivity results suggest that workers are ‘giving back’ to the firms by being more productive, which translates into higher profits.”

“Healthy and happy employees are innovative and productive employees.”

Ulya Tsolmon, assistant professor of strategy

The research also explored the link between high unemployment insurance benefits at the state level and more small firms providing health insurance in that state. High unemployment benefits ease employee mobility between companies, and firms respond by increasing “internal market frictions,” like offering health insurance, to keep their employees, the researchers found. That correlation didn’t apply to bonuses, pensions or training—making health insurance a unique lever among employee benefits.

The paper is the first to explain health insurance provision in small firms from the perspective of human capital management and to use empirical evidence to test its impact on firm performance, the authors say.

Data from 15,000 small firms

“Health insurance is a significant investment for small firms, so the interesting question to me was not why firms don’t offer health insurance, but rather looking at firms that do offer health insurance, asking why they do that and whether it’s a smart strategy and under what conditions,” Tsolmon said.

The research used data from the financial records of 15,000 small firms (with no more than 500 employees) in the US. The data set included accounting details on all expenses and revenues, as well as employee records, for five years. The authors looked at twelve different variables, including training costs for an employee.

Tsolmon supplemented the financial records with 761 Glassdoor reviews and 11 open-ended interviews with randomly selected small business owners, representing different industries and firm sizes. Just like with the numbers’ data, employee satisfaction was reported to be higher in firms that offered health insurance, and business owners spoke about more easily attracting and retaining employees after they began offering health insurance.

Implications for large firms

“By investing in worker well-being,” Tsolmon said, “firms can tap into their latent productivity and innovation that’s difficult to incentivize with monetary rewards alone. Healthy and happy employees are innovative and productive employees.”

The research also has implications for large firms, most of which provide health insurance but whose benefits differ in generosity.

“Given our finding that policies intended to increase employee wellness can affect turnover, productivity, and firm performance, large firms should consider increasing the employee uptake rate of health benefits by bearing a greater share of the insurance costs themselves,” the authors write.

Jill Young Miller contributed to this report.

At Olin Business School, “values based, data driven,” is a pillar that informs our decisions and strategic plans. Recently, John Barrios, assistant professor of accounting, brought that principle to Washington, DC, where his research helped inform and ultimately shape a feature of the Build Back Better legislation.

Attracting and supporting entrepreneurship and investment in communities is a crucial driver of economic growth and is one goal on which Republicans and Democrats can agree. Startups require significant capital, though. That’s where venture capital funds come into the picture.

Venture capital firms raise funding for startups or emerging companies that have been deemed to have high growth potential in exchange for equity or ownership in the company.

“Unlike the large hedge funds and private equity funds, venture capital funds are typically smaller in size and scale,” Barrios explained. “Fund managers usually sit on the company’s board and may be involved in day-to-day operations like a consultant.”

Carried interest

Aside from management fees—which are minimal and primarily cover operational costs—venture capital managers mainly make money when the investments are profitable. Their cut of the profit is known as carried interest. Carried interest is currently taxed as a capital gain rather than general earned income. This method of taxing makes venture capital more worthwhile for managers.

To outsiders, though, taxing carried interest at capital gains rates looks like a loophole for the rich to minimize their tax burden, Barrios said. So it wasn’t surprising that the initial version of the Build Back Better legislation included a provision to tax carried interest as general earned income.

Barrios and Yael Hochberg, at Rice University, wanted to study the potential impact of these tax changes on the economic attractiveness of new venture capital fund formation. In other words, would increased taxes on carried interest turn away would-be fund managers? And, if so, what impact would this have across the country?

“Such tax changes have the potential to have far-reaching effects on the creation and growth of innovation-driven entrepreneurial ventures in precisely the locations where policymakers are often seeking to increase entrepreneurial activity and growth,” the authors wrote.

Findings inform policymakers

The researchers used data from the Private Capital Research Institute/Burgiss and PitchBook, which provided information about funds by state and size. From that data, Barrios and Hochberg generated sample income streams for a venture capital fund manager for funds of varying sizes over the life of a single fund under the current tax taxation regime as well as under the proposed tax regime that taxes carried interest at ordinary income rates.

They then compared those potential incomes for fund managers to the average wage earnings for a person with similar education and experience, by state, adjusting for cost of living and other factors.

Their analysis found that changing the taxation regime for carried interest from long-term capital gains rates to ordinary income rates would significantly reduce the attractiveness of forming a new fund for the vast majority of funds in US states other than California, Massachusetts and New York.

“Given the importance of VC [venture capital] funding for US innovation, our findings may serve to inform and aid policymakers in their current deliberations as they consider, design, and implement potential new tax laws that will affect the VC industry,” they wrote.

As previously noted, the findings did inform and aid policymakers. The proposal of taxing carried interest as earned income was struck from the Build Back Better legislation, which is currently stalled but not dead.

Innovation in mid-America

Barrios said this is good news for cities across the country—like St. Louis—that have made generating new businesses a top priority.

“If we really want to foster entrepreneurial hubs and stimulate investments in middle America, it’s going to take more than tax credits. You need capital, and that comes from VCs,” Barrios said.

“People have this vision of venture capital managers being really wealthy. In reality, starting a VC fund in mid-America is risky and not as profitable as you might think,” Barrios said. “More than 50% of them do not make a positive return. Even successful partners could reasonably make a comparable income working a nine-to-five job at a consulting firm.

“Changing the taxation would make it even less lucrative and would make it more difficult to get people to raise the capital needed to support the innovation happening in our communities.”

Today Dean Mark Taylor announced the recipients of the 2022 Olin Award. They are Kimball Chapman, assistant professor of accounting; Richard Frankel, Olin’s Beverly & James Hance Professor of Accounting; and Xiumin Martin, professor of accounting.

Their winning research explores whether SPACs (special purpose acquisition companies) take advantage of an apparent exemption from prosecution under the Securities Act of 1933 in order to hype forward-looking disclosures to deceive shareholders. The paper is “SPACs and Forward-Looking Disclosure: Hype or Information?”

A quick primer: A SPAC is a shell company that raises public funds to acquire a private company. SPACs are “blank-check companies,” meaning investors are contributing funds to a company that has no concrete business plan.

Taylor congratulated Martin, who represented the authors in a Zoom meeting he set up to surprise her.

“Wow! That’s great news!” Martin said, laughing. “I think Mr. Mahoney knows I have been persistent in the past years.”

Olin Distinguished Executive in Residence Richard Mahoney, who was CEO of Monsanto for 13 years, established the Olin Award to recognize scholarly research that has timely, practical applications. The award is in its 15th year. Because three Olin professors won the 2022 award, Mahoney has upped this year’s award to $15,000, or $5,000 each.

“I think you’ve put in 15 entries,” Mahoney said, as he congratulated Martin during the Zoom meeting.

In comments during the judging for the award, one judge said this about the paper: “Very good. It directly addresses the major trend of SPAC growth and accusations that SPACs evade regulatory scrutiny to the detriment of small investors.”

Another commented: “The research advances business results for SPACs in particular as they try to counter arguments for greater regulatory oversight. And given the quantity and range of SPACs, it certainly applies across a wide variety of industries.”

The authors will present their winning paper at a virtual luncheon in the spring.

Of the 12 papers submitted for this year’s award, five went on to the second round, rated by Olin’s panel of corporate judges as research with potential impact to business. Some of those papers will be presented in the coming months in the Olin Business Research Series.

Top photo, from left: Kimball Chapman, Richard Frankel and Xiumin Martin.