Made in Eurasia

Russia faced a massive drop in imports due to the start of the war and the sanctions. The decrease started as early as in February. In March 2022, imports dropped by about 40% compared to March 2021, and bottomed out in April, shrinking almost by half.

This drop can be compared to the crisis that happened in late 2014. It should be noted, however, that the 2014 imports collapse happened not so much because of the sanctions that followed the Crimea annexation, but mainly because of the fall in oil prices and the devaluation of the Russian ruble. The exchange rate of the US dollar doubled, roughly from 30 to 60 rubles back then. It virtually took six years for imports to reach the pre-annexation figures again.

First and foremost, this time the crisis was caused by sanctions and went hand in hand with the disruption of the existing logistical ties. That is why the predictions were dire during the first few months of the war. Experts spoke about the threat of goods shortage and suspensions of entire industries due to the lack of components. And they also recalled thrift shops and shuttle traders.

However, it was as early as in May when the imports started going up, and the supplies figures from the top-45 countries Russia had traded with turned out to be only 10.7% lower in August 2022 compared to August 2021, approximately on the same level as in 2019-2020.

The imports volume virtually recovered by October, Promsvyazbank’s analysts believe. According to their calculations based on VAT collections, the imports of goods and services were only 5% less in monetary terms in October than a year ago.

Russia’s new best friends

Exactly half of all goods imported to Russia in 2021 were supplied by the countries that are now declared “unfriendly,” namely the EU countries, the US, South Korea, and Japan. Some part of the goods was imported from Ukraine. The exports from these countries to Russia decreased more than by half after the war had started.

Russia used to be a logistics hub before the war, goods coming into the country and then being transported to the rest of the Union, but now it is the other way around.

Belarus has become actively involved in the grey import of vehicles and car parts from Europe to Russia. The imports of these commodities from the EU have almost doubled since the start of the war, and over 50% more tobacco and household chemicals are now being imported into Belarus. Unexpectedly, the country has even started to buy yachts and motorboats, Novaya-Europe has found out. The imports of those from the EU has rocketed almost fourfold and surpassed €2 million.

“The growth of imports from the EEU is partly both about parallel and usual imports,” says economist Tatyana Mikhailova, a visiting senior lecturer at Pennsylvania State University. She also adds that it is currently quite challenging to objectively assess the total volume of parallel imports.

At the same time, it seems like a significant proportion of Russia’s trading partners have taken a wait-and-see approach. India, Indonesia, and Brazil reduced imports to Russia after the war had started, but not as drastically as the EU countries. Perhaps this happened due to difficulties with logistics and payments, and the level of imports from these countries will recover over time.

So, sanctions do not work?

It may seem, looking at the stats, that Russia has managed to cope with the sanctions and buys everything it needs using parallel imports. However, this is not quite true.

Russia’s enterprises and retailers are forced to change suppliers because of the war, which means rejecting the best offers there are in favour of less suitable ones, meaning more expenses and lower quality.

“Replacing old contractors with new ones is always expensive and inconvenient. Therefore, the recovery of imports in monetary terms does not mean a recovery in real terms. And, of course, it is completely impossible to replace some technologically complex supplies,” Tatyana Mikhailova explains.

Parallel imports made it possible to saturate the consumer market, Russia’s Deputy PM Andrey Belousov said. This is the way Russia imports household appliances, electronics, cars, car parts, dentistry and aesthetic medicine equipment.

The situation is worse when it comes to importing raw materials for the industry, such as chemicals, components, and textiles.

Russia is in short supply of parts for cars, planes, and trains, raw materials for the production of paper and packaging, as well as materials and equipment for the production of textiles, including yarn and dyes, Reuters wrote. The Ministry of Industry and Trade is trying to set up supplies of deficit goods from India.

“This is a terrible trend. The opportunities to develop and expand production have been undermined. The flooding of commodity markets with cheap foreign consumer goods is an additional negative factor for Russian manufacturers,” Telegram channel MMI wrote in November.

The US and Europe were the main suppliers of equipment for Russia prior to the war. And there is no replacement for them as of now.

• •The supplies of industrial equipment from the EU dropped by $10.5 billion between January and August. China and Turkey have only managed to replace 800 million.
• •The supplies of cars and tractors from Europe collapsed by $4.3 billion, while China increased exports by $400 million only.
• •China and Turkey have only managed to quickly replace Europe in supplying a part of chemical products, railway transport, and tobacco.

It is the lack of access to modern technologies, such as equipment and spare parts for already purchased machinery that hits Russia’s economy the hardest. The sanctions have already led to its contraction. Russia’s Central Bank is expecting that the country’s GDP might decrease by 6,4-7,8% in Q4 2022 compared to 2021. The downfall will continue next year.

“The biggest problem is equipment replacement. This is why Russia’s technological degradation an absolutely certain prediction that cannot be disputed,” says Natalya Zubarevich, an economist.