New Trends of the Russian Import Substitution Strategy
Russia’s import substitution strategy has been in place for eight years, and although it has made remarkable progress in agriculture, light industry, national defense, and other fields, it still heavily relies on Western countries in high-tech fields. After Russia launched a special military operation in February 2022, Western countries decided to isolate Russia from the global industrial and value chains and imposed unprecedented severe sanctions on Russia. Among them, the scope, strength, and far-reaching influence of export control are unprecedented, which has caused great losses to many fields of the Russian economy. Under this background, Russia has further deepened its import substitution strategy, trying to master key technologies as soon as possible and realize its technological sovereignty. This paper intends to discuss the dilemma caused by Western sanctions on Russia’s economic development, the measures and characteristics of Russia5s new round of import substitution strategy, and the constraints it faces, so as to grasp the trend of Russia’s economic development.
Russia’s production pattern and import and export mix have been relatively stable over the last 20 years, with the ratio of imports to GDP remaining approximately 20% (calculated in US dollars and constant rubles, but its reliance on imported inputs from high-tech branches has increased in recent years. The increase has been particularly pronounced for machinery and electrical equipment. Russia’s import dependence on inputs provided by these sectors increased by 12 percentage points between 2013 and 2018. According to Russian Central Bank data from April 2022, only 8%-23% of industrial enterprises in various industries in Russia do not rely on imports in production, and 30%-40% of industrial enterprises have difficulty replacing suppliers of imported inputs, with mining, machinery manufacturing, pharmaceutical, and metallurgy industries accounting for the highest proportion.2 Following Russia’s launch of the special military operation, Western countries imposed sanctions on Russia, and hundreds of them suspended cooperation with Russia, making it difficult for Russia to obtain the technology, equipment, and services needed by key industries. This results in the disruption of Russia’s supply and production chains, and the severe damage in industrial development.
Following the disintegration of the Soviet Union, the production system and industrial value chain of the Soviet Union5s eastern part were broken and fragmented, the Russian electronic industry almost disintegrated, and the semiconductor production process was obsolete. According to the Russian Kommersant, in the “Basic Principles and Long-term Plan for the Development of Russian Electronics Industry before 2030” draft, the Russian Ministry of Industry and Trade pointed out many problems in the Russian microelectronics industry: key technologies lagging behind the world level for 10-15 years; insufficient production capacity; heavy reliance on foreign technology for design, production, software, and raw materials; and high cost of local components; serious shortage of technicians.1 Russia’s advanced chips and related production equipment and materials basically depend on imports, and servers, data storage systems, and other digital transformation equipment are heavily reliant on foreign components. Therefore, Russia is considered one of the “slowest countries” in the global semiconductor industry, with Russian chips accounting for only 0.5%-0.7% of global chip market share.2 Regarding equipment and technology, Mikron Company, a major chip manufacturer in Russia, can only produce 90-130 nm chips, and the batch production line of 60 nm chips is still under development.3 As a result of Western sanctions, Intel, AMD (Advanced Micro Devices, Inc.), Dell, Cisco, Toshiba, and Oracle have stopped supplying equipment or services to the Russian market, making it more difficult for Russia to obtain advanced technology and equipment. The European Union accounts for 45% of Russia5s high-tech imports4 At the end of June, the US Department of Commerce reported that US semiconductor exports to Russia had dropped by roughly 90%. Regarding software, Russian industrial, logistics, and energy departments rely heavily on the technical products of SAP and Oracle. Once the versions of these products expire, the databases of Russian departments and institutions will become inoperable.1 According to the National Research University Higher School of Economics (HSE University) evaluation, Russia’s reliance on imported software is 68% based on the share of the cost of purchasing foreign software in total software expenditure.2 Furthermore, the aging of existing equipment in Russia is a serious issue. According to the Russian Statistics Bureau, fixed assets in the field of information and communication depreciate at a rate of 66%, whereas computers, electronic, and optical equipment depreciate at a rate of 99%. Russia will only dismantle new equipment parts or use old parts for maintenance to prevent aging and damage to equipment.
In the aviation industry, Russia relies heavily on air transport because of its vast territory and underdeveloped land transportation, and cooperates closely with the West. After 2014, Russia successfully implemented import substitution of military helicopters (engines had previously been imported from Ukraine), but approximately two-thirds of commercial aircraft were still leased from Europe and America, carrying approximately 95% of domestic passenger traffic. By the end of 2021, among the 801 main aircraft in Russia, Airbus accounted for 298, Boeing accounted for 236, and Brazil and other countries made 23 Russian-made aircraft are mostly short-range regional aircraft, with a high proportion of imported components. For example, parts from Western countries account for roughly half of the unit cost of the Russian-made Sukhoi Super Jet 100 (SSJ100). Because of Europe’s total ban on supplying aircraft parts to Russia, some parts have been cut off, forcing Russia to disassemble some components from the same type of aircraft, and the production plan of its domestic MS-21 passenger aircraft has been affected until 2024.
