Import substitution is the new topic in the Russian chemical industry, as producers look to counter-balance the effects of a depreciating rouble and the economic effects resulting from Putin’s foreign policy.  The chemical industry has thus far avoided any direct sanctions from Western countries, but it is almost impossible to avoid the indirect impact and further economic consequences from Russia’s aggression in Ukraine.  A peaceful solution would be the best outcome for both Russia and Ukraine, but probably not for Putin whose revived popularity this year has been based almost entirely on firstly annexing Crimea and secondly maintaining the conflict in eastern Ukraine.  With a state-run cynical media system it has been easy to justify Russia’s involvement and invent reasons for being there. 

Although import substitution can help to create jobs in the short run, economic experience almost always indicate that in the long run output and growth will be lower.  Import substitution denies the country the benefits to be gained from specialisation and foreign imports whereas the alternative law of comparative advantage shows how countries can gain from trade.  The law of comparative advantage ultimately depends on maintaining good political relations with other countries, and in this regard Putin and his political party United Russia has become a liability to Russia. 

The scale of the task for the chemical industry is immense and raises the obvious question why import substitution has been given enough emphasis until now.  Rhetoric has been abundant in the past decade on the need to reduce imports, but not enough pro-active policies or reforms have been applied to make much difference overall.  As a result product substitution in the past few years has been limited to selective areas of industry and has effectively not altered the overall dependency on imports of higher added value products. 

Taking one region Tatarstan as an example the regional government has identified around 300 products in its republic alone which are currently imported, and which it would like to produce itself.  Some of the products mentioned include maleic anhydride, PBT, cyclopentane, polyurethanes, etc., where in many cases Russian technologies are not available and thus would have to be imported unless sanctions prevent chemical technology transfer.  Some products and services may be able to be replaced quickly, but others may take a lot longer to develop whilst others may not be possible at all. 

Ukraine market overview

Recent signs have been noted in a willingness from Moscow to de-escalate the military conflict in eastern Ukraine, but Putin has become highly unpredictable. Perceptions of a threat from NATO, paranoia about internal popularity, are two of the reasons why Putin is active in eastern Ukraine, but above all to ensure that it does not become the model for Russia.

As a result Ukraine faces a real struggle to implement the reform package it needs to stimulate the economy.  Parliamentary elections in October in Kiev will provide a good test of Russia’s intent and whether Ukraine will be allowed to self-determine its own future. 

In the meantime Ukrainian-Russian business relations have reached a low-point.  Some trade is continuing, mainly as there is no easy alternative, but the general trend is trade reduction with Russia.  The process of transferring sales from Russia will take time, from the polymer processers around 40% are estimated to be working normally with Russian consumers.  On the other hand the economic impact of the agreement with the EU should be slow-moving initially as exports to the EU have to surmount formidable obstacles as international certification, standardization and quality control.

Latest News from 2023 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec