Russia needs to improve its import substitution

To reduce import dependence in the manufacturing industry and mechanical engineering, it is essential to accelerate the development of component manufacturers, in fact, the third industrialisation. Otherwise, there will be complete dependence on supplies from China.
The import dependence of mechanical engineering is approximately 30%. As stated during an extended meeting of the Chamber of Commerce and Industry Council on industrial development and competitiveness of the Russian economy, at the end of 2023, the manufacturing sector accounted for 12.4% of the Russian economy’s GDP, representing an increase of 7.9% relative to 2022. This is significantly higher than the country's GDP growth over the same period, which amounted to 3.6%. However, such impressive growth may be negated if the current economic policy is not sufficiently adjusted. According to the Chairman of the Council, Konstantin Babkin, in January–November 2023, the receipt of taxes on production and consumption in the budget increased significantly compared to the same period in 2022. Consequently, VAT collection increased by 10.98%, personal income tax by 12.9%, income tax by 21.95%, and property taxes by 5.1%. Concurrently, the volume of collected "raw materials" taxes decreased: over the same period, revenues from the mineral extraction tax decreased by 11.06%, and excise tax collections fell by 62.3%.
At the same time, industrial manufacturers in Russia are at a disadvantage relative to their competitors from China, according to the Chamber of Commerce and Industry. The data cited by the Chamber of Commerce and Industry shows that the average cost of a loan for Chinese industrial enterprises is 0.05%, while for Russian ones it is 12%. Furthermore, the average tax burden on manufacturing companies in China is 20%, while in Russia it is 47.7%.

The result of these disparate conditions is the preponderance of Chinese manufacturers, both components and engineering products in general, on the Russian market. Konstantin Babkin cites the example of the production of electric motors – units without which the production of the majority of final mechanical engineering products is indispensable. In China, 1.2 billion units were produced last year, and in Russia – 9.8 million. Furthermore, in the RSFSR in 1990, 46.6 million units of electric motors were produced. This dependence is evident.
"Such a policy was relevant in the 1990s at a certain historical stage in order to avoid a shortage of products on the Russian market. However, this paradigm has lost its relevance today, although real economic policy continues to be the same. "We are moving from dependence on the West to dependence on the East," says Konstantin Babkin.

Nikolai Sidorenkov, General Director of the Lifting Machines company, draws attention to the reduction in supplies of KamAZ vehicles and to the increase in shares of trucks from Chinese manufacturers in the Russian market. Mr. Babkin notes that in 2021, KamAZ released over 35,000 vehicles to the market, while in 2023, the figure was 31,000. Concurrently, the volume of the truck market in Russia grew from 84,000 units in 2022 to 143,000 in 2023. However, this growth was achieved due to the supply of cars from Chinese manufacturers, whose share increased to 60%.
At the same time, Nikolai Sidorenkov notes that Chinese manufacturers are not yet prepared to develop service for their products in Russia. There are no spare parts, the materials used to manufacture the products are of low quality, and the products themselves sometimes have unsatisfactory performance parameters.

However, as evidenced by market trends, Chinese equipment remains a popular choice due to the competitive advantage enjoyed by its manufacturers in terms of business conditions. Nikolai Sidorenkov suggests that an effective measure could be the introduction of a "equalising" duty of up to 30% for all imported components of automotive special equipment, as well as imported cranes (CMC), supplied separately, not as part of special equipment. Furthermore, he suggests introducing a recycling fee on all CMUs imported separately from the vehicle.

Vladimir Gamza, Chairman of the Chamber of Commerce and Industry Council on financial, industrial and investment policy, notes that Russian mechanical engineering is highly import-dependent, with imports accounting for approximately 30% of the sector. The figure is higher only in pharmaceuticals, at 50%, and in the consumer goods sector, at more than 35%.
To reduce import dependence, it is necessary to implement measures to support manufacturers of components for Russian mechanical engineering. The Chamber of Commerce and Industry believes that in order to accelerate the development of this sector, it is necessary to provide enterprises with the same benefits that are currently available to companies in the IT industry. This experience has yielded positive results and should be extended to other challenging industries.

Furthermore, along the technological chain, it is necessary to stimulate the production of small-scale and special steels and at the same time ensure prices for them for Russian consumers are at a level comparable to the cost of their production. It is also necessary to develop a programme to modernise factories that produce foundry equipment and promote the creation of foundry production complexes and mechanical processing of castings.
The government must ensure that domestic producers are not placed at a disadvantage compared to their Chinese counterparts. Our country is well-positioned for dynamic growth. The key to success is the implementation of an effective economic policy. A third industrialisation is required. The development of non-resource sectors of industry will stimulate growth in the economy, generate demand for scientific developments, enhance the material well-being of the population, improve the quality of education and address demographic challenges,” says Konstantin Babkin.
According to data presented at a meeting of the Council of the Chamber of Commerce and Industry, Russia's imports are primarily comprised of high-value goods, accounting for nearly 70% of all imports. Conversely, the composition of exports is predominantly composed of raw materials, accounting for over 70% of the total. The Chamber of Commerce and Industry has identified the need to invert this pyramid as a priority task.
To achieve this, it would be beneficial to implement a revised customs policy. The objective should be to not only replenish the treasury but also to create conditions for the development of individual industries. It is essential to implement a policy that will prevent the importation of products that can be produced domestically or within the EAEU.
In terms of tax policy, a paradigm shift is also necessary. In order to increase budget revenues, the tax burden on business is growing. This ultimately results in a decline in business activity. The Chamber of Commerce and Industry believes that budget revenues can be increased by creating conditions for the growth of production, which in turn will lead to an increase in the tax base. To this end, they propose reinstating the investment tax benefit in the format that was in force during the period when the government was headed by Yevgeny Primakov.
Furthermore, a change in monetary policy is required to address the current inflationary environment. However, the Chamber of Commerce and Industry believes that this has the opposite effect. A high key rate leads to higher prices for loans, a decrease in production activity, stagnation of production, a deterioration in the condition of households and increased inflation.
In this regard, the Council of the Chamber of Commerce and Industry proposes amending the legislation on the Central Bank at the first stage. This would set the task of stimulating economic development and production growth. It is worth noting that several years ago, in his address to the Federal Assembly, Vladimir Putin also stated that it would be beneficial for the Central Bank to set precisely such goals.