Planned import substitution should become a strategic direction in the fight against bans on the supply of many goods to Russia
In the context of the sanctions war against Russia launched in late February, a scissor effect has emerged in the country’s foreign trade. Although exhaustive statistics for this time have not yet been published, however, according to expert estimates, exports of goods (in value terms) continued (compared to the period before the start of sanctions), and merchandise imports decreased significantly.
Export foreign exchange earnings grew due to the rise in prices on the world energy market, which make up the bulk of Russian commodity exports. The sanctions have further fueled the surge in oil and gas prices that began last year. And the reduction in imports was due to the restrictions and bans imposed by the collective West on the supply of many goods to Russia. As a result of the “scissors effect”, in the first quarter of 2022, the positive balance of trade in goods and services of the Russian Federation reached a record high of USD 66.7 billion. At the same time, exports amounted to USD 156.7 billion, and imports – 90.4 billion dollars Excess of exports over imports – 1.73 times. For comparison: according to the results of last year, the excess was 1.45 times.
In the coming months, Russia’s trade surplus will increase. Exports are expected to increase slightly, or at least stabilize (until the middle of the year). But imports will continue to decline throughout the year. In March, Russian experts predicted that imports in Russia would fall by 35-43%. In April, the World Bank predicted that Russian exports of goods and services would decline by 30.9% and imports by 35.2%. Although neither Rosstat nor the Federal Customs Service (FCS) have yet published statistical data on Russia’s foreign trade for the month of March, Assistant to the President of the Russian Federation Maxim Oreshkin On April 15, he said: imports to the Russian Federation in March 2022 fell by “tens of percent.” He explained this by the introduction of restrictions against the Russian Federation, logistical problems and the withdrawal of a number of foreign companies from the country.
Already the first and second packages of US and EU sanctions (February) provided for restrictions on the supply of high-tech products to Russia, especially dual-use goods. In particular, the EU introduced a ban on the sale of aircraft, spare parts and equipment to Russian airlines; the supply of goods and technologies intended for use in the aviation or space industry to Russia was also prohibited. In addition, a ban was imposed on the supply of goods, equipment and technologies for oil refining. Some additions to these restrictions and prohibitions were contained in the third, fourth and fifth packages of sanctions. For example, the supply of luxury goods has been stopped. On April 1, the US imposed export sanctions against 96 Russian enterprises related to the defense, aerospace and maritime sectors. Selling technology to these companies will require licensing, which will be denied in most cases.
The circle of countries participating in the trade embargo against Russia has expanded. For example, in mid-March, Japan imposed a ban on the export of 266 goods, such as semiconductors, communications equipment and advanced materials, as well as 26 technologies, including machine design programs for the production of microcircuits. Japan also banned the export of oil refining equipment and related technologies to Russia. Finally, Japan imposed a ban on any export to 49 Russian organizations associated with the Russian Ministry of Defense. On March 29, Tokyo added luxury goods, gold coins and bullion to the banned list.
On March 20, Australia banned the export of alumina, aluminum ores and bauxite to Russia (the ban was accompanied by a statement by the Australian Foreign Minister that almost 20% of Russia’s needs for alumina were met by Australian exports).
On April 5, the fifth package of European Union sanctions was announced. It contains bans on the export to Russia of quantum computers, high-tech semiconductors, transport equipment, etc. (before the sanctions, the supply of these commodity groups amounted to about 10 billion euros annually). Brussels also did everything possible to close any loopholes for a possible circumvention of the ban on the supply of weapons and military equipment to Russia (it was introduced back in 2014).
On April 6, as part of the fifth package, New Zealand imposed a ban on exports to Russia of a number of industrial products, such as information and communication equipment and engines. As part of the latest package of sanctions, the UK banned the export of equipment for oil production and refining, including catalysts; Taiwan has imposed an embargo on the island’s exports of 57 high-tech products, which include special telecommunications equipment, integrated circuit parts and variable frequency drives.
Judging by the statements of the leaders of the states of the collective West, the list of goods for which bans can be imposed on the supply to Russia has not yet been exhausted.
The current trade bans and restrictions, as we can see, primarily affect the supply of high-tech goods, manufacturing products, machinery and equipment. Unfortunately, over the three decades of the existence of the Russian Federation, its dependence on the import of these goods has increased. At the end of last year, according to the Federal Customs Service, all Russian imports amounted to $293.4 billion, including imports of machinery and equipment – $146.3 billion, or 49.9%. More than 94% of all imports of machinery and equipment came from non-CIS countries, less than 6% of such imports – from neighboring countries (CIS). Here are the data for January 2022: all kinds of goods worth $23.32 billion were imported to Russia from non-CIS countries. Of these: mechanical equipment – $4.23 billion; other machinery and equipment – 11.34 billion dollars. Total imports of all types of machinery and equipment – 15.57 billion dollars, or 2/3 of all imports from non-CIS countries. And among such countries, those that are included by Moscow in the list of “unfriendly states” prevail.
