BOFIT Viikkokatsaus / BOFIT Weekly 2019/26

In February, Russia’s ministry of industry and trade released a draft decree which would limit public procurement. The decree would require government agencies to purchase computer, communications equipment and household appliances from domestic producers if suppliers selling the requisite goods are available. Domestic producer is defined as a firm that is at least 50 % Russian-owned.

The legislation is part of Russia’s import substitution policy. Russian industry is currently heavily dependent on imported machinery. In particular, the market shares of Russian companies in quality product categories are quite small. Officially, restrictions on imports are intended to reduce dependence on foreign countries and diversify the domestic production structure. Usually these measures target the location of end-product assembly or the ownership of the firm doing it rather than the production of added value along the entire production chain. In practice, the import substitution policy can be influenced by special interest groups such as the stakeholders of a large factory in a particular city. To the extent that the measures protect special interests and preserve existing business structures, they hardly promote the goals of reducing dependency and diversifying Russian production.

Russia already has several measures favouring domestic manufacturers. In 2014, Russia restricted imports of certain foods from the West in response to Western sanctions on Russia for annexation of Crimea and war in eastern Ukraine. In addition, favouring of domestically produced goods and services has been seen in the pharmaceutical, transport vehicle, telecom and software industries. The effectiveness of these measures is limited as Russia cannot offer serious domestic alternatives.

Russia has traditionally had high barriers to imports. Since joining the WTO in 2012, Russia has incrementally lowered its import duties, but barriers to imports are still quite high. The UN reports that Russia’s average trade-weighted most-favoured-nation customs duty in 2017 was about 5 % of the value of the goods. Thus, the average duty was not particularly high, but duties varied depending on the trade partner and the product category. In addition, Russia’s regulatory environment presents a major obstacle to trade.