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Summary

• Russia’s economic policy is being progressively subordinated to security concerns, with the ostensible aim of insulating the country from internal and external threats. The geopolitical conflict with the West that intensified after the annexation of Crimea in 2014 has resulted in the authorities accelerating their efforts to enhance Russia’s economic sovereignty.
• A high-profile import-substitution campaign is one of the most important components of this drive. The legislation on import substitution began before the West’s sectoral sanctions were announced. The arrangements are institutionally elaborate and indicate a strategy rather than a short-term expedient.
• One way for Russia to become more sovereign would be to diversify its economy away from oil and gas exports. It is one of the world’s largest manufacturers, with a wide range of manufacturing capabilities. However, much of its manufacturing output is not competitive on global markets and is consumed domestically. Activity levels are therefore strongly correlated with export revenues from hydrocarbons. The rest of the economy nosedives when commodity prices drop. Real diversification will occur only if new industries are export-oriented.
• The relatively modest volume of financial resources allocated to achieving import substitution is dwarfed by the magnitude of the ambition. Russia is in the grip of a wider economic downturn that is proving intractable. How the issue of scarcer resources is managed will be of crucial importance. If resources are allocated to already protected and globally uncompetitive industries at the expense of policies designed to support entrepreneurship and strengthen property rights, the prospects for Russia’s long-term prosperity will be bleak.
• The nation’s commitment to import substitution will be tested if the price of oil rises. The strength of the rouble is bound up with the price of oil. The currency’s depreciation since 2014 provides an opportunity for Russian producers to benefit from price competitiveness. However, given the Central Bank’s apparent commitment to a ‘free float’ exchange rate policy, it is unclear whether this price competitiveness will survive any future rise in oil prices. The possible lifting of sectoral sanctions might also weaken the Kremlin’s resolve to pursue import substitution.
• The authorities desire a change in the nature of Russia’s integration with the global economy, in order to boost the domestic economy and national security. In this respect, it is perhaps more accurate to describe the current trajectory not as ‘de-globalization’ but as ‘conditional re-globalization’. The Russian authorities appear intent on changing trade and investment relations where it is desirable for economic and/or security reasons, and where it is feasible given prevailing physical and financial constraints.