Russia’s reverse import substitution

May 3, 2022

Here’s some dose of reality to the people cheering how Russia is going to come out stronger and better from its fight with the world.

The Russian Transportation Ministry has developed a strategy for domestic aviation until 2030. It will cost about 627 billion rubles and its goal is to produce 1,000 domestically-made planes. Their best-case scenario does not forecast a return to prewar levels of domestic travel (100 million people per year) even by 2030. The worst-case scenario predicts that half of their foreign-made plans will be disassembled for parts by 2025. Analysts are wondering if the planned production is even possible (it expects to grow from 18 planes in 2022 to 200 in 2030, a growth of 35% per annum!). Moreover, the technological base for these airplanes will be the obsolete Tupolev as well as the problematic Sukhoi Super Jet. In other words, the optimistic scenario is that by 2030, Russia will boast a fleet that’s comparable to the one the USSR had in 1980.

This is just one example of the regressive import substitution that Russia is now forced to do under the Western sanctions. Usually, countries resort to import-substitution to protect their infant industries and allow them to grow behind a tariff wall until they are ready to compete with international firms. But the trick there is also usually to enjoy “advantages of backwardness”; that is, to use the most current available technology — possibly with some improvements — and end up ahead of the competition by the time the tariffs go down. This sort of strategy envisions eventual opening and out-competing the rivals that used to be the original threat.

Russia is going in reverse. It cannot rely on the best technology currently available for the simple reason that its specialization over the past 30 years has been to rely on Western tech while focusing on export of raw materials. In this, it allowed its Soviet-era production facilities to decay or be replaced with ones that require constant support from Western sources. Now that these sources have dried up, Russia must either somehow develop the technology in-house or seek alternatives. Western tech is not easily duplicated and it will require years of research to come anywhere near it. Therefore, Russia must opt for technologies it already has — they will essentially have to dust off Soviet-era production for many industries (planes, autos, machine building in general, etc.) This will “work” in the sense that it will provide some replacements for what Russia has lost, but it will be permanently of subpar quality and, because of limited supply, much more expensive.

These industries will, of course, keep employing people (which will be critical since the decay and death of import-dependent sectors will release masses of people onto the unemployment rolls), and the skills required will be relatively low. This means the value of education will decline, and fewer people will seek to acquire it — ending up with trade education of various sorts. So in addition to mass regression in technology, there will be mass regression in educational attainment, with corresponding adverse consequences for future economic (and social) development.

The lower technological level of the “reborn” industries will also likely have a worse ecological footprint, and the country will experience high levels of pollution that will make its problematic demographic and health trends even worse. Life expectancy will continue to decline, and various problems — physical and mental — will increase. Crime and substance abuse are likely to increase dramatically as well.

When, at some point in the future, the sanctions are removed, the entire industrial base of the country will be instantly obsolete and non-competitive, and thus subject to elimination by open markets, and the unskilled labor force will find itself unable to adapt to the new conditions. Russia will then lurch into an immediate crisis that is likely to renew calls for a strongman at the helm who could “fix it all.” And this time, it’s unclear that the West will be there with investments and help to prop yet another regime into God-knows-what adventures.

Whether Russia achieves whatever goals it has in Ukraine will not alter any of these processes. The only hope for anything in the near/medium term is for immediate withdrawal from Ukraine, a regime change in Moscow, and some sort of international conference to decide what, in the world, to do with this nuclear pariah state. The alternative is a very grim future for the Russian people.

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