Slow Poison: Russia has failed to replace the imports of high-tech goods hit by direct sanctions

In 2022, faced with unprecedented sanctions and the effective halt of direct imports from Western countries, Russia demonstrated remarkable ingenuity in its ability to organise alternative imports and has managed to avoid a catastrophic decline in production. However, according to data from the Federal Customs Service and 'mirror statistics' from Russia's trading partners, analysed in a study published on the website of the European Centre for Economic Policy Research (CEPR), there has been a major failure in most categories, although it may not be immediately apparent.

Sanctions, i.e. a direct ban on the supply of certain types of products, affected approximately one-third of European exports in terms of value. Transportation equipment accounted for 45% of the prohibited products, chemicals — 19%, electronics — 12%, and machine tools — 11%. Sanctions predominantly affected intermediate goods (40% of the restricted goods) rather than final products (23%).

The import of sanctioned products from the EU practically came to a halt within a few months of 2022, according to customs statistics. At the same time, imports of non-sanctioned products, after a steep decline, managed to rebound in the fourth quarter of 2022. Imports from countries that did not join the sanction coalition also saw a decline in the spring and summer of 2022 but later began to recover. At the same time, imports of non-sanctioned products from these countries significantly increased compared to pre-war levels, while the import of sanctioned goods only slightly exceeded these. From these findings, the authors of the study draw a clear conclusion: Russia has failed to fully restore imports of those products which have come under direct Western sanctions to the pre-war level.

Three-quarters of compensatory import supplies were provided by Turkey and Kazakhstan. Additionally, Armenia, Uzbekistan, Georgia, Azerbaijan, and Serbia became notable transit hubs for the goods sent from the EU to Russia. However, ultimately, in the fourth quarter of 2022, Russia missed out on approximately $7.7-8.8 billion worth of goods from the EU compared to the same period in 2021. Supplies from countries that did not join in with sanctions managed to replace just 10-25% of the shortfall.

The authors of the study emphasise that the situation is particularly dire for high-tech products. The EU was a key supplier before the war, and it has been impossible to replenish deliveries in the necessary volume. Imports from countries that did not join the sanctions have changed insignificantly, while imports from the EU and other countries that imposed sanctions have collapsed by 80%. As a result, Russia missed out on $7 billion worth of high-tech products in the fourth quarter alone.

According to economists, there is only one significant sector affected by sanctions where imports have not decreased, but rather increased: chips and microchips used, among other things, in the military-industrial complex. Russia has managed to secure its supplies of these products through Chinese intermediary firms (Re: Russia has previously discussed these schemes in our 'Fence on One Side' review). In the fourth quarter of 2022, Russia imported $947 million worth of semiconductor products. Shipments from China amounted to $828 million, accounting for approximately 90% of all imported semiconductors. However, for the majority of shipments, the country of origin is unknown. Specifically, China was the country of origin for only $247 million worth of these products. By comparison, in the fourth quarter of 2021, the total volume of semiconductor shipments were worth just $587 million, of which China accounted for $238 million and the EU for $274 million.

Thus, when discussing the effectiveness of sanctions, it is important to distinguish at least three aspects. Russia has restored imports of non-sanctioned goods from the EU through re-exports via its southern neighbours (parallel imports). However, the import of high-tech products from the EU has not been fully reestablished, only partially replaced by supplies from 'friendly countries.' An exception to this is the import of semiconductors, which Russia has not only restored but also increased supplies of (through 'grey imports').

The survival frenzy has created a perception that the impact of sanctions may not be that significant. This is because the deficit in unrecovered high-tech imports does not have an immediate critical effect on the economy. It does not lead to a shutdown of production but rather to a gradual simplification of processes and technological stagnation or even degradation, the effects of which accumulate over time. According to a survey by the Centre for Business Tendencies Studies at the Higher School of Economics, most enterprises (87%) need equipment that is now difficult to obtain from foreign analogues without compromising quality. Currently, only a quarter of businesses surveyed have access to such equipment, 18% are in 'extremely high need,' and 47% are in 'high need.' Additionally, over the next three years, about 60% of companies that rely on imported equipment, components, technologies, and raw materials are prepared to at least partially do without them. Thus, the costs incurred by businesses as a result of the deficit of high-tech components and equipment, as well as the need to find substitutes, will be stretched over time but will not disappear.

The authors of the CERP study — economists Alessandro Borin, Gabriele Capodano, Francesco Paolo Conteduca, and Michele Mancini from the Bank of Italy, as well as Oleg Itskhoki from UCLA, Maxim Mironov from IEU, Elena Rybakova from IIF, and Benjamin Hilgenstock from KSE — previously published a detailed study on the effectiveness of sanctions against Russian oil, which Re: Russia has also discussed.