TOSome car brands first disappeared, then came back. Hyundai, Suzuki, Mitsubishi, Toyota, Nissan, Mazda. Japanese companies that participated in the sanctions. But several models have reappeared in Russian dealerships, says an analyst at Finam, an investment bank based in Moscow. It’s a parallel market, contraband today approved and blessed by the Ministry of Industry and Commerce. At the beginning of the war, as soon as Western sanctions were triggered, the Kremlin took countermeasures, legalizing a system of parallel imports: criminal and administrative liability for importing products without the authorization of the copyright holder was abolished. Unclear channels, with which Russia tries to react to the isolation.
The case of Iran
According to government calculations, smuggling could bring in up to 2 billion dollars of goods every month (therefore well over 20 billion in 2022). Other analyzes give lower numbers: according to Finam, pirated goods do not exceed 1.5 billion dollars a month. A lot, but certainly not enough to keep the entire economy going: it should be remembered that in 2021 Russia imported goods worth $304 billion -. In the long run, deterioration and loss of efficiency are inevitable. However the underground market can be surprisingly effective.
Iran knows something about it, which has been living under sanctions for years and has learned to circumvent them. Here’s proof: Russia, in its raids against Ukrainian infrastructure, is making abundant use of Iranian-made kamikaze drones – rudimentary, but insidious, also because they are very cheap -. Analyzing these devices has revealed that they are filled with American components, including microchips, despite Iran being one of the most sanctioned countries on Earth.
Putin’s three ways
Ultimately, Russia’s economic future depends on its ability to rapidly produce alternatives to foreign goods it can no longer access. There are three roads ahead and they are all quite rough. The first is that of rely more on friendly countries, such as China. Xi Jinping and Putin, moreover, had sworn “friendship without limits”. And it is true that, with the war, they have strengthened their economic ties. While the European market closed, Russia found new outlets for gas and oil: China, but also India, increased their purchases enormously. And in the case of Beijing, exports to the Russian market have also grown. But for some strategic components, the Chinese friend is not so reliable. Xi’s priority is always national security, that is, to strengthen China in the confrontation with the United States. For this reason he has blocked the export of some of his microchips, currently needed by the military industry, despite the fact that they are an alternative to the American chips that Russia will have increasing difficulty in buying.
The second way is to produce internally what no longer comes from abroad. Autarchy, in conclusion. How practicable is it? It is true that the Russian economy has demonstrated considerable resilience, but in one respect it was unguarded: its industry is heavily dependent on foreign, often Western, technology. Replacing it is complicated. Sometimes it is possible, sometimes not, and almost always there is a loss of efficiency. It’s hard to find an industry in Russia that doesn’t depend on imports for at least 50 percent of inputs, says Elina Ribakova, an economist at the Institute of International Finance.
Some sectors are more at risk than others. Those ‘super critical’, according to the government, are the construction of airplanes, pharmaceutical and medical technology, the production of microchips and high-end computer equipment and the technology to build space vehicles. These are the difficulties a modern economy encounters when it can no longer import many of the components, technologies and raw materials on which it depends. In this regard, data from trading partners show that Russian imports have decreased by 20-25% since the beginning of the war. A trauma, if you have been embedded in global trade for years.
The magicians of smuggling
In some ways it’s like going back to the Soviet era. And as in the times of the USSR, the third way to survive is represented by espionage and smuggling. Profitable, the latter, but volatile and unpredictable, a trade that the beleaguered economy will ultimately struggle to rely on. Profitable for a growing number of specialists, wizards at finding loopholes and sneaking goods through customs. Here’s how it works. The tells a certain Stanislav al Financial Times. Stanislav is a Russian man of about forty. For him, the war was a business, the sanctions a prairie of new opportunities. He buys the goods through front companies established in Europe. The goods travel by truck from the European Union to one of the former Soviet countries that share customs agreements with Russia, often Kazakhstan and Armenia.
Any brand that has left Russia, from clothes to alcohol and household appliances, is imported in some way. And several offices from the state administration are also turning to him. Two chambers of commerce – one in Siberia, the other in central Russia – ask smugglers like Stanislav for foreign goods affected by the embargo. But the flow is not regular, there are unexpected events and bottlenecks that slow down trade or block it completely. Clinker, the basic component of cement, has disappeared since June. “No one knows how to import it anymore.” Eventually, ways will be found, almost certainly, to get around the obstacle. However, the smuggling route makes the material more expensive and therefore only available for high-end orders.
