Cumulative Effect: Russia has failed to restore pre-war imports and replace the supply of sanctioned goods

Russia’s overall imports are shrinking. Over the first seven months of this year, import volumes were at 91-92% of the previous year's levels. When compared to mid-2021 pre-war import levels, a similar decline is observed, while dollar inflation during this period was around 15%. With sanctions in play, prices have risen even more. This means that, in physical terms, Russian imports today are likely 20-25% lower than in 2021. Such a reduction is unlikely to be fully explained by import substitution.

It is also believed that re-exports of Western dual-use goods through China, Turkey, and Central Asian countries have allowed Russia to mainly replace direct exports from the EU and the US. In monetary terms, the volume of supplies has remained nearly unchanged, but in physical terms, it must have decreased slightly due to inflation and the costs associated with circumventing sanctions.

At the same time, the alternatives to Western goods that Russia has been purchasing from China and other countries are cheaper than those previously acquired directly from the West, even considering the ‘toxicity’ markup applied to Russian buyers. This implies that actual purchase volumes might have increased. On the other hand, the quality of these alternatives is lower, leading to faster wear and tear, which reduces the actual degree of substitution. According to the Vienna Institute for Economic Studies, in 2022, the level of substitution for sanctioned goods in the Russian economy may have been only 70% of the 2021 level, and in 2023, it dropped to just 60%.

This indicates that the shortage of goods is gradually intensifying, and if sanctions pressure on suppliers persists, the shortfall will grow, as will the costs of replenishing goods. The widely accepted conclusion that import sanctions have failed may prove premature. The expectation of a crippling impact on production and the economy was overstated, but the cumulative effect of rising costs and deficits, leading to a second wave of sanction pressure, has been underestimated.

According to data from the Central Bank, over the first seven months of 2024, Russian imports were 9% lower compared to the same period in 2023, while Russian customs data indicates a 7.8% decline. Food imports have remained at last year’s levels, but the biggest drop has been in mineral products, down to 75% of last year's level. Metal and metal product imports, as well as chemicals, decreased by 10%. The gap in machinery and equipment purchases is widening, with a 7% reduction now, compared to 4-5% a few months ago.

Russian authorities tend to attribute this decline to import substitution, but the problem likely runs deeper. When comparing Russian imports in the first seven months of 2024 to those in 2021, we see that imports between April and July this year were 7% lower than in the same months of pre-war 2021 (note that in the first quarter of 2021, the economy had not yet fully recovered from COVID). Meanwhile, dollar inflation over this period was about 15%. Taking inflation and sanction-related price increases into account, the physical volume of imports may be 20-25% lower than in 2021. The notion that Russian imports have fully recovered to pre-war levels is quite inaccurate. In reality, imports are shrinking, and this decline is unlikely to be explained by the successes of domestic industry.

Russia's imports in 2023-2024 compared to 2021, in billion $

The situation with dual-use goods imports is even more complex. According to a common view, supplies from China, Turkey, and Central Asian countries have allowed Russia to significantly replace exports from the EU and US, which have dropped to almost zero due to sanctions. For example, the Bruegel think tank estimated the volume of such imports in 2023 at $12.5 billion, which is roughly on par with 2021 levels (when total European exports to Russia amounted to $104 billion). The physical volume, accounting for inflation and the costs associated with circumventing sanctions, likely decreased, although the total volume still appears significant. However, such comparisons fail to account for the fact that some Western goods Russia received before 2022 have been replaced by cheaper, lower-quality alternatives, as noted by experts from the Vienna Institute for International Economic Studies (wiiw). This suggests that while the physical volume of goods may be higher than assumed, the overall level of replacement is lower due to reduced quality.

Since the beginning of the war, the export of 50 high-priority dual-use goods (Common High Priority items, CHP) essential for military production has been banned. These items are grouped by importance for the military-industrial complex. The first group includes advanced microchips, the second contains communication devices and satellite navigation equipment, the third consists of various electronic components and optical equipment, and the fourth includes CNC machines. Before the war, Russia primarily imported the most high-tech products from the West. Overall, according to the Econpol project, 47% of dual-use goods imported by Russia came from the EU, 35% from China, and 14% from Hong Kong.

Despite efforts, the flow of American microchips to Russia has not been fully cut off. A recent report by the Institute for Science and International Security (ISIS) revealed that some Russian companies continued purchasing products from Texas Instruments, XILINX, and Analog Devices via China, even after these firms were sanctioned by the U.S. More than 70% of the microchips extracted by Ukrainian experts from Russian military equipment, ammunition, and other weapons are still of American origin (→ Re: Russia: Sanctions compliance). However, in other categories, the share of Chinese goods in 2022-2023 likely increased significantly, as shown by the experts at wiiw who analysed data from the UN, the EU, and third-country customs authorities (Russian customs data has mostly been classified since the war began).

China’s role in supplying dual-use goods to Russia is steadily growing, according to the wiiw experts. In 2024, Turkey and Armenia, among others, reduced their exports, while China ramped up exports in the same categories. Turkey, Russia's second-largest trading partner, cut its exports by 40% in January 2024 compared to the 2023 monthly average.

While prices for dual-use goods purchased by Russia from China, Turkey, and other countries have increased since the war, the rise has not been substantial enough to suggest that these countries are fully re-exporting the same volume of goods that the EU used to supply directly. For instance, in 2021, China sold dual-use goods to Russia at an average of $227 per kilogram, while the EU’s average price was $599. In 2022, the price per kilogram for Chinese exports rose to $418, and in 2023, it climbed to $445. Notably, the wiiw experts observed that prices for China’s other trading partners did not increase as significantly.

Prices at which Russia's trade partners supplied Russia with dual-use goods in 2022-2023, $/kg

If the cheaper alternatives were of the same quality as European goods, Russia would have preferred them even before the war, but it did not. The experts from wiiw conclude that fully replacing European exports has not been achieved. Assuming that the price difference for similar goods in 2021 reflected a difference in their quality, the substitution level for sanctioned products in 2022 amounted to just 71% of 2021 levels, and in 2023, it dropped to only 60%. Until now, replacing higher-quality products with lower-quality ones may not have caused significant problems, as the study's authors note. However, these problems will likely arise in the future, when low-quality equipment and components start to fail.

These calculations highlight an effect of sanctions that had previously been overlooked. They indicate that shortages in certain categories of imported goods are gradually intensifying. If sanction pressure on suppliers continues, these shortages will increase further, and the costs of addressing the deficits will rise. The widely accepted conclusion that import sanctions have failed may be premature. While the expected devastating impact on production and the economy has not materialised, the cumulative effect of rising costs and shortages likely remains underestimated. This effect will gradually create a second wave of sanction pressure.