In the machinery and automobile manufacturing industry, Russia’s import substitution process slowed down after 2015, and its overall reliance on foreign countries was high. On November 5, 2020, Russia stated in a new government order that domestic metal processing equipment output only accounted for 17% of domestic demand; 80%-95% of the main shaft, numerical control system, guide rail, and other parts used in machine tool production must be imported.1 At the same time, because bearing manufacturers from the United States, Japan, Germany, and Sweden left the Russian market after the special military operation, bearings necessary for Russian machinery manufacturing are already in short supply. The predicament of the machinery manufacturing industry has a wide impact on the automobile, metallurgy, military, and other industries. In the automobile industry, the Russian import substitution is mainly realized through localized production, and the level of independent production is not high. At the end of 2021, Russian foreign brand passenger cars and light commercial vehicles accounted for 73.6% of the total sales.2 Its share of cars and parts imported from “unfriendly” countries accounts for 27% and 26% respectively.3 After the special military operation, affected by sanctions, logistics, and other factors, international car companies, which account for about 45% of the Russian market share, left Russia or stopped delivery, which greatly reduced the production and sales of new cars in Russia4 According to the European Enterprise Association data, from January to August 2022, the sales volume of new cars in Russia decreased by 59.1% compared with the same period in 2021, and even decreased by 63.6% in August.
In the energy industry, Russia has mastered basic processes, such as storage tanks, reactors, compressors, oil and gas purification separators, and refining catalysts, but more advanced oil and gas production equipment, digitalization, and information technology continue to rely on imports from the West. Russia’s fixed assets in the oil industry are generally old. The average service life of approximately 60% of drilling equipment is estimated to be over 20 years, which is close to the standard service life of 25 years. Russia requires spare parts and repair services from the West. In the field of liquefied natural gas (LNG), the overall import rate of production equipment is as high as 68%, with small- and medium-sized projects relying heavily on Western technology and equipment. At the moment, the Yamal LNG Projects fourth production line is Russia’s only domestic LNG production line, with a capacity of only 900,000 tons, far less than the 5 million tons of comparable production lines, and frequent failures occur.2 According to an assessment by Russia’s HSE University, Russia’s dependence on imported gas turbines and parts exceeds 90%, with more than 75% of imports coming from countries that have imposed sanctions on Russia.3 In addition to production technology and equipment, the energy industry has great demand for industrial software such as SAP and > Oracle, and there is no substitute at the same level in Russia, so it will take several years to develop similar software.
More than 80% of the drugs on Russia’s standing drug list (808 items) have been localized to varying degrees (half can be localized throughout the process), and drugs and raw materials from “unfriendly” countries account for 48% of Russia’s final consumption and 22% of Russia’s pharmaceutical industry’s intermediate product consumption. In 2021, Russia imported $13.8 billion in medicines, nearly 75% of which came from the United States, the United Kingdom, and the European Union 4 Although pharmaceuticals were not included in the scope of sanctions following the special military operation, a large number of enterprises terminated their investment and marketing in Russia and suspended new clinical trials. Biological companies in Germany, Switzerland, the United States, and Finland ceased working with Russia, forcing the Russian research center to postpone the production of some cancer treatment equipment. The settlement and logistics issues associated with sanctions caused Russia’s drug imports from the EU to drop by 25.7% in April 2022 compared to February. In the short-term, cancer treatment, which relies more on advanced technology, equipment, and innovative drugs, will be the most affected. Noteworthily, the Russian pharmaceutical industry cannot replace all imported does technically, and the production process may be disturbed by the cut-off of intermediate products. According to various estimates, only 10%-15% of medicines in Russia are produced from domestic raw materials, with the remainder imported primarily from China and India. Although China and India did not participate in the sanctions, factors such as currency exchange rates, logistics, and the prepaid cooperation mode made it more difficult for Russia to import raw materials.
The fields of wood processing and agriculture also have varying degrees of external dependence. Sanctions have affected the supply of raw materials, auxiliary materials, equipment, and accessories for Russian wood product production, causing prices to rise. Russia’s wood processing industry is 90% dependent on imported equipment and accessories, and chemical raw materials such as bleach and melamine resin are in high demand. Faced with the sanctions dilemma, Russian manufacturers must adjust production lines, transform manufacturing technology, and even suspend or reduce production. Import substitution in agriculture raises additional concerns. On the one hand, some seeds still need to be imported. The self-sufficiency rate of the main crop seeds in Russia is about 63%, which has not yet reached the goal of 75% stipulated in the Food Security Doctrine of the Russian Federation. Among them, the domestic seeds of corn, soybean, and potato only account for 45%, 56%, and 35% respectively. The import rates of sunflower, rapeseed, and beet seeds were as high as 73%, 88%, and 98% respectively. In the new edition of the National Security Strategy 2021, Russia specifically emphasized that the import dependence of agriculture and animal husbandry breeding must be solved. On the other hand, the key components of agricultural machinery have not been localized. More than half of Russia5s agricultural machinery (combine harvesters, pasture harvesters, tractors, and fertilizer applicators) is currently manufactured in Russia, but equipment required in market segments such as gardening and fruit tree planting, special equipment such as picking and primary processing, and agricultural machinery parts such as transmissions, engines, and bearings must still be imported.
II
Faced with unprecedented sanctions pressure and a realistic industrial process, Russia has taken a series of measures to accelerate the implementation of the government-led import substitution strategy in order to achieve technological sovereignty and protect national security.
