Russia's import-substitution drive will take years - and may be misguided

MOSCOW (Reuters) - Russia’s drive to promote domestic products at the expense of imports is creating new opportunities for business, but it will take years for the benefits to show, participants at the Reuters Russia Investment Summit said.

They differed sharply on whether the strategy as a whole was beneficial or an example of misguided protectionist thinking.

So-called “import substitution” has become a central plank in Russia’s response to an economic crisis resulting from the plunge in international oil prices and Western sanctions imposed because of the Ukraine crisis.

The trend is driven in part by the sharp decline in the rouble, which has the effect of making imports more expensive, helping the competitiveness of goods made locally.

It is also being actively promoted by the government. In its most drastic response to Western sanctions, Russia has introduced a ban on most food imports from the West.

Moscow is also promoting import substitution in numerous other areas, such as pharmaceuticals and electronics, favoring local producers through procurements and subsidies.

President Vladimir Putin said last month that there were 2,500 import-substitution projects already and the state planned to spend 2.5 trillion roubles ($38 billion) to support them.

“For us import substitution isn’t a fetish. It concerns the most important technologies,” Putin said. “One way or another we had to do it ... but now we will have to do it more quickly.”

Deputy Prime Minister Arkady Dvorkovich told the Reuters Russia Investment Summit this week that it was only a matter of time before the panoply of projects brought tangible benefits, although it was too soon to expect large-scale results.

“Import substitution is absolutely real, but it is all investment projects. They have various stages,” he said. “We will see a result somewhere in a year, elsewhere in two years, elsewhere in three.”

Dvorkovich said that while international sanctions were always negative, there was a positive side to them.

“Sanctions force each country to think about internal sources (of development) and operate more energetically for using its own resources,” he said.


Russia’s food ban is certainly having the desired effect of encouraging more investment in products that Russia typically imported.

Electricity and farming tycoon Dmitry Arzhanov told the Summit he plans to invest heavily in apples and potatoes to fill gaps caused by the food embargo.

“From the point of view of agriculture we see only positive factors,” he said.

Before the food embargo, Russia largely imported apples from Poland - where apples have now been dubbed “putinki” (little Putins) in an ironic swipe at the Russian leader.

But Arzhanov said cheap Polish apples would probably flood back to Russia if the embargo were lifted soon.

In general Russia needed to keep import restrictions in place long enough for domestic producers to invest and turn a profit, which often required several years, he said.

“The process (of substitution) is a long one,” he said.

“I’m not for counter-sanctions or against them. I’m for consistency. If they have been introduced then they will need to remain for a certain time.”

Arzhanov’s concerns illustrate the likelihood that import restrictions may ultimately prove hard to remove because of the domestic lobbies that benefit from them.

This was of concern to Pascal Lamy, a former head of the World Trade Organization.

He told the Summit that import-substitution policies rarely bring long-term economic benefits, because they contradict the principles of free trade.

“It’s a tiny and shrinking part of the market of ideas,” he said of import-substitution theories. “But blaming the foreigner has always been a fundamental trick of domestic politics: it has worked for centuries.”

Import-substitution policies may well work in terms of boosting domestic production, he said. But they do so at the expense of consumers, who end up paying more, and erode overall economic performance by distorting the allocation of resources.

“In most of the cases I have known import substitution policies have failed,” said Lamy. “They degrade the efficiency of their economy.”

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Reporting by Gabriela Baczynska, Jason Bush, Lidia Kelly, Darya Korsunskaya, Christian Lowe, Anastasia Lurchikova and Alexander Winning, writing by Jason Bush; editing by Susan Fenton