The Russian authorities are looking for opportunities to mitigate the consequences of trade embargoes by reorienting the Russian Federation to imports from other countries that do not belong to the category of “unfriendly states”. Particular hope is placed on China. In its exports to all countries of the world in 2020, high-tech industrial products accounted for more than 2/3. In the first place – electrical machines, equipment and their parts (sound recording equipment, televisions, as well as their parts and accessories) – $ 698 billion. Next (billion dollars): nuclear reactors, boilers, as well as equipment and mechanical devices for them – 450; computers and their blocks (hard disks, disk drives, video cards and similar computer components) – 187; television cameras, digital cameras and camcorders – 187; electronic integrated circuits – 118. And so on.
Meanwhile experts who are well aware of the intricacies of China’s economic policy and the behavior of Chinese business are reserved about optimistic plans to replace the loss of Russian imports from the West with supplies of high-tech products from our eastern neighbor.
Large Chinese companies that carry out large-scale deliveries of goods to the foreign market are afraid of secondary sanctions from Washington. For many of them, America is the main market, and Russia is only an additional one. Such companies will not risk losing the American market by supplying banned goods to Russia. For reference: last year, China traded with the United States for almost $750 billion, with Russia five times less – $146 billion.
How can the US control the supply of high-tech goods to Russia? Many of these products are manufactured in China under licenses to use American technologies and brands. And the American licensor can demand from the Chinese company that the manufactured product is not supplied to Russia. A major Russian entrepreneur working in the field of trade in household appliances and electronics (co-owner and president of the DNS group of companies), Dmitry Alekseev On February 25, when the first volleys of the sanctions war sounded, he wrote in one of the social networks: “It all depends on the sanctions themselves. If there is a ban on American technologies, and they are in all products, then all large Chinese companies will comply.”. As he noted, most of the equipment to Russia is purchased not from the United States, but from China, Korea and Taiwan, but American sanctions could cut off this flow as well. “It is very likely that all large companies will be forced to leave Russia. I try not to think about it for now.”concluded the businessman.
And here is what the head of the regional representative office of the Chamber of Commerce and Industry of the Russian Federation in East Asia (Beijing) said the other day Ivan Izotov: “It is naive to say the least that Europe has now turned its back on the Russian Federation and that suddenly a stream of, for example, consumer equipment from China will rush into Russia. We must proceed from the fact that almost 80% of European brands are assembled under license in China, and in order for China to supply this consumer electronics, it must have permission from the copyright holder.”.
It should also be borne in mind that large Chinese export companies are serviced by large and largest Chinese banks. And such banks are even more zealous in fulfilling Washington’s sanctions, because the Chinese export business is heavily tied to the US dollar (this is the main currency for settlements in Chinese foreign trade). Chinese banking giants do not welcome sanctions violations by their corporate clients. Medium and small Chinese banks, in this sense, are less susceptible to sanctions by the US and its allies and to violations of such sanctions by their clients. However, large corporate businesses prefer to work with large banks for a variety of reasons.
There are a number of reasons to refrain from overly optimistic hopes for China related to Russia’s internal problems. In addition to large corporations in China, there are still quite a few companies of medium and small caliber that are ready to supply us with high-tech products, household appliances, consumer electronics, cars, car parts, etc., in order to replace the losses of Western imports, without looking back at the sanctions of the collective West . But they will not start doing this until the Russian ruble stabilizes (and the prospects for its stabilization, as you know, are difficult to predict).
The information on Russian-Chinese trade for March is interesting. Since the outbreak of the conflict in Ukraine, China’s exports to Russia have declined. Russia’s exports to China rose 26.4% last month. But Russian imports from China fell by 7.7% to $3.8 billion. This is the lowest figure since May 2020, when the coronavirus outbreak significantly reduced supplies from China. We should not think that the decline in imports from China will continue further, but we should not expect an explosive increase in such imports for the reasons mentioned above. Import opportunities should also be sought in other countries that are not included in the group of “unfriendly states”. In any case, you will have to follow the “safety precautions”, use long chains, look for bypass routes for the movement of goods. Experts do not predict sharp collapses in imports of both household and investment goods. But the costs of such bypass imports will be significant, and the final prices on the Russian market will be higher. All such measures against trade embargoes are necessary but not sufficient.
Import substitution should become a strategic direction in the fight against bans and restrictions on the supply of many goods to Russia. Such import substitution should be of a planned nature and involve the mobilization of Russia’s foreign exchange resources for the purchase of investment goods, i.e. machines and equipment for industrial purposes.
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