1. Adjust the systems and mechanisms. Since July 2022, the Russian government has successfully adjusted the high-level personnel and functions division. Denis Manturov, Minister of Industry and Trade, has been promoted to Deputy Prime Minister (also Minister of Industry and Trade), with expertise in technology, nuclear supervision, rockets, communication networks, electronic components, and quantum sensor technology. The remaining six deputy prime ministers are in charge of biochemistry, the environment, agriculture, new energy, artificial intelligence, and software development, in that order. Former Deputy Prime Minister Yuri Borisov was transferred to the president of the Russian Aerospace Group, and will focus on key areas such as navigation, communication, data transmission, meteorology, and geographical survey. Since 2014, Manturov has been involved in the import substitution, and all walks of life in Russia regard his promotion to deputy prime minister as a symbol of the government’s accelerated implementation of an import substitution strategy. In his first speech as deputy prime minister, Manturov stated that in order to ensure the supply of key components, Russia must establish new cooperative relations and “accelerate the production of similar products at home to replace certain imported components.’* In addition, by the end of 2022, all-Russian federal departments will appoint deputy leaders in charge of scientific and technological transformation, who will follow relevant national technical strategies and instructions. Dmitry Chernyshenko, Deputy Prime Minister, compared it to “scientific special forces.It is worth noting that Katerina Tikhonova, Putin’s youngest daughter, general manager of the National Intelligent Development Foundation and director of Moscow University’s Institute of Artificial Intelligence and Intelligent Systems, was recently appointed co-chairman of the Russian Industrialists and Entrepreneurs Alliance’s Import Substitution Coordination Committee.
In terms of mechanisms, in April 2022, Putin issued a decree establishing an inter-departmental committee under the Federal Security Council to ensure Russia’s technical sovereignty over key information infrastructure. Dmitry Medvedev, vice chairman of the Security Council, chairs the committee. Members include leaders from the Ministries of the Interior, Emergency Affairs, Science and Higher Education, National Defense, Industry and Trade, Communications, Finance, Digital Development, Communication and Mass Media, Economic Development, Energy, the Central Bank, the National Guards, the General Administration of Foreign Intelligence, the Federal Security Service, the Federal Customs Administration, the Russian National Atomic Energy Corporation, the Russian Aerospace Group, and the Russian National Technology Group. At the same time, Putin called for the formation of an alliance to invest in high-tech companies in order to entice them to invest in fost-growing high-tech companies. Dmitry Peskov, Russia’s Special Representative for Digital and Technological Development, proposed establishing a “Diamond Technology Fund” to assist Russia in establishing technological sovereignty within 10-20 years and creating 30-50 advanced development lines to “provide food, safety, medicine and network for Russia in case of any disaster.55 Russian Finance Minister Anton Siluanov said that Russia needs to rely on its key technologies and proposed formulating a “‘technical security doctrine55 similar to the Food Security Doctrine.
2. Accelerate the revision of industry planning. The first step is to accelerate digital transformation. Russia began to gain traction in the digital field soon after the outbreak of the Ukrainian crisis in 2014. Economic digitalization was designated as the primary development direction of Russia’s national strategy until 2025 in 2017. The COVID-19 outbreak has accelerated this process even more. Digital transformation is listed as one of the five major goals in Putin’s Decree on the National Development Goals of the Russian Federation for the period up to 2030, which was signed in July 2020, and it is planned to promote key sectors in Russia’s economic and social fields to achieve “digital maturity” before 2030. Russian Prime Minister Mikhail Mishustin signed the Strategic Direction of Digital Transformation of the Manufacturing Industry and the Strategic Direction of Digital Transformation of the Social Field in November 2021. After the special military operation, Western science and technology sanctions significantly negatively impact Russia’s digital transformation. Putin instructed that the digital transformation strategy needs to be updated from the perspective of the integrity of economic and social coverage and the depth and significance of the planned changes. In 2024, the Russian government intends to complete industrial digital transformation, connect enterprises to the national industrial information system, create a unified digital catalog of domestic software, and introduce professional engineering software and other technologies.
The second goal is to accelerate the implementation of industry development plans in light of the new circumstances. Russia has issued the Air Transport Development Plan for 2030, in which 770 billion rubles will be invested in aircraft production, repair, maintenance, and personnel training, among other things. It is planned to launch SSJ New, the most localized short-range passenger aircraft, in 2023, deliver the first batch of medium-range passenger aircraft MS-21 in 2024, and accelerate production of Russia’s first long-range passenger aircraft TU-214. By 2030, it is expected that 1036 passenger aircraft and 764 helicopters will be produced, increasing the domestic aircraft share from 33% to 81%. Russia has formulated a semiconductor development plan, which will invest 3.19 trillion rubles in developing production technology, building data center infrastructure, training talents by 2030. According to the plan, Russia will focus on increasing 90-nm chip production capacity in 2022 and 28-nm chip production capacity before 2030, forming a technical product portfolio, and increasing household coverage rate of domestic electronic products to 30% and public procurement coverage rate to 100%. Russia has accelerated the development of import substitution plans for wood processing, provided additional support measures for sanctioned enterprises and small and medium-sized enterprises, and organized enterprises to produce auxiliary products for wood processing such as chemical raw materials, machinery and equipment, and furniture accessories. Russia will make every effort to develop oil and gas deep processing production equipment and industrial software, as well as focus on developing the LNG industry. To that end, the government will identify the equipment needed for LNG projects, invest 1 billion rubles in the development of LNG production equipment, and aim to increase the domestic share of large-tonnage production equipment to 80% by 2030. By 2030, the pharmaceutical industry expects Russian-made drugs to account for 75% of total sales. Furthermore, Russia is establishing a network of 37 national medical research centers that are developing new methods of prevention, diagnosis, treatment, rehabilitation, and consultation for regional medical institutions through the use of telemedicine.
