Russia's costly plan against economic sanctions

A worker at a rocket equipment factory in Yekaterinburg, Russia, on December 15, Donat Sorokin (Donat Sorokin / TASS)

Driven by sanctions, the Kremlin launched an ambitious economic plan in 2014 to replace imports with domestic products. The punishment of the European Union and the United States against the people and firms that participated in the annexation of Crimea, in 2014, and the Donbas war was answered by the Kremlin with a general veto on the purchase of food from the West. In the following years, and under more accusations of repression and interference in foreign elections, the list of sanctions grew while Moscow redoubled its bet, with greater or lesser success, for the “made in Russia”.

Orders to replace imports with Russian products cover every imaginable sector. The Ministry of Industry created a portal in which all substitution plans appear, from heavy industry to medicines and retail. For example, the import of children's clothing was to be reduced from 85% of the total in 2016 to 65% in 2021; and automobile brake discs from 60% to 20%, respectively.

In some cases notable progress has been made.

Oil and gas companies, heavily affected by the sanctions, reportedly reduced their equipment imports from 60% to 43% between 2015 and 2020, according to the Ministry of Industry.

This sector has been one of the targets of Washington's punitive measures "to exert long-term economic pressure on the country," as recognized by the United States Congress in a January 2020 report.

In other cases nothing has changed in the market.

According to a study by the Higher School of Economics, at the end of 2020, retail trade imports exceeded 75% of the total, with clothing and toys above 90%.

“The substitution of certain imports is not,

, protectionism. In the 1970s, Japan and South Korea bought licenses and resources from foreigners to start producing themselves and they were successful, "says Alekséi Portanski, professor at the Higher School of Economics and former head of the Office for the Accession of Russia to the World Trade Organization (WTO), which Moscow joined in 2012. "However, this must be strictly planned: what specific sectors do we want to change and within what period of time", emphasizes Portanski.

Seven years after this plan was launched, Russian companies still face enormous problems in equipping themselves with national designs. "The main obstacle was, and still is, the absence of Russian alternatives of any quality," says Sergei Tsujlo, head of the Department of Business Surveys at the Gaidar Institute for Economic Policy. According to the agency's polls, 80% of the country's firms encountered this obstacle last September, the highest percentage since that survey began in January 2015.

"This factor is closely associated with the expansion of restrictions imposed both by our 'Western partners' and by the Russian authorities," says Tsujlo. "With global logistical problems, and as equipment wear and tear increases, Russian manufacturers cannot find what they need on the domestic market," he adds. The second problem, according to the survey, is "the low quality of Russian products" manifested by more than half of the companies, compared to 25% who said the same in 2016.

One of the problems to encourage national production is that its development requires significant investments of time and money, especially if you want to be competitive to export, because the domestic market of the sector is not large enough to compensate for the expense. And to this is added the cost of importing materials for production: the Russian currency has devalued from 45 rubles per euro in January 2014 to 85 rubles per euro today.

“Import substitution has not paid off. They say it has succeeded, but it is not true, they manipulate the figures ”, asserts Portanksi. “Russian foods have increased their market share, yes, but let's look at it from the consumer's point of view, which is what interests us. Russian products have appeared, but they are more expensive and the quality is not very good, why? Before the supermarkets had more supply, now our producers are monopolists ", says the expert.

Portanski refers to a 2019 study by the Russian School of Economics that analyzed how substitution had worked in the food sector in its first five years. Except for the categories of poultry, pork and tomatoes, whose real prices fell, the rest became more expensive for the consumer. According to his calculations, Russian citizens paid an extra cost of 5.1 billion euros a year compared to 2013 prices. And this before the coronavirus. With the pandemic and the global disruption in supplies, the situation is even worse, as according to Rosstat (the Russian statistics agency) only last year food was 10.6% more expensive.

"The European Union is our main commercial partner, and we are interested in continuing with this collaboration, with their investments we get the

(practical knowledge) that we need", emphasizes Portanski.

In the middle of the conflict over sanctions, Brussels accuses the Kremlin of prioritizing Russian companies over EU companies in its tenders and therefore announced in November that it will appeal to the WTO, whose basic principle is that its members do not discriminate based on origin.

The European Commission emphasizes that the economic impact for its companies "is very significant", since Russian tenders move billions of euros every year.

Brussels specifically denounces three Kremlin regulations.

First, Russian state corporations value the price offered by national companies as having a deduction of up to 30%.

Second, Russian companies must seek authorization when importing certain engineering products.

And third, there are quotas that guarantee Russian origin in tenders for numerous items, such as vehicles, medical equipment and technological products.

The Russian Foreign Ministry spokeswoman commented on Brussels' demands through her Telegram channel.

“It is stupid because the import substitution was a response to the European Union sanctions against Russia.

Brussels said for a long time that our country had been 'severely punished'.

What is "hard" is "sadomasochism", affirmed María Zajarova.

An indication that the plan is not advancing as planned is that on December 24, the 2014 decree on quotas for state purchases of Russian products was amended. Of the 100 items listed according to the Russian classification, 41 have been exempted as there are still not enough manufacturers. Among them, medical lamps, notebook computers, smart cards, integrated circuits and other electronic components.

By law, the programs of the key computer systems of the public sector will have to be replaced as of January 1, while the rest will have to be replaced by

Russian

at the end of their useful life. However, the resistance shown by companies has led Russian President Vladimir Putin to support the proposal of the Minister of Digital Industry to hold executives who do not meet this objective legally responsible. The department headed by Maksut Shadáyev even vetoed the oil company Transneft a purchase from Microsoft for seven million euros, although in the end it yielded to reality: on December 29, it approved that the nuclear agency Rosatom acquire business management software from the company. German SAP for nine million.

And in health, the same. In 2015, a five-year program was launched so that 40% of the medical teams were national, but it has made little progress, especially after the outbreak of the pandemic, and by the end of 2020 its quota was around 29%, according to the Chamber of Accounts. The incentives are few: long deadlines to register products and the depreciation of the ruble, which makes it even more expensive to buy materials outside, especially from China.

In January 2014, just before the sanctions, the economist Víktor Ivánter (who died in 2019) advocated in an article published in the official

newspaper for investing in the national industry and also putting an end to the “critical dependence” on food .

"After 20 years reforming, we have achieved something we do not want to give up: consumer choice, but this still depends on imports," said Ivan.

Eight years later, the choice is smaller and more expensive in the shopping cart.

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