Russia's import-substitution drive will take years - and may be misguid... http://www.reuters.com/article/us-russia-economy-import-substitution...

Thu Oct 1, 2015 10:44am EDT

MOSCOW | BY JASON BUSH

Russia's drive to promote domestic products at the expense of imports is creating new
opportunities for business, but it will take years for the benefits to show, participants at the
Reuters Russia Investment Summit said.

They differed sharply on whether the strategy as a whole was beneficial or an example of
misguided protectionist thinking.

So-called "import substitution" has become a central plank in Russia's response to an

economic crisis resulting from the plunge in international oil prices and Western sanctions
imposed because of the Ukraine crisis.

The trend is driven in part by the sharp decline in the rouble, which has the effect of making
imports more expensive, helping the competitiveness of goods made locally.

It is also being actively promoted by the government. In its most drastic response to
Western sanctions, Russia has introduced a ban on most food imports from the West.

Moscow is also promoting import substitution in numerous other areas, such as

pharmaceuticals and electronics, favoring local producers through procurements and
subsidies.

President Vladimir Putin said last month that there were 2,500 import-substitution projects
already and the state planned to spend 2.5 trillion roubles ($38 billion) to support them.

"For us import substitution isn't a fetish. It concerns the most important technologies," Putin
said. "One way or another we had to do it ... but now we will have to do it more quickly."

Deputy Prime Minister Arkady Dvorkovich told the Reuters Russia Investment Summit this
week that it was only a matter of time before the panoply of projects brought tangible
benefits, although it was too soon to expect large-scale results.

"Import substitution is absolutely real, but it is all investment projects. They have various
stages," he said. "We will see a result somewhere in a year, elsewhere in two years,
elsewhere in three."

Dvorkovich said that while international sanctions were always negative, there was a
positive side to them.

"Sanctions force each country to think about internal sources (of development) and operate
more energetically for using its own resources," he said.

DESIRED EFFECT

Russia's food ban is certainly having the desired effect of encouraging more investment in
products that Russia typically imported.

Electricity and farming tycoon Dmitry Arzhanov told the Summit he plans to invest heavily
in apples and potatoes to fill gaps caused by the food embargo.

"From the point of view of agriculture we see only positive factors," he said.

Before the food embargo, Russia largely imported apples from Poland - where apples have
now been dubbed "putinki" (little Putins) in an ironic swipe at the Russian leader.

But Arzhanov said cheap Polish apples would probably flood back to Russia if the embargo
were lifted soon.

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Russia's import-substitution drive will take years - and may be misguid... http://www.reuters.com/article/us-russia-economy-import-substitution...

In general Russia needed to keep import restrictions in place long enough for domestic
producers to invest and turn a profit, which often required several years, he said.
WAR COLLEGE
"The process (of substitution) is a long one," he said.

"I'm not for counter-sanctions or against them. I'm for consistency. If they have been
introduced then they will need to remain for a certain time."

Arzhanov's concerns illustrate the likelihood that import restrictions may ultimately prove
hard to remove because of the domestic lobbies that benefit from them.

This was of concern to Pascal Lamy, a former head of the World Trade Organization. Playing with government propaganda
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Import-substitution policies may well work in terms of boosting domestic production, he

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"In most of the cases I have known import substitution policies have failed," said Lamy. Islamic State alongside Kurds

"They degrade the efficiency of their economy."

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($1 = 65.6115 roubles)

(Reporting by Gabriela Baczynska, Jason Bush, Lidia Kelly, Darya Korsunskaya, Christian
Lowe, Anastasia Lurchikova and Alexander Winning, writing by Jason Bush; editing by
Susan Fenton)

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