3. Introduce a series of supporting measures. In addition to direct export control, multiple factors such as logistics, settlement, delisting of foreign companies, risk of sanctions escalation, and third-party risk aversion affect Russia’s acquisition of key products, making it difficult for Russia to obtain spare parts and materials required for independent production, and even affecting the highly localized manufacturing process. To that end, Russia has taken a number of steps and increased its support.
The first measure is to expand the logistics channels. The shortage of containers and transport vessels, insufficient port capacity, rising freight, service fees have seriously hampered Russia’s shipping and rail transportation in Asia. Putin instructed to build infrastructure such as railways, ports, and pipelines as soon as possible: promote the construction of the “South-North Transportation Corridor” with Iran, focus on building Arctic waterways and Caspian Sea transportation hub, accelerate the modernization process of Trans-Siberian Railway and the Baikal-Amur Mainline, and upgrade the infrastructure of border ports in the Far East.
The second step is to hasten the development of financial markets. As early as after the Ukrainian crisis in 2014, Russia successively launched its own financial information transmission and payment systems, which guaranteed domestic financial transactions. Russia has increased its financial infrastructure docking with friendly countries such as China and India, established alternative trading channels, and promoted the transition of financial institutions to domestic software since the comprehensive escalation of sanctions. Russia has made significant efforts to improve the domestic financial market, develop domestic financial resources, attract private capital, assist enterprises in raising funds, and increase loan concessions for key industries such as agriculture, energy, electronic communication, and machinery manufacturing in order to solve the financing problem.
The third goal is to entice talent to return. The fear of complete decoupling from the West has resulted in a trend of Russian scientific and technological brain drain following the Ukrainian crisis. In Russia in 2021, there will be approximately 1.7 million IT workers, including approximately 500,000 scientific research personnel. Since the spring of 2022, according to various estimates, 70,000-170,000 IT experts have left Russia, and the brain drain scale may further expand.1 At the same time, Kazakhstan, Uzbekistan, Georgia, Armenia, and other neighboring countries of Russia have stepped up efforts to attract high-tech personnel from Russia in order to improve the level of their own technological industries. The Russian government attached great importance to the brain drain phenomenon, and quickly provided subsidies to the science and technology industry, improved personnel treatment, and relaxed restrictions to attract talent to return. Putin signed the presidential decree declaring the Russian Federation’s Decade of Science and Technology on April 25. The year 2022-2031 has been designated as Russia’s Year of Science and Technology, and it is proposed that this decade be used to accomplish three tasks in the field of science and technology: attracting talented young people to join science, encouraging researchers and developers to participate in solving the most important tasks of social and national development, and making it easier for people to obtain information about Russian scientific achievements and prospects. On July 25, the Russian government unveiled the “Russian Science and Technology Decade Action Plan,” which established 18 initiatives and projects to address the three tasks listed above, and mandated that various government departments, state-owned enterprises, and scientific education institutions collaborate with one another in order to have a positive socioeconomic impact in key areas of individual, social, and national development.1 Prime Minister Mishustin recently stated that 85% of IT experts who left Russia returned. Following Putin5s “partial mobilization order； in September, IT, communication, media, and practitioners who ensured the stability of the national payment system and financial market infrastructure were exempted from being sent to the front lines of the war.
The fourth step is to speed up the introduction of national standards. The dispute over technology is essentially a dispute over standards. Under two camps and two parallel markets in the Cold War, the Soviet Union placed a high importance on the development of national standards, establishing a vast and extensive national standard (GOST) system. GOST standards were transformed into regional standards after the disintegration of the Soviet Union, and were primarily used by CIS countries. Russia has developed nearly a thousand new national standards in the last 30 years. In 2021 alone, 1,600 were approved, with more expected in 2022. This emphasizes Russia’s sense of urgency to plan ahead in the face of the ongoing conflict between Russia and the West. According to Anton Shalayev, director of the Russian Federal Agency for Technical Regulation and Metrology, the average time for developing a national standard in the Russian Federation has been reduced from 24 months in 2016 to 8 months, and may be reduced to 3.5-4 months in the future if the legislative process is improved. Priority will be given to the development of national standards in the microelectronics, radio, mechanical engineering, and, in particular, the machine tool and automotive industries. Medical care and medical equipment industry standards will also be heavily scrutinized.
To summarize, Russia has taken a number of steps to accelerate the implementation of the import substitution strategy, and additional steps will be taken in the future. For example, Russia plans to enact new legislation to protect the implementation of import substitution strategies and ensure technological sovereignty. “We will use this summer to prepare for the autumn session and to work on draft laws on import substitution and the creation of new Russian technologies together with the Government,Putin said on July 7 during a meeting with Duma leaders and heads of various parties.
Before the special military operation, the import substitution strategy was a part of Russia’s strategy of seeking economic sovereignty, involving a wide range of fields and following market logic. Since February 2022, the import substitution strategy has not only attracted much attention, but it has also taken on distinct new features, such as a greater emphasis on establishing technological sovereignty, security-related fields, and non-market means.
