Import Substitution in Russia Failing as Moscow Buys Products Not Technologies

Vladimir Putin’s much-publicized program to promote import substitution is failing. Indeed, Russia may be in worse shape now than it was a decade ago as sanctions and declining earnings from the sale of raw materials leave the central government with less money to spend. Moreover, in contrast to China, which has a successful program in this area, Russia continues to buy completed products rather than the technologies on which they are based. Doing so is less expensive and gives a short-term boost in some areas; but over the long term, it means that Russia will not develop its own technologies, and instead fall even further behind. Such a decline will also result in losing foreign markets because other countries will be decreasingly willing to purchase the products Russia does manufacture.

Russian economics experts are warning about all these consequences. Andrey Kolganov, a senior economist at Moscow State University, is particularly outspoken. He recently told Regnum that sanctions and, especially, falling oil earnings are behind the 3.5 percent decline (year-on-year, during January–February 2019) in Russian purchases abroad, much of it in the energy sector. As a result, he suggested, not only will Moscow not be able to maintain current levels of production, but it will certainly not be able to independently produce the kinds of manufacturing machinery that it would need. Indeed, some firms set up to produce such equipment have been closed, while other Russian companies are now buying ready-made machinery from abroad, albeit in ever smaller quantities. This creates a vicious cycle of falling incomes and declining domestic production of high-tech equipment from which it will be difficult to escape (Regnum, March 22).

That, in turn, means Russia will remain dependent on imports for a long time to come, despite government promises to the contrary. Kolganov said that the more high-tech the sector, the worse the situation has become. Russia does not produce any advanced robotics equipment on its own. Not long ago, it closed its last domestic plant that had sought to produce industrial robots. Its machine-building and metal-working industries are “more than 90 percent” dependent on equipment manufactured abroad. And in the chemical, printing and even textile sectors, Russian firms are still importing 60–80 percent of the equipment they need (Regnum, March 22). Other Moscow economists argue that this means Russian manufactured goods will be ever less attractive to customers in other countries. In fact, they point out, many countries now view Russian goods as “primitive.” A major reason why the Kremlin’s call to increase exports has fallen short is that, in the past year, the manufacturing sector met only 20 percent of the regime’s goals (Nezavisimaya Gazeta, March 25).

Speaking with Pravda.ru, Kolganov underscored what this trend will mean in terms that the Russian government and many Russians may find especially disturbing. Due to Moscow’s approach, he said, the country is falling behind not just the West—something many in Russia have long known to be true—but China as well. Kolganov added that this is happening not because of sanctions or even falling oil prices, but because of a conscious choice by Russian officials and businessmen. Namely, they have elected to purchase ready-made equipment but not the technology that allows its production; whereas, the Chinese, whenever possible, have done just the opposite, putting themselves in a position to be independent of such imports in the future (Pravda.ru, March 27).

Kolganov is seriously puzzled with the current approach to the technology sector in Russia. He said, “We are purchasing ready-made equipment, but for some reason we are not buying the underlying technologies.” An obvious case that illustrates this involves Moscow’s acquisition of high-speed trains. Russia bought the trains from Germany’s Siemens company. The Chinese, in contrast, bought “the licenses to produce these trains.” It is true that Siemens has factories in Russia (although they could be shuttered at any time if the company decides it must do so under the West’s sanctions regime), but even while they are still in operation, the German company uses its own technologies and people to run them. On the other hand, China produces the same train models in Chinese plants and with Chinese employees who acquire the skills to do all these things independent of Siemens (Pravda.ru, March 27).

In many respects, the economist argued, Russia today is only continuing what the Soviet system did: purchasing finished products rather than developing the ability to produce them domestically. Kolganov acknowledged that this strategy worked for certain rush projects, but it nonetheless left the Soviet Union then and now Russia doomed to fall behind, irrespective of how much money it spends. And as Russia suffers from ever tighter budgets because of falling prices for raw materials and sanctions, it increasingly will not be able to import even ready-made products lower down the value chain. Russia may be able to limp along in this manner for some time, but its economic prospects and the standard of living of its people will suffer (Pravda.ru, March 27).

That development will, the economist continued, both conceal and exacerbate the country’s political problems down the road. On the one hand, the absence of domestic production in the industrial sector has contributed to the severe shrinking of Russia’s working class—thus making this segment of the population less likely to engage in the kind of strikes that could challenge the regime. But on the other, the rising generation can see its own prospects being taken away by government policies of buying foreign goods rather than developing them at home. These young people, Kolganov warned, could become the nucleus around which a new wave of protests will form (Pravda.ru, March 27).