Russia's Imports Substitution Policy: What Are the Drawbacks?

Other Food Products September 23, 2016
Author: Kirill Rodionov
Oil&Gas Analyst

Photo: © Stasique / Bigstockphoto

"Counter-sanctions" have resulted in higher prices and poorer quality consumer products.

Russia introduced a products ban against the USA, the EU and several other developed countries exactly two years ago this August. In the immediate aftermath of the ban coming into effect, experts warned, amongst other things, that it would lead to higher prices and a reduced availability of consumer goods.

This is exactly what happened. According to data published in a report last summer by the Analytical Centre for the Government of the Russian Federation, the share of bread, cereal and pasta products increased (from 22.2% to 23.1%), while the share of fruit and vegetables declined (from 20.6% to 16.8%), within the cost structure of the minimum food products range during 2015. At the end of last year, the share of these food items in the consumer goods basket stood at 38% - much higher than the typical levels for developed countries (15-20%) and for some developing countries, for example, Brazil (17.8%).

The quality of dairy products has become an acute issue under the terms of the ban. According to data from the Federal Service for Veterinary and Phytosanitary Surveillance, in October 2015, 50-78% of cheese in various regions across Russia was a counterfeit product - it was actually vegetable fat. The double-digit price increases were another problem: in 2015, the price of butter surged by 11%, milk powder by 20%, beef by 16%, frozen fish by 24% and apples by 14%. It should be mentioned here that prices were also increasing on those products that did not fall under the embargo: bread (by 13.2%), pasta products (by 19.5%), sunflower oil (by 37.2%) and granulated sugar (by 12.9%). Egg prices soared the most: they reached their lowest level in August (49 rubles for 10); by December, the cost had surged to 65 rubles, exceeding even February's record (64 rubles for 10).

A number of quality foreign goods automatically became unavailable to Russians as a result of the food ban. The imports slump across a whole range of product categories is also associated with this: in 2015, imports of fresh and chilled fish contracted by 66%, poultry by 44%, butter by 38%, cheese and cottage cheese by 37% and frozen beef by 37%. Imports of these products would have invariably contracted following the devaluation of the ruble; this curtailment would have been less significant, however, if the food ban had not been introduced.

Given this scenario, the impact of the price hike would not have been as harsh. Neighbouring Belarus is one example of this: in 2015, the rate of the national currency against the dollar plummeted by 56%. In December 2015, however, the price of beef in Belarus was 19% lower than in Russia; the price of pork - 15%, poultry - 11%, apples - 38%, and milk 24%. Nothing other than the negative effect of the food ban, which restricted competition on Russia's food products market, could account for this discrepancy.

Overall, the concerns of those experts who believed that the embargo would result in a price hike and poorer quality consumer products, were justified. IndexBox experts maintain that Russian experience has indicated once again that the consequence of foreign trade restrictions may be not simply the substitution of imports, but also a depleted status for the consumer.