The rate at which the share of enterprises with critical and high levels of import dependence in Russian industry is declining appears quite impressive. According to data from the Higher School of Economics’ Center for Conjunctural Research, over the past year, 36% of firms have increased their level of import substitution, and the number of enterprises highly dependent on Western equipment has decreased by 20%.
However, these figures are deceptively optimistic. Faced with the effect of widespread sanctions, businesses have been forced to engage in import substitution across a wide range of positions. The first to be replaced were products where domestic analogues and developments existed but lagged behind imports in terms of 'price/quality' parameters. Currently, the potential for cheap import substitution, based on the adaptation of existing analogues, has been largely exhausted.
Furthermore, the situation with parallel import channels has dramatically improved compared to 2022 and early 2023. The share of companies solving their problems through this means has grown from 22% to 40% over the year. This will also have a discouraging effect on import substitution.
Finally, the effect of import substitution has been achieved by shifting from purchasing finished products to localising 'assembly' in several sectors. For instance, almost half of the servers on the Russian market in 2023 are domestically produced, but in reality, Russian companies only manufacture the cases, motherboards, and power supplies.
Russian import substitution programmes remain declarative and unfeasible. They could have a greater effect if the government abandoned its characteristic ideological fetishism and limited itself to a narrower and economically justified set of goals. However, at the moment, such a scenario seems highly unlikely.
In 2023, a smaller but still significant portion of Russian enterprises reduced their dependence on imported equipment, components and raw materials, according to another survey by the Centre for Conjunctural Research of the Institute for Statistical Research and Knowledge Economics at the Higher School of Economics (over a thousand enterprises in 30 regions were surveyed). While a year ago, 18% of surveyed enterprises reported a very high dependence on imported equipment and 47% reported a high dependence (→ Re:Russia: Import Substitution), now these figures are 8% and 35%, respectively. The total reduction in this category was 21 percentage points, with a 14 percentage point reduction in components and raw materials, and an 11 percentage point reduction in technologies. Overall, high and critical dependence on intermediate imports persists for a quarter of the surveyed enterprises.
In terms of sectoral breakdown, the leaders in import substitution dynamics were 'primarily medium- and high-tech enterprises' in the manufacturing sector – specifically in the production of computers, electronic, and optical products (51% of respondents noted increased import substitution), electrical equipment (47%), and pharmaceuticals and materials (47%). The worst dynamics were observed in the consumer sector: 28% of furniture and food product manufacturers, 25% of clothing manufacturers, and 23% of leather and leather product manufacturers reported increased import substitution. Overall, positive import substitution dynamics were observed in 36% of industrial enterprises.
The rates of reduction of dependence on imported raw materials, equipment and components could be called quite high, but there are several caveats. First, the dynamics of import substitution have been dictated by a sharp gap in supplies in 2022; in such a situation there is a need for import substitution in respect of an extremely wide range of goods. Enterprises are primarily replacing what is easiest to substitute — intermediate goods and equipment that have domestic analogues or developments that are inferior in terms of 'price/quality' - now they are forced to use them. Therefore, the dynamics of import substitution will not be linear: what is not substituted is likely to be much more difficult and expensive to replace. Such import substitution will require long investment cycles.
Second, the segments where there is high import substitution — in the production of electronic and optical products, as well as electrical equipment — are related to defence needs and the protection of critical infrastructure. Here, the government has played a significant role in stimulating import substitution, while the decline in consumer qualities of products does not affect the manufacturer.
Third, the slowdown of import substitution intensity will be facilitated by the establishment of parallel import channels. Analysis by the Centre for Conjunctural Research shows that in 2022, 22% of enterprises were purchasing critical components for the production process within the framework of parallel imports, and in 2023, as the macroeconomic situation improved and channels were established, 40% of enterprises did so. At the same time, last year, 54% of enterprises reported difficulties in organising the process of parallel imports, and this year this figure was 37%. If there are no new incentives for import substitution related to the ruble exchange rate or new sanctions, enterprises will rely increasingly on the strategies of parallel or analogue import.
Finally, the 'quality' of import substitution remains another issue. The Russian authorities proclaimed a course on import substitution back in 2014, when they first faced serious international sanctions in response to the annexation of Crimea. Although circumstances were much more favourable at the time, certain successes had been achieved by the beginning of the war mainly in the substitution of finished products. In food production, the food embargo (so-called 'anti-sanctions') played a significant role. At the same time, in the manufacturing industry, import substitution 'had an ideological-declarative character', i.e. in most industries the dependence on imports, despite the statements of officials, did not decrease, according to the research of Alexei Kalinin, Associate Professor at the Higher School of Economics.
According to Kalinin’s calculations, in gross fixed capital formation, a monotonous reduction in the share of imported products in 2016-2020 was observed only in the automotive industry — from 36% to 24% - and, since 2017, in machine building. In 2017, dependence on imports was 98% here; by 2020, the figure had fallen to 74%. However, Kalinin stipulates that a reduction in the share of imported products in gross fixed capital formation may not mean a reduction in import dependence as such. In other words, import substitution may hide 'assembly' behind import substitution. Thus, according to Delta Computers, as cited by CNews, in 2023, almost half of the servers on the Russian market were domestically produced, but most of the components in them were imported: Russian companies are only able to produce cases, motherboards and power supplies. The transition from the import of final products to assembly will have a significant effect on statistics, but the real added value will be insignificant. The reduction of final imports will be compensated by the growth of intermediate imports.
The paradox of Russian import substitution is that in previous decades Russia switched to an 'assembly' model in the automotive industry. Now, after the withdrawal of Western car companies, it has been forced to return to a strategy of purchasing finished cars. And vice versa, to increase assembly in new segments where such a strategy is sponsored by the state. However, in the most market-oriented consumer sector, import substitution rates appear to be significantly lower.
The low quality of Russian import substitution in the high-tech sector has also been confirmed by a study by Heli Simola, an expert from the Bank of Finland's Institute for Developing Economies (BOFIT). Of the data on 22 electrotechnical commodity groups that she studied, only for six did domestic production increase synchronously with the decrease in imports. These groups were transmitting and receiving equipment, signalling devices, some types of batteries and computer equipment, and thermostats. However, for some groups, the data in value terms does not allow us to say whether we are talking about an increase in import prices or an increase in output. At the same time, the study also notes that in a significant number of cases, these are substitutions of imports lost due to sanctions with alternative imports, often resulting in higher costs and sometimes in lower quality and production efficiency.
Russian import substitution programmes are predominantly declarative-ideological and reactive in nature and, as a result, lack an economic basis and are unworkable. Their effectiveness could be somewhat increased if the government were able to abandon its fetishistic attitude to import substitution. However, the probability of such a development appears extremely unlikely today.