Negative Mixed Effect: a quarter of industrial enterprises have benefited from the ‘positive’ effect of sanctions, but this will eventually lead to the growth of a ‘stagnant sector’ in industry

Russia’s most innovative and forward-thinking companies, which in the past tended to rely fairly heavily on imports, have been the hardest hit by sanctions. Nonetheless, many of these companies have also been able to adapt fairly well to new circumstances. A survey of businesses conducted by economists from HSE has shown that although two-thirds of Russian enterprises have been affected negatively by sanctions, one in four companies reported both negative and positive consequences. Sanctions have not only created challenges, but have also presented new opportunities for businesses, particularly through reduced competition. This has had a somewhat positive effect on the overall performance of Russian industry in 2022, but has had a negative impact on consumers.

According to the survey, around a third of all enterprises exhibit passive behaviour when it comes to their market performance and are technologically backward as a result of their low reliance on both exports and imports. Sanctions are likely to exacerbate this trend further by reducing market competition. The main challenge faced by the Russian economy is its heavy reliance on imported technologies, and this situation is unlikely to change in the short term. As a result, Russian industrial output is vulnerable to the effects of secondary sanctions which may be introduced against its ‘friendly’ suppliers of technology.

A survey conducted by the Center for Structural Policy Research and the HSE Institute for Industrial and Market Studies has found that 67% of the companies surveyed have been impacted by the sanctions imposed in response to the Russian invasion of Ukraine. Of the businesses surveyed, 39% experienced only negative consequences, while 3% reported positive outcomes alone. A quarter of all companies faced both a mixture of positive and negative effects. Speaking of the positive outcomes they had experienced as a result of sanctions, 28% reported that they were able to take advantage of the new business opportunities. Large companies were able to increase their market share in their traditional markets (9%), identified niches for new products (7%), and expanded into new markets (6%). Despite the sanctions, some small and medium-sized companies (4% of respondents) managed to attract skilled employees to their rosters.

A significant number of businesses have been able to mitigate the impact of sanctions as a result of the closure of the Russian market and the reduction of competition. Consequently, the overall impact of sanctions on industrial output was mitigated, resulting in an improvement in its performance. However, Russian consumers have also experienced widely negative consequences as they have been forced to switch to domestic alternatives or less technologically advanced products, as detailed in our report ‘Worse than a Crisis’.

The degree to which sanctions have impacted Russian companies varies and is dependent on their level of integration into the global economy. The study found that in 2021, 32% of Russian companies imported intermediate goods from countries that were deemed ‘unfriendly’, while 17% imported equipment from these states. The most successful and fastest developing companies tend to be those most reliant on imports. At the same time, in 2022, a quarter of manufacturing enterprises found themselves in a situation where their imports had no viable substitutes either in Russia or in ‘friendly’ countries. The highest levels of dependence were observed in imported machinery and equipment (40% of company leaders noted that Russia lacked usable analogues), parts and components (34%), and raw materials and resources (31%). The pharmaceutical industry has been hit particularly hard, and representatives of this industry have frequently reported that they are unable to find alternatives to substitute the imports they require.

When it comes to company size, large companies suffered the most (77%), while approximately half of small companies (53%) reported that they had been negatively impacted by sanctions. Representatives from industries such as metallurgy, pharmaceuticals, electrical engineering, the automotive industry, chemical production, as well as rubber and plastics production felt the adverse effects of sanctions most acutely (70-80% of enterprises). In contrast, representatives from the textile, light, and food industries were less likely to report negative consequences (no more than 60% of companies). Of all the industries surveyed, the sector engaged in repair and installation of machinery and equipment demonstrated the greatest resilience, with companies reporting the lowest occurrence of both negative and positive effects of the restrictions.

Sanctions have opened up new avenues of opportunity for some medium-tech industries (such as chemical production, electrical engineering, machinery and equipment, and transport engineering). However, the woodworking sector and the sector involved in the repair and installation of machinery and equipment have reported the fewest new opportunities to emerge as a result of sanctions.

According to the researchers, one-third of the companies surveyed can be classified as passive and technologically backward. These companies tend to utilise production processes that rely on low levels of technological development, and over the past two years, they have not attempted to adapt to either the sanctions introduced in 2022 or to the effects of the COVID-19 pandemic. While their low dependence on imports and lack of exports have made them less sensitive to sanctions, these same factors have led to their technological stagnation. It is likely that, in the near future, the number of such enterprises, which operate in closed and low-competitive domestic markets, will continue to grow within Russian industry.

In sum, the authors of the study conclude that the Russian economy continues to be heavily reliant on imported technologies, with the government's import substitution strategy primarily focused on finished goods rather than technology. The analysts recognise that this situation is unlikely to change in the short term, which means that if secondary sanctions are expanded to include suppliers from ‘friendly’ countries, the Russian economy may run into even greater problems.

The study titled ‘Adaptation of Russian Industrial Companies to Sanctions: First Steps and Expectations’ was conducted by the Center for Structural Policy Research and the Institute for Industrial and Market Studies at the Higher School of Economics. It involved a survey of top executives of Russian manufacturing companies in 71 subjects of nine federal districts of the Russian Federation, carried out between August and November 2022. A total of 1,860 top managers from various companies were included in the survey, and 75% of these respondents were CEOs. The study ensured representativeness by including enterprises of different sizes and industries that were distributed across Russia.