Import substitution

Challenges or opportunities?

by GNC.Group

Import substitution

Challenges or opportunities?

by GNC.Group

by GNC.Group

2014 was marked by the mutual sanctions between Russia and a number of Western countries provoked by annexation of Crimea. A wide range of fruit, dairy, meat and fish products were banned for import to Russia. Import substitution program opened a whole new market for equipment and machinery fostering local production.

Following the sanctions, the Government Commission on Import Substitution was created to develop economic strategy which would allow to locally manufacture products prohibited for export and import to Russia. Since than Russia has been taking targeted steps to reduce imports of goods from countries with which Russia has sensitive political relations and substitute them with domestic goods. 800 selected products in 19 industries are expected to be manufactured locally by 2020. Apart from food industry, the most affected by import substitution are the automotive sector, the defense industry, engineering, electronics and pharmaceuticals. The total cost of the import substitution program is currently estimated at around EUR 35 billion.

The import replacement program provides substantial support to local manufacturers. Legislation of public (State) procurement was altered to privilege locally manufactured products. The procedure depends on industry. However, in most cases domestic products have 15% price advantage in tenders. To put it simple, in order to compete with domestic products, foreign products have to be at least 15% cheaper.

However, the goal of the import substitution policy is not a ban of foreign companies and not even a total replacement of import by local production, but a scale down of dependence on import.

Western technologies are required for the modernization of the Russian industry. While denying export chances to some manufacturers, Russian import replacement program creates massive opportunities for others. The growth of local production causes the rising demand for the machinery to equip new and expanding production lines, as well as for components of high quality at reasonable price.

Import substitution also fosters production localization, as local manufacturers can very well be foreign companies that have localized production in Russia.

Import substitution is an attempt to diversify Russian economy which is heavily dependent on raw materials and energy resources. It has been one of the topics of discussion in Russia for a long time, sanctions have only accelerated the process. There are strong chances the current order of things will last and become the new reality.

While at first sight, it might seem to be the bad timing for venturing in the Russian market, a thorough market study will help you weigh all risks and opportunities and take the right decision. After all, numerous companies have gone this path before you and achieved success at the market of the largest country in the world.

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