Russian Import Substitution Blues

cherry coke 2018“Try Ripe Cherry Coca-Cola.” Billboard, Petersburg, July 28, 2018. Photo by the Russian Reader

The Consequences of Countersanctions: Food Import Embargo Makes Russian Producers More Inefficient
Vladimir Ruvinsky
Vedomosti
June 25, 2019

Vladimir Putin has extended Russia’s food embargo until the end of 2020, but the policy’s positive effect has dried up. Instead, it has been making Russian producers less efficient and driving up prices. The Kremlin imagined an embargo would be a good response to western sanctions over the annexation of Crimea, but Russian consumers have had to foot the bill.

Putin’s ban has been in effect since August 2014. It prohibits the import of meat, fish, and dairy products from the United States, the European Union, Canada, Australia, and Norway. During his televised “direct line” to the nation the other day, Putin explained that, over the past five years, the sanctions those countries imposed on Russia had led to the loss of $50 billion for the Russian economy since 2014. The west, however, had lost more. According to Putin, the EU had lost $140 billion, while the US had lost $17 billion. Apparently, Russians should take heart knowing they have not been the main losers in the sanctions war.

First, however, the economies of the EU and the US are many times bigger than Russia’s, so, in fact, Russia has lost the most. Second, the losses do not boil down to simple arithmetics. Third, the subject of countersanctions has not really been discussed. Natalya Volchkova, director of applied research at the Center for Economic and Financial Research (CEFIR), has calculated the protectionist policy costs every Russian 2,000 rubles a year: this is the sum total of what we overpay for products in the fourteen categories affected by the countersanctions. She argues that, out of this sum, 1,250 rubles go to Russian producers and 500 rubles go to companies importing food from countries not covered by countersanctions, while the toll on the Russian economy’s efficiency amounts to 250 rubles per person per year.

Full import substitution has not been achieved: suppliers from the sanctioned countries have been replaced by suppliers who work with other countries, who often charge more for their goods. Restricting competition was meant to give Russian agriculture a leg up, and some domestic producers have, in fact, increased output. According to Rosstat, retail food imports decreased from 34% in 2014 to 24% in 2018. Since 2016, however, the dropoff in imports has trailed off. Volchkova complains that most Russian import-substituted goods have increased in price. They are produced by businesses that had been loss-making. This is the source of the overall inefficiency.

Natalya Orlova, the chief economist at Alfa Bank, divides countersanctions into two phases. When they are implemented they have a positive effect, but over time the risks of negative consequences increase.  The only good option on the horizon is the lifting of the sanctions. When it might happen is not clear, says Orlova: it is currently not on the agenda. When it does happen, however, it will be bad news for Russian producers. Countersanctions have helped major players increase their shares of the domestic market. They have become more visible in such cushy conditions but less competitive as well. The longer the conditions are maintained, the less ready the Russian agro-industry will be to face the harsh competition. When the walls come tumbling down, we will see again that European producers are more sophisticated technologically.

Translated by the Russian Reader

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