Xu Poling: Russia's import substitution has changed from passive defense to active action

Source: Global Times

Since the Crimean crisis in 2014, the United States and Europe have imposed severe sanctions on Russia while simultaneously accusing Russia of implementing import substitution policies that violate relevant WTO rules. This accusation by the United States and Europe is undoubtedly a politicization of WTO rules and an international political speculation in which "if it is used in accordance with it, it will be abandoned if it is not in line with it."

Import substitution has two meanings. One is when a country's currency depreciates sharply and imports become expensive, domestic consumers and investors have to reduce their imports and replace imports with similar products produced in their own countries. The other refers to a certain industrial policy or strategy adopted by a country on its own initiative. This policy or strategy restricts imports through tariff or non-tariff barriers, encourages or subsidizes domestic production and domestic procurement, and thus achieves the purpose of promoting the development of the corresponding industries (generally industrial manufacturing) in the country. Latin American countries adopted this strategic policy in the 1960s and 1970s.

It starts with passive defense

In 1992, Russia began to transform its market-oriented economy, liberalized domestic prices, and liberalized foreign trade internationally. Despite the rapid deindustrialization in Russia since then, until 2008, Russia did not actively intervene or restrict domestic consumers and producers on whether imports or domestic goods were consumed. Especially after 1999, because of the soaring energy prices, the export of oil and gas was very profitable, and it was more cost-effective to import consumer goods and machinery and equipment with the money from the sale of oil and gas than to produce themselves. So by 2008, the Russian market was flooded with clothes, shoes and socks, milk and eggs, and automotive appliances from abroad. Russia's rockets, warships, ships, tanks also have a large number of rocket engines, gas turbines and other key components from Ukraine.

Beginning in 2008, Ukraine began to accelerate its relations with NATO and the European Union. At this time, Russia found that its defense industry, as well as the aircraft, shipbuilding, aerospace industry, etc., was still highly dependent on key accessories provided by Ukraine, and there were hidden dangers to national security. Therefore, in 2009, Russia first proposed a policy plan for import substitution, requiring national defense and military industry and food production to achieve self-protection. After that, import substitution as a strategic plan, although implemented, the pace is not fast. But in the second half of 2013, the "color revolution" in Ukraine suddenly accelerated, and anti-Russian sentiment rose sharply. In this context, the Russian decision-making level is deeply disturbed and has begun to promote self-sufficiency in the production of defense products in an all-round way. Since then, the first import substitution document in the modern economic history of Russia prohibits and restricts imports - the Regulation on Prohibition and Restriction of the Purchase of Foreign Products and Services in Defence and Security Orders.

After 2014, the United States and Europe imposed rounds of sanctions on Russia. Among them, the United States imposed a technical blockade on Russia, the European Union cooperated with the implementation of a financial and international capital blockade against Russia, and Poland, the Czech Republic, Lithuania, Latvia and other countries carried out border and passage blockades. Russia then imposed anti-sanctions and prohibited import measures, of which the main role can be to restrict the import of agricultural products from the US and European camps, and at that time, the main ones affected were milk and related products from Poland, as well as fruits, vegetables, poultry and egg products.

Gradually become a proactive strategy

Under the severe sanctions imposed by the United States and Europe, Russia not only cannot obtain military technology and international financial resources from the West, but also slightly more sensitive civilian technology and Russian enterprises in strategic fields have also been blocked in the international market. In this context, Russia has further strengthened the attributes and status of the import substitution strategy as a national security strategy. The National Security Strategy of the Russian Federation, launched on December 31, 2015, calls for "the implementation of an active import substitution strategy, the reduction of dependence on foreign technology and industrial products, and the acceleration of the development of agricultural complexes and pharmaceutical industries"; "to accelerate the development of high-tech fields, consolidate the existing position in the field of aviation and atomic energy, and restore the leading position in the traditional industrial fields (heavy machinery, aviation and complete equipment);" "to use the defense industry as the engine of the modernization of Russian industry and accelerate the development of the defense industry, Reorganizing the industrial base of the national defense industrial complex on the basis of new technologies".

