Import substitution in Russia - General Introduction


Statement of the problem

The Russian economy is currently suffering from a severe structural crisis. Added value is insufficiently created in the country, particularly in the field of industrial production. This phenomenon started in 2012 when oil prices began to decline. It has become even more obvious with the subsequent fall of the Russian rouble. The Russian Government has identified this problem and is trying to take counter-measures to increase domestic production. Thus, the national industrial policy is aimed at developing the manufacturing of Russian products that are to replace imports (import substitution) and as a consequence – an increase in domestic production (production localisation).

The economic policy in any country is generally designed to support the creation of added value. In the past, Russia pursued this goal through a variety of approaches but had mixed success.

The most successful example of the localisation policy is the promotion of domestic production in the automotive industry. Since the beginning of the 2000’s Russia has offered reduced customs tariffs for automotive products imported into Russia provided that the importer transfers some of its production to Russia. Support was given through entry into investment contracts providing for certain obligations. Typically, the manufacturer assumed an obligation to annually increase the share of local added value and produce a certain amount of products while the Russian Government, in its turn, granted a zero duty on imported components intended for production. Such incentives apply today to almost all areas of the automotive industry (cars, trucks, car components). Since Russia’s accession to the WTO, this incentive system has run its course as customs barriers for all importers should gradually be eliminated. In addition, the collapse of the Russian rouble has distabilised the entire incentive system. Currently, a new balance is being sought between the interests of foreign producers and those of the Russian state.

The Russian Government has chosen a different approach in the agricultural sector. In response to economic sanctions, mainly from the US and EU, Russia has imposed an embargo and closed almost the entire market of food products imported from these and other countries. At the same time, extensive measures have been taken in the area of Russian agriculture. Support is provided mainly through financial assistance. The agriculture and food industries are now some of the few sectors that are growing at a time of economic crisis in the Russian economy.

The new approach of import substitution, which is potentially harmful for foreign companies, is designed directly against foreign market players. This approach is based on the Industrial Policy Law (488-FZ) which entered into force on 1 July 2015. This law abolishes the previously existing principles of public procurement: while in the past foreign and domestic goods could compete on equal terms, the advantage is now given to domestic goods. This entails far-reaching implications for foreign market players who have no production sites in Russia.

“Made in Russia” solution

Given the share of the public sector in the Russian economy, the on-going changes represent a significant challenge for companies focused on the Russian market. The only way that would allow to freely participate in a public procurement tender as well as to prevent discrimination in a general tender, is to classify one’s product as a “domestic” one.

It is generally decided whether a product may be regarded as a Russian one on the basis of the customs laws and regulations of the Eurasian Economic Union. A product is assigned a certificate of Russian origin if it is fully manufactured or sufficiently processed in Russia. The sufficiency of processing – an abstract wording – is achieved when one of the first four digits of the customs classification code of an imported product is changed after such a product is processed into a final product (formal criterion), or if it has undergone industrial or technical processing leading to a certain percentage of added value in the finished product.

Finally, the sufficiency of processing in Russia required to obtain a certificate of Russian origin is always determined on a case by case basis depending on a particular product.

Outlook; Develoment prospects

In its effort to promote domestic production, Russia has adopted a protective approach aimed at limiting the import of competitive foreign-made goods. The Industrial Policy Law sets the direction: the previously existing principle of equal treatment of domestic and foreign goods has now been replaced with a general concept of domestic goods preference. The market is expected to see further development of industry-specific regulations based on the already established principles, the application scope of such regulations is to extend. Preference schemes, from subsidies to tax and customs relieves, will be further elaborated.

The market share of foreign-made goods is set to shrink, both in the public and private sectors, even though the latter is not covered by the import substitution regulations.

This article is opening a series based on the publication "Import Substitution in Russia" which we compiled for the Swiss embassy in Moscow. To learn more, register for the webinar on 14. September with Dr. Thomas Heidemann.