From the goal of import substitution, more emphasis is placed on establishing technological sovereignty. For Russia, “technological sovereignty” or “technological independence” is not new. For a long time after the Ukraine crisis in 2014, Western restrictive measures against Russia are mainly concentrated in three core areas: finance, energy, and national defense. Russia’s measures are part of a quest for “economic sovereignty” to ensure that the Russian economy is not affected by foreign political decisions.
However, after the special military operation, Western sanctions were unprecedented, particularly the extensive scientific and technological blockade and trade control imposed on Russia, with the goal of weakening Russia’s technological foundation and industrial capacity, destroying Russia’s national economy, and emphasizing the importance of developing technology to Russia’s national security and development. Beginning with the reality of being sanctioned by the West and the global development trend, the Russian leadership has given the concept of “import substitution55 a new meaning and significance. From the perspective of Western sanctions, Prime Minister
Mishustm pointed out that “sanctions barriers and bans have fundamentally changed the current order. No country in the world can guarantee the supply of important products from other countries. This means that we need to establish technological sovereignty in a short period of time.” Putin also emphasized that “Western sanctions are a chance to strengthen the country5s technological and economic sovereignty 急 From the perspective of the world development trend, the Russian top leaders believe that the future world will be a polycentric world with an obvious trend of collectivization, and that Russia, as an important pole, must own and defend its own technological sovereignty. In this regard, Dmitry Peskov stated that the world could transition to an “isolated” development model in the next 10-15 years, in which large technological and economic blocs are separated from one another. Each country will achieve technological sovereignty and construct its own “technology island.55 For Russia, technological sovereignty entails establishing a green agenda, forming its own tech-economic bloc, setting up agricultural export packages, and establishing new transport corridors with Asian countries. However, technological sovereignty does not imply isolation. When forming alliances with other countries, it is a powerful bargaining chip.
In this context, Russia regards technological sovereignty as a critical step toward ensuring national security and development, and import substitution is an important path toward achieving technological sovereignty. Russian Deputy Prime Minister Chernyshenko has formally defined technological sovereignty as “the ability of a state to possess technologies that are essential for ensuring prosperity and competitiveness, as well as the ability to independently develop and acquire these technologies from other countries5 economy without unilateral structural dependence”，Medvedev, the Russian Federation’s deputy chairman of the Security Council, even proposed replacing the term “import substitution” with “technological sovereignty” or “technological independence, stating that “technological sovereignty is one of the main conditions to ensure national independence and security.’* The St. Petersburg International Economic Forum in Russia, the “Army-2022” military technology exhibition, the ninth International Technology Development Forum, and other large-scale domestic events have recently made technological sovereignty an important theme.
More emphasis is being placed on security-related industries in terms of import substitution. Previously, Russia’s import substitution strategy included a wide range of industries and projects. In April 2014, the national “Industrial Development and Competitiveness Improvement” plan was officially launched, proposing import substitution development plans for 20 industries by 2021 and nearly 3 trillion rubles ($50 billion) to support Russian companies to themselves off Western imports. Russia established an import substitutiongovernment committee in 2015 to develop import substitution plans for over 2,000 products and technologies across 19 economic sectors, including agriculture, food manufacturing, machinery manufacturing, and petrochemical manufacturing. Following the Ukraine crisis in 2022, Russia’s survival and development environment changed dramatically, and the country’s import substitution policy was adjusted to focus on “selected fields which are linked to its national security and economic sovereignty”. After his appointment as deputy prime minister, Manturov outlined five strategically important areas where technological sovereignty is critical: national security and defense, the energy sector, the shipbuilding, aircraft, and chemical industries.
The focus on security-related industries is based on practical considerations. On the one hand, there is an urgent need to consolidate military security. Although the import substitution in the field of Russian defense is relatively successful, the Russian military’s performance in the special military operation reveals a significant gap between Russia and Western countries in terms of military modernization. The flaws are most visible in the fields of military digitalization and intelligence. Russia, which has long pursued a security-first policy, must undoubtedly strengthen import substitution in the defense and security sectors, not only to achieve 100% localization, but also to achieve high-tech substitution. According to Manturov, then-Minister of Trade and Industry, complete import substitution is required in national security-related industries such as military-industrial complexes and military product companies in June 2022. “It’s not an economic issue, it’s a national security issue” On the other hand, sufficient energy and food resources, as well as import substitution achievements over the last eight years, have greatly improved Russia’s level of economic security, enhanced its economy5s and society’s ability to withstand pressure, and created favorable conditions for pooling resources to solve security-related problems. Russia has the world’s largest natural gas reserves, second largest coal reserves, and sixth largest oil reserves. It leads the world in both output and export volume, and its domestic energy market is very stable. Russia has made rapid progress in import substitution in agriculture, the chemical industry, and light industry since 2014. Grain self-sufficiency reached 150% in 2021, vegetable oil, fish, and meat were also fully self-sufficient, and potatoes, milk, and vegetables self-sufficiency exceeded 80%.2 Moreover, Russia has emerged as a global food and agricultural trading power, steadily increasing in international agricultural trade, with its wheat, sunflower seeds and sunflower oil, and barley exports accounting for 18.8%, 20%, and 13.1% of the global supply, respectively.3 Russia is an important player in the global fertilizer market, as the world5s largest exporter of nitrogen fertilizer, second largest exporter of potash, and third largest exporter of phosphate fertilizer. In the food processing sector, the Russian market is already largely dominated by domestic producers, with most of the imported food coming from neighboring countries that have not imposed sanctions on Russia. Russia has a good basis for localization in the textile, daily chemical, and other industries. The raw materials and equipment needed to import are mainly supplied by friendly countries, unaffected by sanctions. As a result, Russia can devote more human and financial resources to security-related industries.
