The Bell, 7/17/22

New Deputy PM and Putin’s Daughter to Kickstart ‘Import Substitution’

Rumors were flying all last week about an “extraordinary” session of the Russian parliament, with predictions about what would be discussed ranging from a declaration of war to a new prime minister. In the end, the news was relatively minor: the State Duma convened Friday to promote Trade and Industry Minister Denis Manturov to deputy prime minister. This is apparently one of the ways in which President Vladimir Putin hopes to accelerate import substitution and make Russian industry self-sustaining (a Kremlin ambition since at least 2014). Another way Putin is trying to make this happen is with his own daughter. It was announced last week that Katerina Tikhonova will play a leading role developing import substitution at the influential Russian Union of Industrialists and Entrepreneurs (RSPP).

• The unscheduled meeting of the State Duma was announced last Sunday, just four days after the close of the regular session. The apparent urgency sparked speculation about general mobilization, the closure of Russia’s borders and even talk of a government reshuffle. Independent media outlet Meduza, for example, cited sources saying that Prime Minister Mikhail Mishustin was going to be replaced by Alexei Kudrin, the head of the Audit Chamber.
• All the speculation was wide of the mark. It emerged Friday that the Duma was gathering to rubber-stamp a new ministerial appointment — and one likely planned before the invasion of Ukraine (one of The Bell’s sources described it in detail before the war). Manturov was promoted to deputy prime minister and handed responsibility for the defense industry (in addition to civilian manufacturing). Deputy Prime Minister Yury Borisov, previously in charge of the defense sector, will head state space agency Roscosmos. That meant the Elon Musk-baiting former Roscosmos chief Dmitry Rogozin was left without a job — although his credentials as an aggressively anti-Western official means he’s unlikely to be out of action for long.
• The special Duma session was required as a result of 2020 constitutional reforms. The main aim of the reforms was to extend Putin’s presidential term through 2036, but for appearances’ sake (and in the interests of a balance of power) parliament was also given the final say over deputy prime minister appointments. The reason Manturov’s promotion wasn’t confirmed during regular parliamentary time a week earlier was, apparently, that the Kremlin forgot.
• Newspaper Kommersant, known for its good relationship with Mishustin, reported that the aim of the new appointment was to give Manturov the tools to speed Russia’s path toward import substitution. Manturov has been involved in Russia’s attempts to reduce its dependency on Western-made goods since 2014.
• But Manturov’s appointment wasn’t the only high-profile one related to import substitution last week. Media outlet RBK reported Wednesday that Putin’s daughter Katerina Tikhonova will soon start in her first official role by taking charge of coordinating the council for import substitution at the RSPP, an association bringing together Russia’s billionaires. The Bell’s sources at the RSPP could not explain how Tikhonova’s presence will help wean big business off Western imports. But it may well be harder to say “no” to the president’s daughter than a government minister.

An unsuccessful battle with import dependency

Before the annexation of Crimea in 2014 and the start of Russia’s conflict with the West, the Russian government barely gave a thought to reducing imports.  

Putin himself has frequently expressed public skepticism about import substitution. “We often say that one of the demands of industrial modernization is import substitution. However, I think import substitution should not be a criterion, otherwise we will have to rely on our own strength in the manner of the [North Korean] Juche idea,” he said in 2007.

All that changed when the annexation of Crimea brought the first Western sanctions and the Kremlin realized that, in the event of a conflict, the West could deny Russian industry access to key technologies. Then-Prime Minister Dmitry Medvedev stated that imports were needed for 90% of machine tool construction, 80% of the civil aviation industry, 70% of heavy engineering, 60% of the oil and gas industry and 50% of energy equipment. 

Later that year, Putin identified import substitution as one of Russia’s economic priorities and called for the market to “return to our national producers.” Over the next eight years, import substitution became an article of faith. Special government commissions were created, 20 government programs were approved, and almost 3 trillion rubles ($50 billion) was approved to support Russian companies moving away from Western imports. But no results were ever officially announced and, in 2019, the program end date was pushed back to 2024. And, despite the invasion of Ukraine and new Western sanctions, the government has not announced a new import substitution strategy.

“The end of further illusions”

There is no single metric to measure the success of import substitution. However, studies by the CMASF think tank — linked to Deputy Prime Minister Andrei Belousov — suggest success has been limited. In 2019, CMASF summed up the results from five years of import substitution. It concluded that in 2014 and 2015, in the immediate aftermath of Western sanctions, there was some progress. However, between 2015 and 2019, imports actually increased. “We can speak with confidence about import substitution only in the manufacturing sector, and not in the economy as a whole,” wrote the report’s author, economist Vladimir Salnikov. “Even then, we are talking only about a short period in 2014-15.” He has not changed his mind since: he told The Bell on Friday that import substitution has only been a success in the agriculture, chemical and defense sectors.

 Analysts at the Gaidar Institute, a Moscow think tank, independently reached the same conclusion. From mid-2015 through 2018, the number of companies intending to implement some form of import substitution dropped to just 10 percent, according to a Gaidar Institute survey of executives. “The scale of import substitution was not great and over time it began to fade,” a subsequent report stated. In 2019, the think tank ceased monitoring all together “due to the clear picture we obtained and the end of further illusions.”

After the war started in February, CMASF reviewed imports from countries officially labeled ‘unfriendly’ by Moscow and found that imports from these countries made up 48.2% of Russia’s pharmaceuticals, 44.7% of chemical products and 32.2% of vehicles. 

There are still sectors where import levels have barely changed from the numbers Medvedev announced in 2015. For example, Russian-made radio-electronics products have just a 12 percent share of the domestic market, equipment for producing baby food is at 3 percent and automatic gearboxes are entirely imported.

CMASF chief analyst Dmitry Belousov (brother of Deputy Prime Minister Andrei Belousov) reached a paradoxical conclusion in a report published last week about import substitution: while Russia is attempting to reduce dependence on imports to produce goods that can compete internationally, it finds itself completely dependent on imports. “As a result, during the import substitution program, our technical dependence in our most successful industries has actually increased,” he concluded.

Why the world should care: Russia’s biggest economic problems since the invasion of Ukraine are not connected with Western-imposed restrictions on exports (it’s clear that, at least for the moment, the Kremlin is earning more money from exports than before the start of the war), but result from bans on the high-tech imports without which Russian industry cannot function.

Putin evidently continues to believe in import substitution — so much so that he has even thrown his daughter into the struggle. “We need to be one step ahead, creating our own competitive technologies, goods and services that can set new world standards,” he claimed last month at the St. Petersburg International Economic Forum. But the paradox noted by Dmitry Belousov suggests the opposite: Russia cannot build competitive industries without competition. All that remains is for the country to fall back on outdated ideas of economic autarky — exactly what Putin said he did not want to do a decade and a half ago.

Peter Mironenko, Julia Starostina

Translated by Andy Potts

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