Import Substitution Festival: Forecasts and Prospects

Import-substituting economic growth becomes the basis of the economic policy of Belarus and Russia and acquires strategic importance. The countries closed in the ruble circuit – they announced the transition to the Russian ruble when distributing import duties at the external border of the EAEU.

After the anniversary CSTO summit, which was held on May 16^th in Moscow, Lukashenka held a brief conversation with Putin, during which, reportedly, three sets of issues were raised: “union” import substitution; transhipment of goods through the ports of Russia and construction of the Belarusian port near St. Petersburg; and the topic of the military-industrial complex.

On the same day, Putin and Lukashenka agreed to hold full-fledged talks, which are scheduled for Monday, May 23^rd. Lukashenka went to Sochi in advance on May 20^th. This face-to-face meeting will be the fifth in a row since the beginning of this year: in this regard, Lukashenka and Putin are going to a record.

In the Belarusian elite, it is becoming a good tradition to speak warmly about Western restrictions. Sanctions, according to  Industry Minister Petr Parkhomchik, “are not so much a minus as a plus – the country has excellent opportunities for import substitution.” The West, without knowing it, “pushed us to the most intensive development – Russia and Belarus. ” And that thought belongs to Lukashenka. He shared it on May 19^th during a meeting with the governor of the Nizhny Novgorod region of Russia Gleb Nikitin. Among other things, the Belarusian head said that Belarus bought Iskander missile systems and S-400 air defence systems from Russia, and praised this equipment.

The Belarusian government has designed as many as 30 “import-substituting” applications that have a priority status: in mechanical engineering, woodworking, petrochemicals, and instrumentation. Deputy Minister of Economy Yuri Chebotar called the price of the issue – about USD 2.5 billion of investment.  He also gave an optimistic forecast: Belarus this year will release import-substituting products for USD 25 billion. Where did this figure come from? Probably, this is how the government estimated in monetary terms the volume of market niches of the “union state”, abandoned by Western suppliers of goods and services. If you mentally master these niches – without making adjustments for the inevitable decline in output and effective demand – then such forecasts can be made easily.

The idea of import substitution was once put forward by Jane Jacobs. Many researchers noted that, in general, import substitution can contribute to economic growth, but in the long term, there is a decrease in its pace – primarily due to the loss of the country’s advantage from specialisation and international trade. Protectionist policies and the growth of the state sector reduce the incentives for entrepreneurial risk, which leads to a decrease in efficiency and, as a result, to crisis phenomena in the economy. With regard to Belarus and Russia, the most legitimate question is: what prevented the development of import substitution in more favourable times?

For example, since 2013, the share of imported components in Russian-made cars has not decreased but has grown significantly. The paralysis that has now engulfed all Russian car factories is a direct consequence of the failure of the import substitution process. The culprits were found instantly. On May 16^th, the deputy head of the Ministry of Industry and Trade of the Russian Federation, Alexander Morozov, who oversaw the automotive industry for the last 7 years, was dismissed. His place was taken by Albert Karimov, previously – Deputy Prime Minister of Tatarstan.

Independent experts negatively assess the campaign launched in Belarus and Russia to replace imports and its prospects. Russian senator and entrepreneur Andrei Klishas said about the complete failure of  the import substitution program: “there is nothing but bravura reports of industry departments.”

The other day, Belarus and Russia closed themselves in the ruble circuit. They signed an interim agreement on the transition to the Russian ruble in the distribution of import duties on the external border of the EAEU. Armenia, Kazakhstan and Kyrgyzstan will use the old scheme of currency settlements among themselves, and with the “union state” – on the basis of the Russian ruble.

Import duties are levied along the external perimeter of the EAEU in the country through which the goods are imported. Then the duties are distributed between the countries in accordance with the agreed quotas. Since 2020, the share of Russia is 85.06%, Kazakhstan – 6.96%, Belarus – 4.86%, Kyrgyzstan – 1.9%,, Armenia – 1.22%.