From the perspective of the means of import substitution, more attention is paid to non-market factors. Previously, implementing an import substitution strategy mainly followed the market logic. In 2016, then-Prime Minister Dmitry Medvedev explicitly wrote.
“we talk a lot about import substitution. What’s most important is to understand the two significant ways in which it differs today from common import substitution models of the 20th century. First, import substitution is not to replace imported goods but to encourage the emergence of competitive producers in the global market. Second, genuine import substitution is based not on currency manipulation or administrative props for Russian companies but on creating conditions that are conducive to the emergence and growth of Russian companies that can conquer the global market.
Putin describes it as a return of the market “to domestic producers. In the process of import substitution, Russia abandoned trade protection measures such as tariffs and quotas, abandoned the multiple exchange rate system and financial management practices, and followed market logic without obvious incentive distortion.
However, following the special military operation, Russia must maintain economic development in the face of extremely severe sanctions. Apparently, relying solely on the role of the market is insufficient. In the field of science and technology, “mobilization,” defined as the remanagement of scientific and technological potential and the redistribution of resources, including the acceleration of import substitution of technology and equipment, is an extremely important task for the state that must be addressed coercively to some extent. “Only the state can theoretically bring the resources and coordination needed to clear the accumulating bottlenecks choking the economy. Markets can’t move fast enough to address the kind of problems that are emerging ”1 Therefore, the Russian government vigorously assisted enterprises in combating the crisis, implementing a variety of support measures for key enterprises and enterprises in key industries, such as tax cuts, administrative inspection reductions, and the issuance of preferential loans. Simultaneously, the Kremlin proposes first identifying the needs of representatives of big business, determining how much raw materials and components are required to produce a certain number of units of goods. Then find enterprises that are able to create the necessary components and “encourage them to cooperate.2 Deputy Prime Minister Manturov stated that the government has come to an agreement on the need to transition from a purely market-oriented industrial policy to one that ensures technological sovereignty.3 Non-market factors are expected to play a larger role in the Russian economy as a result of the West’s long-term blockade and isolation. Of course, increasing the importance of non-market factors does not imply that Russia will transition to a planned or command economy. Deputy Prime Minister Manturov in particular emphasized that Russia “will not completely reject the principles of the market economy” and that the state will participate in the management of industries and projects to the extent necessary.4 According to Russian Business Consulting newspaper, the new economic model will not result in the emergence of a “comprehensive state planned economy,as this would be counterproductive and extremely harmful to the Russian economy.5 Therefore, non-market means may become more embodied in these industries as the strategic focus of import substitution shifts to security-related industries.
For a long time, there are different voices on how to view and evaluate the current situation and the prospects of Russia5s import substitution strategy. Russian officials are confident, with Putin saying, “Russia has the professional, scientific, technological potential to develop products for high-end demand products, including household appliances and construction equipment as well as industrial and service equipment.’* The Russian people are also relatively upbeat. According to the All-Russian Public Opinion Research Center’s May 2022 survey, 70% of respondents believe there will be no shortage of Russian goods and products; the vast majority of respondents believe Russian manufacturers can replace foreign companies in food (94%), health (91%), detergents (90%), and construction and decoration (86%); More than 60% of respondents believe Russian manufacturers can replace foreign companies in industries such as pharmaceuticals (69%), aviation (66%) and industrial machinery (63%). In terms of quality, 56% preferred domestic products. However, some elites, entrepreneurs, and liberals are pessimistic and even oppose the import substitution strategy itself. “In Russia, the import substitution program has been a complete failure, with nothing but bombast reports from various ministries,Andrey Klishas, head of the Russian Federation CounciFs Committee on Constitutional Legislation and State Building, stated publicly on the social media platform Telegram. Some liberal economists even call import substitution a trap with little objective justification.
Under the background of long-term Western sanctions and inherent structural problems in the Russian economy, further deepening the import substitution strategy has become an urgent, inevitable, and realistic choice for Russia to safeguard its sovereignty, security, and development interests. However, in the process of its implementation, it is inevitably faced with many factors.
From the standpoint of import substitution, Russia’s options are limited. There are three main ways to realize technology sovereignty through import substitution: (1) the localization of production by foreign enterprises; (2) international technology transfer; and (3) the development of Russian technologies based on prior knowledge. The first mechanism is the transfer of foreign high-tech enterprises to Russia. Localization of production creates jobs, but if a foreign company builds an assembly plant in a local country and the local plant is unable to use new technology, the foreign company can leave at any time and take all of the technology with it. The second step means that new technologies, knowledge, and know-how are acquired by Russian companies through technology transfer. This is the most efficient way to develop export-oriented import substitution. The third strategy will be both costly and time-consuming.1 In reality, the first two paths are obviously difficult to go through due to Western sanctions and technological blockade, if foreign enterprises withdraw or cut off supply, local production cannot be sustained. Western and Russian science and technology are completely decoupled, and Western technology transfer is impossible. Therefore, the only feasible and practical way for Russia to realize the import substitution is to develop independent technologies.
