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

Other Food Products September 23, 2016

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 X% to X%), while the share of fruit and vegetables declined (from X% to X%), 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 X% - much higher than the typical levels for developed countries (X%) and for some developing countries, for example, Brazil (X%).

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, X% 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 X%, milk powder by X%, beef by X%, frozen fish by X% and apples by X%. It should be mentioned here that prices were also increasing on those products that did not fall under the embargo: bread (by X%), pasta products (by X%), sunflower oil (by X%) and granulated sugar (by X%). Egg prices soared the most: they reached their lowest level in August (X rubles for X); by December, the cost had surged to X rubles, exceeding even February's record (X rubles for X).

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 X%, poultry by X%, butter by X%, cheese and cottage cheese by X% and frozen beef by X%. 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 X%. In December 2015, however, the price of beef in Belarus was X% lower than in Russia; the price of pork - X%, poultry - X%, apples - X%, and milk X%. 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.