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Russia’s promotion of a self-sufficient economy fails before Western sanctions

Russia has spent years withdrawing from imports to strengthen its economy against Western sanctions.

Part of Russia’s automobile industry has been closed due to a shortage of foreign parts. Russia’s flagship homemade jet airliner obtains engines and other key components from overseas suppliers. Foreign pet foods and medicines have disappeared from stores.

“Import substitutions failed to meet the goal of making Russia less susceptible to such sanctions,” said Janice Kruge, an expert on the Russian economy at the German Institute for International Security. A small economy like Russia cannot produce complex, high-tech commodities on its own. It’s simply impossible. “Replacement of foreign products may take years, he added.

Import substitution is to replace foreign products with homemade ones. Most economists believe that building everything domestically is costly and inefficient, but the Kremlin has adopted a strategy to combat sanctions following the 2014 acquisition of the Crimean Peninsula. Observer protects the economy called Fortress Russia.

McDonald’s restaurant in Moscow. The fast food chain has ceased operations in Russian locations.


Photo:

Maxim shipenkov / EPA / Shutterstock

However, Russia’s reliance on imports has actually deteriorated over the years. In 2021, about 81% of manufacturers said they could not find the Russian version of the imported products they needed. More than half were dissatisfied with the quality of their domestic production. The highest record since the investigation by Russia’s Gaidar Institute for Economic Policy began in 2015.

By 2020, imports accounted for 75% of non-food consumer goods sales in the Russian retail market, according to a study by the Faculty of Higher Economics in Moscow. In some sectors, the market share was even higher, rising to 86% in telecommunications equipment. According to a survey, imports in 2020 were about one-fifth of GDP, but 16% in China, higher than in other major powers such as India and Brazil.

Russian carmakers have been particularly hit by the shortage of imported parts such as computer chips. On Wednesday, Russia’s leader in the Tatarstan region said truck maker Kamaz was facing a production drop of up to 40%, with 15,000 employees until some company’s supply chain problems were resolved. It may be idle.

A Kamaz spokesman described the leader’s comments as the worst-case scenario, stating that the company is shifting much of its production to truck lines made of Russian parts.

Technology products are one of the most important commodities blocked by sanctions, such as semiconductors, computers, lasers and sensors, while the value of the ruble has plummeted and the prices of commodities that Russia can import have risen. I am.

Wheat harvest in southwestern Russia. With sanctions being taken, Russian leaders have promoted self-sufficiency.


Photo:

EDUARD KORNIYENKO / REUTERS

Another high-risk area of ​​Russia, according to analysts, is the energy industry. Russia relies on Western technology for dilapidated oil and gas fields. Previous sanctions forced Russian energy companies to postpone or cancel their projects.

Until last month, Russia was highly integrated into the world economy. Unleashing yourself from the international supply chain can be a slow and difficult process.

Russian President Vladimir Putin acknowledged the challenges ahead.

“Our economy will need deep structural changes in these new realities, and I won’t hide this-they won’t be easy,” Putin said Wednesday.

Russian officials said domestic companies would benefit from this situation. “Previously it was unprofitable to produce certain commodities domestically, but now it’s more interesting for businesses,” at costs, including rising inflation.

Some imported products are deeply integrated into the business of the company. Maria Shagina, who is visiting a senior researcher at the Finnish Institute for International Affairs, estimates that up to 90% of Russian banks and businesses use Western software.

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“It was possible to exchange low-tech items like pipes, things that didn’t require a lot of know-how or R & D investment,” Shagina said. Technology, Western software, Western know-how. “

Even the prestigious projects that the Kremlin advertised as an example of the resurgence of the Russian industry have proven to be stubbornly dependent on imports.

Introduced in 2007, the Sukhoi Superjet 100 was a bid to revive the country’s major commercial aircraft construction sector. However, Russian officials say that about half the cost of the parts used to make Superjet comes from imported parts.French aerospace company Saffron SA

It manufactures jet engines, landing gear and engine covers, but said it would suspend all operations in Russia due to Western sanctions.

Officials said the planned version of the plane, made almost entirely of domestic parts, would not be able to go into mass production until 2024.

Sanctions have also hit consumers accustomed to obtaining imported products. 36-year-old Moscow-based Svetlana Riabois, who assists in running a stray cat rescue program, said finding foreign pet food and medicines has become difficult. She disappeared from the store and she said she was short of vaccines such as Novivac and Purevax manufactured by foreign pharmaceutical companies.

Ryabova wants domestic manufacturers to make up for the shortfall. “Of course we have them, but people are panicking and buying everything,” she said.

Since Russia invaded Ukraine at the end of February, the United States and its allies have imposed strict sanctions on Russia. The WSJ’s Shelby Holliday is investigating how these sanctions affect everyone from President Vladimir Putin to everyday Russian citizens. Photo: Pavel Golovkin / Associated Press

Russia has launched an import substitution drive by banning the import of many Western foods. French cheese, Spanish ham, and other delicacies valued by the country’s wealthy urban elite have disappeared from the store shelves. Import substitution drives later expanded into other industries, including medicine and technology.

Between 2015 and 2020, authorities allocated 2.9 trillion rubles, or $ 27 billion, to import substitution programs. This represents 1.4% of budget spending during the period.

However, this policy did not boost the Russian economy, which had been double-hit by sanctions and low oil prices. Its gross domestic product has grown slower than the world average since 2014, and Russians are poorer than they were before the Crimean crisis. At the end of 2020, real income fell 9.3% from 2013 levels.

While Russia has had some success, including the development of the dairy and meat industry, the food ban has pushed up prices, costing consumers 445 billion rubles a year, or $ 4.1 billion a year. ..

The big wildcard is China. Beijing, already Russia’s largest trading partner, has the potential to replace the United States and Europe as suppliers of many commodities. Chips and other high-tech products needed by Russia.

As sanctions were taken, Russian leaders made great efforts to promote self-sufficiency and even praised the Soviet economy.

“The Soviet Union really lived under sanctions, developed and had great success,” Putin said earlier this month.

“Russia’s economy will now be much more primitive,” Kruge said.

Write to Georgi Kantchev at georgi.kantchev@wsj.com and Alexander Osipovich at alexander.osipovich@dowjones.com

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