Russia’s production base is relatively weak in terms of industrial base. Although the Soviet Union had a relatively complete industrial system, the technical level was relatively low, and most Russian industrial complexes were privatized and liquidated after the Soviet Union’s demise. At the same time, Russia’s economic structure reflects the distinct characteristics of energy and raw materials due to its abundant resource reserve. The energy industry dominates the industrial structure, export structure, and investment structure. In contrast, Russia’s manufacturing industry is relatively uncompetitive, the industrial level is relatively low, and the industrial chain is incomplete. As a result, manufactured goods and mechanical equipment account for approximately half of total Russian imports. The EU is Russia’s top trading partner in terms of import and export region, accounting for 36% of total foreign trade, 38.3% of exports and 32% of imports. Moreover, all the unfriendly countries supporting sanctions against Russia account for 54% of Russia’s total trade.1 The EU is the main provider of imported inputs for Russia. The EU-28 countries accounted for 40% of Russia’s intermediate imports in 2018. The share of the United States was 9%, and all advanced economies combined accounted for 60% of Russia’s input imports. Therefore, it is clear that Russia faces challenges in promoting the implementation of an import substitution strategy, and sectors with a relatively high technological content face even greater challenges.
In terms of technological innovation, affected by factors such as late starting and poor investment environment, Russia’s high-tech investment level has been low for a long time, and its innovation capacity is seriously insufficient. Before the sanctions, Russia’s investment in high-tech enterprises was very limited, 1/70 of that of the United Kingdom, 1/40 of Australia, and1/15 of Brazil. It was hundreds of times less than that of China and the United States and ranked 38th globally. There are no “unicorn” companies in Russia, lagging behind other BRICS countries. Russia ranked 47th in the World Intellectual Property Organization’s Global Innovation Index 2022, down two places from 2021 and even lower than Estonia, Lithuania, and Latvia. China has 21 of the top 100 tech clusters in the world, India has four, and Russia has only one In terms of talent pool and competitiveness, Russia also lags far behind technologically advanced countries. In addition to the overall talent reserve decreasing year by year along with the population decline, many scientific and technological talents tend to emigrate since they cannot find adequate use and pay in Russia, thus further shrinking the available number of highly skilled workers. A survey conducted by the Institute of Psychology of
the Russian Academy of Sciences and the social service organization “Decisive Voice” among the remaining scientific workers in the country two months after the launch of the special military operation showed a “significant increase” or “somewhat increase”in the emigration sentiment of 31.6% of them, primarily from the cities with the greatest scientific potential: Moscow, St. Petersburg, and Novosibirsk.1 Simultaneously, despite Russia’s high national education level, highly educated talents will be wasted if they do not have access to cutting-edge technology, adequate opportunities, and a favorable work environment. In fact, Russia has failed to capitalize on its relatively strong capacity in basic research and education. Today,s Russia suffers a severe high-education, low-human-capital paradox “2 Russia ranks 45th in the “2021 Global Talent Competitiveness Index” released jointly by the Institut Européen dAdministration des Affaires and Portulans Institute, ranking lower than Estonia, Latvia, and Lithuania.
In terms of production and supply chains, Russia needs to be rebuilt. Russia’s participation degree is limited in the global value chain, and forward participation is much higher than backward participation. This means that Russia primarily exports resources and is rarely involved in higher levels of the value chain, such as imported inputs, reprocessing, and exporting. Especially after the Ukraine crisis, the global value and supply chains are being restructured. Western countries are trying their best to exclude Russia from the global value chain and industrial chain, which puts Russia in a very unfavorable situation. On the one hand, to stabilize the macroeconomy and maintain economic development, Russia should explore new export markets and maintain forward participation in the global value chain, adjust relevant supply and production chains, and try its best to increase backward participation. On the other hand, Russia is facing an import substitution in multiple fields and sectors simultaneously, and needs to organize independent production in a very short period. Independent production entails numerous links from design, research and development, to production and promotion, which not only has a long cycle, but also requires the reconstruction of the production and supply chains if any link fails. Valentina Matviyenko, chairwoman of the Russian Federation Council, once marveled that “although Russia produces a lot of metals, the fact is that even nails are imported.” Russia’s Kommersant newspaper vividly called this situation “the tragedy of small objects 对 More seriously, the sanctions mainly target machine tools, production lines, instruments, equipment, and other means of production, and greatly impact industrial production. Russia’s production facilities are outdated and the fixed asset depreciation rate is on the high side. If substitutes are not obtained in a timely manner, production must be reduced or even stopped. The situation for cross-sector production will worsen as more Western companies leave Russia. Russia has a long way to go in reestablishing its manufacturing and supply chains.
The Ukraine crisis is currently at a standstill, both sides are unwilling to negotiate, and the trend of prolonged conflict and sanctions is becoming more prominent. In essence, the Ukraine crisis is a “hybrid war” a tug of war, a protracted war, and a war of attrition between Russia and the “collective West； putting both sides to the ultimate test of strength, will, endurance, and resilience. Because of Russia’s laggard development of key technologies, the West views export control as one of the most important means of sanctions, hoping to impose an international blockade and isolation on Russia, reduce the upper limit of Russia’s national development, and erode Russia’s economic growth potential in order to win the great game between Russia and the West. In this context, it is more important and urgent to accelerate the implementation of an import substitution strategy for Russia’s security and development, and it has become a key step to realize its technological sovereignty. Russia has taken a number of steps to break the blockade, but its import substitution strategy is likely to be difficult. However, it also provides a glimpse of Russia’s economic development.