As mentioned earlier, import substitution essentially belongs to the industrialization policies and strategies of late-developing countries. But Russia's import substitution is different from the general situation. On the one hand, Russia experienced a high stage of industrialization in the 20th century; on the other hand, Russia attaches more importance to the development of new types of knowledge-intensive industrialization than to the transformation of traditional capital-intensive industries. Therefore, in the design of Russia's import substitution policy, a large number of import substitution measures are directed at the food industry, defense industry, pharmaceutical industry with strategic security significance, as well as the information industry, aerospace, biotechnology, and atomic energy industry with strategic significance. Import substitution in these industries is defined as "new industrialization".

In addition, Russia's import substitution strategy is a hybrid strategy of import substitution and export orientation. Among Russia's import substitution policy tools, there is basically no reference to traditional import substitution strategic trade protection means such as quotas, tariff protection and exchange rate system. Although the Russian government has implemented financial and fiscal support for key import substitution industries, it is still based on the policy support of market logic. This policy logic basically avoids incentive distortions, adheres to the principle of equal emphasis on protection and competition, and also makes use of the competitiveness recovery mechanism brought about by the depreciation of the ruble.

How effective is the implementation

Russia's import substitution policy stipulates the proportion of domestic goods supply in various fields such as military industry, grain, meat, eggs, poultry and dairy products, chemical equipment, transportation machinery, and pharmaceutical products in a certain period of time. Overall, the autonomous security of the military industrial system has been basically realized after 2018, and the self-sufficiency rate of grain and food has reached more than 98%. There has also been considerable progress in the substitution of imports in complex and precision manufacturing fields such as medicine and medical equipment, electrical equipment, chemical equipment, machine tools and instruments, but there is still a considerable distance from the policy objectives.

Especially since 2018, the Russian government has launched 13 national projects, and the national infrastructure investment, industrial development and scientific and technological innovation, new investment in people's livelihood, environment, education and other aspects have a clear proportion of domestic product procurement. Since these investments mainly come from the state treasury and the corresponding development and development funds, more than 30% of the government procurement of national projects must be domestic equipment, and even rise to the level of legal compulsion. However, these requirements are often difficult to implement or can only be met at the last moment of the assessment. The main reason is that the domestic equipment or products that replace imported products are difficult to meet the standards in terms of performance and technical indicators, or the quality and price are high, and the service life and later maintenance costs are high.

In general, the rise of import substitution in Russia from a spontaneous process to a strategic policy is the result of a combination of external pressures and domestic structural contradictions. First, Russia's import substitution was initially a passive defensive act in the sense of national security. Second, in the context of the Ukraine crisis and the 2015 economic crisis, import substitution itself is also an anti-crisis policy. Against the backdrop of the sharp depreciation of the ruble exchange rate in 2015, encouraging the localization of consumption and investment goods procurement is a need to respond to the crisis. Third, import substitution is Russia's self-help behavior after a long period of deindustrialization.

For a large country like Russia, industrial autonomy and economic autonomy are an integral part of the country's overall security. In Russia's import substitution industry planning, the growth of new industries based on cutting-edge technologies is the focus. In the process of implementing the import substitution policy, Russia basically abandoned the trade protection means of Latin American countries in the 1960s, such as tariffs and quotas, and also abandoned the practice of possible "incentive distortion" such as the exchange rate system and financial regulation. The scope of application of import restrictions and government procurement is basically limited to the level of national defense and military industry and national projects. Of course, the import restrictions imposed by Poland, the Czech Republic and Lithuania are different. (The writer is director and researcher of the Russian Economic Research Office of the Institute of Russian Eastern European and Central Asian Studies, Chinese Academy of Social Sciences)