Russian import substitution will struggle

Subject

Russia import substitution.

Significance

The Kremlin proclaimed last year that replacing imports with domestic production was to be a key policy objective in the face of Western sanctions. However, the newly-created Russian government Commission on Import-Substitution held its first meeting only on August 11. Just how the commission will promote import-substitution remains unclear but the risk of a significant increase in state micro-management of industry is elevated.

Impacts

• Import-substitution provides, in principle, a supply-side boost to the Russian economy.
• It reduces competition for established Russian firms when potential new Russian businesses face barriers to market entry.
• Incentives for efficiency will be reduced.
• Implementation of import-substitution policies requires increased state monitoring and micro-intervention.
• In a hyper-patriotically charged political atmosphere, ideas for a radical increase in state control of the economy may gain more traction.