First, import substitution is not the same as sector-wide substitution, nor does it mean total self-isolation. Russia does not subjectively want to be completely decouple from the West, and completely disconnected from the world. At the St. Petersburg International Economic Forum in June, Putin stressed that openness is the key principle for Russia’s national and economic development. Import substitution is neither a cure nor a panacea. “It is clear that we cannot develop in isolation from the whole world,” he said again in July at the Presidential Council on Strategy and National Development in July. “In the modern world, drawing a compass, putting up a huge fence一it’s simply impossible. In terms of import substitution scope, Russia does not require or should implement all-field substitution ” Import substitution strategy focuses on key technologies, services, products in key areas. Putin has stated repeatedly that Russia’s inclusion in the global value chain will not isolate the country from the global economy, and that there is no need fbr Russia to produce all goods. Prime Minister Mishustin said that Russia needs to move from a catchup development model to a leading one, recapture the domestic market, and increase high-tech exports.3 Deputy Prime Minister Manturov also stated that Russia does not set the goal of industry-wide import substitution, but rather of participating in the global chain and global cooperation
Second, import substitution will not be a quick fix. History shows that once Western countries impose sanctions, it is difficult to lift them quickly. Following the special military operation, Western countries imposed the most severe sanctions ever imposed on Russia, totaling nearly 10,000 sanctions, more than the current sanctions on Iran, Syria, and the DPRK combined. More importantly, the United States has imposed permanent sanctions on other countries: Sanctions against the Soviet Union (such as the Jackson-Vanik Amendment of 1974) remained in effect against Russia fbr 20 years after the collapse of the Soviet Union, even though the reasons for the sanctions in the first place had completely disappeared. The sanctions imposed by the United States on Russia are part of the US’s great power competition strategy, which some scholars believe could last for 50 years. In the context of prolonged sanctions, import substitution is the key for Russia to realize its technological sovereignty, so the strategy will not be short-term.
Third, parallel import will become a temporary measure of import substitution for Russia for some time. To ensure the supply of important commodities and the normal life of the Russian people under the Western sanctions, In the short-term, Russia must increase parallel imports. Following the expansion of Western countries sanctions, Putin immediately signed Federal Law No. 46, which amended the provisions of the Russian Federation’s Civil Code on trademark and patent protection, stipulating that Russia no longer recognizes, that is, no longer protects, Western countries intellectual property rights and patents. Later, the Russian State Duma plenary session approved an amendment to the law submitted by the government of the Russian Federation, legalizing parallel imports in Russia. The amount of goods imported into Russia via parallel import reached $9.4 billion from May to August 2022 alone, and is expected to reach $20 billion by the end of 2022. The Russian government recently announced that the policy would be extended for another year after the end of 2022. Whether or not the mechanism is extended after 2023 will be determined by the supply situation of foreign entities and the replacement capacity of Russian manufacturers. However, some academics argue that parallel import is more advantageous to Russia than import substitution.
Fourth, non-Western countries, particularly Asia-Pacific countries represented by China, will be the focus of Russia’s future foreign cooperation. Russia’s strategic focus gradually shifted eastward following the Ukraine crisis in 2014. As a result, while Russia continues to rely on Western countries in the field of high technology, some changes have occurred in the sources of Russian imports. The largest increase in Russia’s share of imports was accounted for by China’s growing status as an import source. Imports from China accounted for 5% of global goods imports in 2002. Russia’s Chinese imports shared a similar percentage. By 2021, Chinas share of global imports had risen to 15%, while Russia’s imports from China had risen to 25%. Meanwhile, while the EU is still the largest supplier of Russian imports, its share has dropped to 32%. The Asia-Pacific countries, particularly China, account for a large share of Russias imports of information and communication technology products. According to the data released by Germany’s Statista data platform in June 2022, Russia’s import share of information and communications technology goods in 2021 (by origin) is as follows: China (65%), Vietnam (8.4%), Poland (2.4%), Malaysia (2%), India (1.7%), Belarus (1.6%), South Korea (1.6%), Thailand (1.6%), the United States (1.5%), and the Czech Republic (1.5%). After the special military operation, Russia urgently needs to accelerate the implementation of an import substitution strategy and strengthen the cooperation with non-Western countries, especially the Asia-Pacific countries represented by China, which is a general trend. The importance of practical cooperation between China and Russia, as well as Russia’s need for China, are emphasized further. China and Russia enjoy stable political relations, complementary economic structures, and face Western restrictions and oppression as a comprehensive strategic partnership of coordination. They are naturally motivated to collaborate in responding to external threats and to pursue independent, controllable, safe, and efficient industrial and supply chains. Among its friendly countries, China has the highest industrial level, the most diverse technology, and the largest market, and has the greatest potential to fill the market gap left by Western countries. The two countries are expected to deepen cooperation in energy, finance, science, and technology; strengthen strategic industries alignment; jointly maintain the stability of industrial and supply chains; and cope with external risks and challenges. Therefore, China-Russia practical cooperation faces new challenges.