“It will be like this for 15 years”
Kirill is another Russian moving in this gray area. With the war he opened a smuggling business specializing in furniture and fixtures. He says one of the most common schemes for parallel imports is working with a company that already has a business relationship with a Western brand. This company begins to place orders in much larger volumes. Behind it, explains Kirill, is a Russian buyer, who pays to import the surplus. Once the goods arrive in Kazakhstan, they are safe, because there are no customs borders from there to Russia. However, not all goods are the same and some are more complicated to find. In particular microchips and serverssays an executive at a Russian technology company.
Producers today are even more wary. They get suspicious, bite the bullet if a customer suddenly starts ordering much larger volumes. Some American companies, says the Russian executive, have stopped selling in Armenia or Kazakhstan, now notorious hubs of parallel imports. Or they ask to check on Zoom if the office really exists and needs all that material. These workarounds are costly, even when successful. Popular American chips enter clandestinely at double the market price. It’s only worth paying if the penalties don’t last too long. Which is unlikely. “It will be like this for the next 15 years, unless he dies first,” says an oligarch under sanctions resigned. And by “him”, of course, he means Vladimir Putin.
What to do then? Russian companies, according to analysts, will end up falling back in the long run inferior Chinese microchips. But all this happens when the United States is busy clipping the wings of a far more dangerous competitor than Russia: China, in fact. On October 7, Joe Biden announced the most radical export controls in decades. New rules that cut off Chinese companies from artificial intelligence chips, software to design advanced chips and machines to make them, all cutting-edge technologies of American origin. And this is how friendships crack, even those without limits: cornered, China has decided to keep some of his best microchips for himself, allocating them to the military industry and blocking sales abroad, including to Russia. The news was first reported by the Moscow newspaper Kommersant. The chips whose export will be banned are those with the LoongArch micro-architecture, the first totally made in China, independent of any foreign technology.
It must be said that LoongArch is still used quite rarely in Russia. In production intended for the domestic market, the sources continue Kommersant, it is much easier and safer to use Intel chips, “of which there is enormous availability in the world, billions of units”. But Chinese technology, although inferior to American technology, was still considered a decent alternative. Having already successfully tested them, some Russian companies considered the LoongArch systems “reliable, promising and, in perspective, able to compete with AMD and Intel”. China, however, has taken away this life preserver.
What to do now? Russia could embark on domestic production: a difficult road, warns a senior executive of a Moscow technology company. And tremendously expensive. It may take 50 billion dollars a year for ten years, claims the executive, to bring Russia to the same level as the Chinese in terms of ability to produce microchips. A mountain of money that Russia does not have. And it is said that spending those amounts does not guarantee success. The operation may fail.
Get by or evolve
For a practical survival course let’s move to a large factory of tractors and other heavy machinery on the banks of the Volga, east of Moscow. As soon as Western sanctions were triggered, the head of the factory – the Cheboksary Power Machinery Plant – gathered his team around a sheet of paper. He started drawing the map of activities and supply chains. Some product lines, too dependent on western parts, had to be discontinued. On other things the team has come up with do-it-yourself remedies. The tractor sector, the company’s cornerstone, could not be abandoned. So the company has managed to create microchips to replace the imported ones. Somehow new components arrived from other sources and the engineers welded them. Tractors worked.
For other materials, the company has found domestic alternatives, or nearly so. There was the problem of the parts of some freight elevators. Our Belarusian friends, a close ally of Moscow, have sent the engines to replace those coming from Japan. Even in this case the freight elevators – all in all – worked. “Of course, Minsk engines are noisier, more expensive and less reliable. But they are available. We are used to it, our customers are used to it,” the head of the company told al Financial Times. But the manager himself realized theinexorable declining fold. Getting by is one thing, evolving another.
Russia, China’s poor gregarious
There is no doubt that the blockade on imports will have a negative impact: the company will churn out products of lower quality and technology, and at the same time more expensive. Its goods were once considered medium-priced, today – with the sanctions – they have moved to a higher market segment. And the same effect is being felt everywhere: from banking to agriculture and the extraction of energy resources. “Maybe you will still be able to produce, but you will do it more expensively, because you will be inefficient,” explains Ribakova, the economist at the Institute of International Finance. Here the country risks a spiral of technological regression.
It must be said, however, that it could have been much worse. The most ominous predictions submitted to Putin by the best Russian technocrats they did not occur. As the war began, with the economy beleaguered by sanctions, they feared the apocalypse. A 30% drop in GDP in two years. The recession, on the other hand, has been milder: between 3.5 and 5.5% is expected in 2022 and something similar in 2023. Russia is shipping more oil to China and India. It sells less, but thanks to the high prices, the takings are still very respectable. The economy is likely to flounder, even if it stumbles. But at what price? The tsar wanted to make Russia great again. Instead he has the role of China’s poor gregarious.
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The smuggling card: this is how Putin sends goods worth 2 billion a month to Russia