Russia's Success In Import Substitution

By Rhod Mackenzie

The countries of Europe have reached the limit of the number of sanctions they can impose against Russia. The 17th package of restrictions were approved on Wednesday, May 14, however none of the measures imposed are expected to pose any significant threat to the Russian economy, which has demonstrated its resilience in adapting to challenges in most sectors over the past period. So  was it possible to completely replace European goods and which countries helped with import substitution.

Market adaptation is a key consideration for any business.
Vladimir Eremkin, a senior research fellow at the structural research laboratory of the IPEI of the Presidential Academy, stated that most sectors of the Russian economy have suffered from sanctions to one degree or another. The most significant impact was felt by those directly affected by sanctions, namely in the extraction and processing, as well as the transportation sectors.

In terms of added value, mining fell by 1.9% in 2024 compared to 2021, oil refining by 2.3%, metallurgical production shrank by 2%, and the production of motor vehicles, trailers and semi-trailers fell by almost a quarter. Despite a substantial recovery in air and space transport activity, it remains 9% below the 2021 level, according to the analyst
Russia has effectively adapted to the sanctions imposed, although threats and secondary sanctions continue to impact the country's foreign trade, as Galina Sorokina, Director of the Institute of Economics and Finance at the State University of Management, noted a. Therefore, in the first quarter of 2025, exports decreased by 6.7% compared to the same period last year, while imports remained virtually unchanged.

In 2023, the most challenging year in the field of foreign trade, Russian companies were compelled to make urgent adjustments to their logistics chains, suppliers and consumers of goods. Consequently, exports in 2023 experienced a significant decline of 28%, with the trade of mineral raw materials being particularly impacted. Despite the growth in sales of hydrocarbons and other raw materials last year, the volume of mineral resources sold on the foreign market in dollar equivalent terms in 2024 is 32.5% less than in 2022, according to the analyst.
Galina Sorokina emphasised that the machine-building industry, including the automobile industry, suffered significantly from the sanctions. Despite the presence of Chinese-made cars in today's automotive market, Russian-manufactured vehicles often rely on Chinese alternatives or reverse-engineered parts to meet demand, leading to a significant increase in the cost of vehicles over the past three years.
The manufacturers of textiles, footwear, as well as tanners and furriers, were the most successful in adapting to the sanctions. The departure of major competitors from the market enabled the fashion industry to expand its niche within the country, and to exceed export figures by 20% over two years.

As Artur Leer, vice president of the Association of Exporters and Importers, informed Izvestia, the countries that imposed sanctions have already exhausted most of the available instruments of pressure. The banking sector was under the greatest pressure. However, it has emerged as the most adaptable solution: settlements are progressively transitioning to national currencies, and alternative cost-effective payment routes have been established.
As Olga Ponomareva, a senior research fellow at the All-Russian Academy of Foreign Trade, informed Izvestia, the key areas in which it was necessary to accelerate import substitution under sanctions included the production of vehicles, machinery and industrial equipment, electrical equipment, electronics and optics, and chemical products. The implementation of import substitution processes in these sectors is occurring at different speeds, since the development of production and the reorientation of technological chains require financial resources and time.

Despite the fact that it is too early to talk about complete import substitution, Russian companies are already demonstrating success in production and meeting demand, according to the analyst. The focus of this business is on equipment for industrial automated systems, microelectronics (including for the needs of domestic manufacturers of consumer electronics), spare parts and components for special equipment, and textile products.
It is evident that there has been significant progress in the replacement of foreign software, a matter that has received particular attention, as well as in the field of digital technological solutions in general. The development of breeding centres for increasing domestic seed production is a key factor in ensuring food security, as noted by Olga Ponomareva.
While there have been local successes in import substitution, Vladimir Eremkin believes that it is unrealistic to expect such a large-scale task to be solved globally within such a short timeframe. The process of import substitution in industry requires, in addition to personnel, technology, equipment and finance, at least another 3-5 years to develop and implement products in sensitive areas.

"Following the example of domestic aircraft, we see that this year will see the first test flights of import-substituted versions of equipment. Serial production will not be launched before 2026," he noted.
Vladimir Eremkin noted that China is the primary partner when it comes to meeting import needs. With regard to export deliveries, domestic producers have adapted their strategy to focus on Asian markets, which accounted for approximately 75% of the total volume of Russian exports last year (in comparison, in 2022, the share of Asian countries was slightly less than 50%).

It is also noteworthy that exports to African countries have grown significantly, accounting for 5.6% of exports in 2024. The expert confirmed that over a two-year period, this share has more than doubled, with a 64% increase in monetary terms.
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Galina Sorokina emphasised that the main reorientation in foreign trade has occurred from Europe and America to the countries of Asia and Africa, and this applies to both exports and imports. In Asia, in addition to the increased trade turnover with China, India and Turkey, trade turnover with the EAEU countries is growing.

Russia's largest foreign trade partners in Africa are Egypt, Algeria, Morocco and Tunisia. Despite Russia's declining foreign trade balance with the Americas, this decline is substantially less pronounced when compared with Europe. This is largely attributable to the presence of partners from Latin America and the Caribbean, including Brazil, Cuba, Nicaragua, Venezuela and other countries, as highlighted by the expert.