Substituting for imports in Russia
Note kindly translated by Anne-Marie de Grazia
A development strategy by means of substituting for imports has always raised questions. It was a success in Russia from 1998 to 2004, but it was a failure, or less than a success, in the countries of Latin America. It befits therefore to look closely at recent developments in Russia, since 2014.
The impact of substitution to imports
It is presently clear that exports are playing a major role in the growth of Russia. This was to expected with the strong depreciation of the Rouble which has boosted industrial competitiveness.
Contribution des facteurs à la croissance
Source: Central Bank of Russia
In 2015, we notice that the dynamic of a decrease in manufacturing was shaped by three major factors, which were acting in opposite directions. The major factor was of course the negative impact of the global decrease in demand, which translated into a contraction in the retail trade, which entailed a contraction of production in this sector. Nevertheless, several factors have slowed down this decrease and it must be pointed out that industrial production is evolving far more favorably than are the GDP or retail trade.
Main macroeconomic indicators for the first four months of 2016
|4 months||Jan16||Feb16||Mar16||Apr16||May 16*|
|GDP year on year||-1.2%*||-2.6%||-0.6%||-1.8%||-0.5%**||-0.2%|
|Retail trade y/y||-5.2%||-6.0%||-4.3%||-5.8%||-4.8%||-4.2%|
|Real salaries y/y||-0.9%||-3.6%||0.6%||1.5%||-1.7%||-1.0%|
|Nominal salaries y/y||7.1%||5.8%||8.7%||8.9%||5.4%||5.0%|
|Industrial production y/y||-0.1%||-2.7%||1.0%||-0.5%||0.5%||1.0%|
|Source: Ministry of Economic Development, Rosstat, Alfa-Bank .
First of all, external demand has brought some support to production: exports of goods and services have increased 3.1% in 2015 (in relation to 2014) and this dynamic is confirmed in the first quarter of 2016. This result derives directly from the depreciation of the rouble, which has broadly improved the competitiveness of industrial producers. There was also the substitution to imports, that is, a change in the market structure in favor of national producers. This also contributed to a lesser decrease in manufacturing than those suffered by the GDP or by the retail trade. This factor has played an important role: in 2015, manufacturing has diminished only by 3,7%, whereas imports of manufactured products has plummeted by 37%. If we compare this with the figures of the contraction of trade (retail and wholesale), it is clear that there has occurred an increase in production in some sectors. This shows in the employment situation by a very moderate rise in unemployment. The latter seems to take more the shape of a reduction of work time, and seems to concentrate in the sectors of trade and sales services.
Evolution in the labor market
Source: Central Bank of Russia
The increase in nominal salaries is presently more or less equal to inflation. In the industry it is even above it, which signals a high rate of activity. In some activities one can find employment rates superior to those of 2012-2013. This derives from the fact that the sector open to competition is undergoing a dynamic of salaries superior to the rest of the economy.
Source: Central Bank of Russia
The dynamics of substitution to imports
Let’s now examine the impact of factors sustaining production (exports and substitutions to imports) by those sectors which showed an increase in production in 2015, these being the food industry, the chemical industry and the sub-industry of rubber, as contrasted with the manufacturing of chemical products.
The contribution of these three factors to the variation of the real production index is estimated as follows. One takes into consideration the wares which have weighed sensibly on the dynamics of the industry considered. The variation in production for period (i) for each of these products has been calculated as the result between the variation in imports (Xi) and domestic demand. This domestic demand has been satisfied by domestic production (Prodi) and imported production (Ei). The total resources available to households, which we will call (Tri), are the sum of national production and imports, less exports: (Tri = Prodi + Ei – Xi). The periods were chosen in function of the availability of the required statistical data. So that January-September 2015 (i = 1) was compared with the level during the equivalent period in 2014 (i = 0).
The impact of the variation of domestic demand onto the exit dynamic has been decomposed into two components: qualitative and quantitative. The first refers to the variation of the share of imports in the production of a given article, and is interpreted as a change in production caused by substitution to imports. This change is defined as the difference between the volume of real production in 2015 and the hypothetical volume, which would be necessary to maintain imports at the former level, the latter being generally higher, in terms of their share in the whole product:
- (Prodimport substitution = –1 * Tr1)
The quantitative factor reflects the change in production, for reasons not associated to the substitution to imports:
- (Proddomestic demand =2 * (Tr1 – Tr0),) where (Proddomestic demand) is the change in production resulting from domestic demand.
Changes in stocks of goods have been considered negligible in this analysis. The resulting spread of dynamic exit goods has been regrouped according to types and sub-types of economic activity by using average prices calculated from public sources. Analysis has shown that the substitution to imports in the food industry has been the determining factor of growth, representing more than 95% of the growth of the sector in 2015, according to estimates. The effect, here, is very sharp.
In the chemical industry, production increased by 6.2% in 2015. In these, substitution to imports contributed 2,5%, that is more or less 40% of growth. Exports contributed 0,9%, that is about 15% of growth. The small contribution of exports can be explained by the growing competition on the markets for external base products, and the nature of the exported products which are considered to be of a low technological level. The other 45% in the growth calculation can be explained by other factors, not linked to the replacement of imports (like the effect of the drop in the price of commodities). This part of the increase in production can be explained in part by the 16% growth in demand for some categories of drugs, but most of the time (52%) by the peculiar position of the chemical industry as a provider of intermediary commodities for other industries showing positive dynamics. More precisely, demand has increased for base- and special chemical products used in the growth of export industries (mainly the extraction of ore, the production of chemical fibres, the production of key chemical products), and special additives used in the transition towards the production of fuels in conformity with the Euro-5 norm.
In the rubber industry, growth in 2015 has been of 2,8%. As the production, mostly of tires for automobiles and special vehicles and trucks, is sufficiently competitive on the domestic market, but also on the European and Asian markets, the substitution to exports has more than compensated for decreased domestic demand.
The solvency of companies
In 2015, the net financial results of companies has been positive. The calculation at nominal prices has been of 8.422 billion (net), that is 53,1% higher than the figure for 2014. Among the principal industries, net profit has increased most in transportation and communications, and in the manufacturing sector (by 64,8%).
This growth in the total net financial result has been upheld by measures of cost reductions adopted by the companies in response to the intensification of restrictions on demand and the worsening of the conditions for loans. For nine months in 2015, operational indicators of yield (yields of sales, yields of assets) were higher than in 2013-2014. But it must be kept in mind that this strong increase in net profit has been possible because of the low base used for comparison. Indeed, in 2014, this net profit had decreased by 9,1% in relation to 2013, mainly due to the deterioration of external economic conditions during the second half of the year. We have therefore returned to the situation of 2013, which shows that the effect of sanctions has been both limited and temporary.
It seems therefore that since 2014 the mechanism of substitution to imports has worked out in the case of Russia.