Diversification of Russian Economy under Sanctions

DOI: 10.20542/0131-2227-2016-60-6-52-60

V. Zagashvili, Primakov Institute of World Economy and International Relations, Russian Academy of Sciences (IMEMO), 23, Profsoyuznaya Str., Moscow, 117997, Russian Federation (zagashvili@imemo.ru

Acknowledgments. The article has been supported by a grant of the Russian Science Foundation (project 14-28-00097 “The optimization of Russian foreign investment ties in the context of deteriorating relations with the EU”).

Abstract. The article estimates the prospects of diversifying the structure of the Russian economy under current Western sanctions. When they were imposed, diversification, the need for which has long been recognized, took the form of import substitution. Sanctions limited the potential of import substitution through several channels. The essential equipment and technology are under export ban. The access of Russian banks and corporations to international capital markets is restricted and this deprives them from financing investments into import-substituting production. There is a ban on transactions with individuals and legal entities included into the sanctions’ lists. Many Russian industries use outdated equipment and badly need modern foreign technologies. The cost of imported equipment, technology, components, parts and materials has grown along with the depreciation of the Russian currency. The Russian economy needs foreign investment, especially in the form FDI which is accompanied by the transfer of technology and expertise. The reduction of the FDI inflows slows down the development of the national economy and worsens its technological backwardness. The hope for receiving financing and technology from China are justified only to a small part. In fact, Chinese banks are extremely cautious while considering credits to the Russian borrowers. They estimate the implied risks as rather high, require costly guarantees and often tie the credit with the purchase of Chinese goods. Chinese investments are mostly limited to general statements and protocols of intent. Basically, it should be remembered that Asian countries are primarily users, rather than creators of advanced technology. The scope of high technologies that Chinese and South Korean companies can freely dispose is very limited. Usually, the consent of Western owners for their further transfer is mandatory. The progress in import substitution can be traced almost exclusively in the area of food production in Russia. However, the quality of many foodstuffs has worsened while prices have gone up. So far, it is only in theory that falling oil prices can help the Russian economy to get rid from the notorious Dutch disease. In effect, the import substitution process is slowing down. Long-term objectives of development of the Russian economy do not correspond with wide-scale import substitution. Russia is interested in improving its international industrial specialization. Under the current conditions this aim can be achieved only through inclusion and integration into the global value chains, not through frontal import substitution. Expansion of ties with European and American companies in the field of science and technology remains a necessary condition for deep modernization of the Russian industry. Thus, success in the area of diversification depends on the normalization of political relations with the leading countries of the West. 

Keywords: Russian economy, diversification of production, import substitution, economic sanctions, technology, investment, transnationalization, global value chains 

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For citation:
Zagashvili V. Diversification of Russian Economy under Sanctions. World Eonomy and International Relations, 2016, vol. 60, no. 6, pp. 52-60. https://doi.org/10.20542/0131-2227-2016-60-6-52-60

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