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A Business Lesson: How Russian Producers Saved the Russian Market

Prime Minister Dmitry Medvedev (L), Russian Deputy Prime Minister Arkady Dvorkovich (2-R) and Russian Agriculture Minister Alexander Tkachyov (R)
Prime Minister Dmitry Medvedev (L), Russian Deputy Prime Minister Arkady Dvorkovich (2-R) and Russian Agriculture Minister Alexander Tkachyov (R)

It’s been two years since the economic sanctions forbidding a number of Russian companies to export their goods to Europe were imposed by the EU. Russia, for its part, has demanded a ban on import of some goods and products from the EU and has launched a so-called import substitution program. As a result, the Russian food market has suffered serious losses, although both European and Russian producers have found ways to save their businesses amid the political tension.

Myths and facts about Russia’s import substitution

With the import substitution program the Russian government have tried to repeat the 1990 economic miracle, when Russian producers retrieved the country’s market just in 6 months after the Russian currency had devaluated.

But by the summer 2014 (the time when the sanctions were forced) the Russian food market looked completely different from the one in the 1990s. Within 15 years the Russian producers have created a new market system which allowed them to export the most profitable goods abroad (e.g. wheat and oilseeds) while buckwheat and crops alike were delivered to the Russian market. Before the sanctions were imposed the Russian food market was highly developed and competitive with blue chips and major corporations playing the key role while the businesses were seeking for innovations and were buying foreign equipment in order to increase competitiveness of their goods and win a place on a shelve in the market.  In this situation the government call for import substitution looked quite bizarre.

Nevertheless, the Russian government invested billions of rubles in Russian businesses to help them start import substitution hoping that by the end of 2015 the self-sufficiency rate would reach 95%. The government investments were not in vain: some Russian companies started producing high-quality cheese, butter and oil while some corporations started importing from the new destinations providing the market with potatoes from Israel, meat from Argentina and fruits from Egypt and Latin America.

Belarus: Jack of both sides

Meanwhile, some Russian companies used Belarus as a perfect mediator which served the both sides. Minsk started importing as 8-10 times as more from the EU selling European products as Belorussian and providing the Russian market with the forbidden foods. As a result, the Russian market was flooded with “Belorussian” seafood, apples and oranges. In 2015, the EU annual customs reports showed that Belarus imported 822K tons of apples. However, according to the Minsk’s official version, Belarus bought only 233K tons of apples. The mission of Belarus to please both the EU market and Russian customers was completed.

To let the picture look complete for a Russian customer the only issue to be solved was cheese. With the lack of technology and special ferments, some Russian producers found the easiest way and started buying palm oil which they used  as a substitute of high-quality milk and ferments for cheese production. No surprising it may seem, the Russian market was simply flooded with adulterations for almost all sorts of cheese. Needless to say soon after such fake production these companies watched distributors and end customers turning away from them. 

Who wins from import substitution?

With the current situation in the Russian market the winners are again big corporations who can use their lobbying opportunities; and third companies who benefit from selling imported goods as much as higher. Unfortunately, small food producers (which are more than 1 million all over Russia) sometimes fail to get at least the loan from banks to support their business.

With the economic embargo the Russian market has definitely suffered some losses; however the deficit risk remains very low. Russia successfully maintains the market economy and looks for new opportunities to fulfill the lack of the banned products.