State support causes a habit – Newspaper Kommersant No. 58 (7503) dated 04/05/2023

The Presidium of the State Council for Industry was dedicated to finding mechanisms to reduce business risks in the regions in order to increase production. The governors are proposing to expand measures to support Russian industry even more widely, from new tax breaks to “cheap” money for priority projects and customs privileges for raw materials and spare parts. The idea of ​​further strengthening protectionist policies in anticipation of the localization of production compromises only one thing – in reality, with the already high level of protectionism and reduced competition due to the departure of foreign suppliers, these incentives to launch replacement industries in market conditions are still not enough – both due to general uncertainty, and because of the risks of the arrival of producers from friendly countries and competition with parallel imports. The tools for protecting the domestic market without strengthening its technological backwardness are practically exhausted.

At yesterday’s meeting of the Presidium of the State Council on Industry, the regions presented their proposals for its support – in fact, the announced initiatives are designed to expand protectionism to support the adaptation of industry to new conditions and mitigate the risks associated with the uncertainty of the development of the situation.

As surveys of enterprises show, despite the departure of foreign companies, most entrepreneurs are not ready to occupy the vacant niches, and consider the main advantage not the possibility of developing new industries, but the reduction of competition in the domestic market, which increases the rate of profit. High uncertainty remains the main barrier to investment, including due to the risks of suppliers from friendly countries entering the market, the return of departed foreign investors in the event of a change in market conditions, as well as supplies through parallel imports.

At the same time, the president expects to repeat the success of the agricultural sector in the manufacturing industry as a result of counter-sanctions in 2014, coupled with tax incentives and R&D funding – then this caused accelerated import substitution and the development of technologies in the agro-industrial complex.

Now it is proposed to deploy similar measures for the manufacturing industry.

According to the governors, it should be supported by increased protectionism – the expansion of restrictions on access to foreign products and new benefits for domestic products. The proposals include a reduction in the tax burden for processing enterprises, long-term orders from the state and state-owned companies, and more active use of offset contracts. First of all, as follows from the words of the governor of the Tula region, the head of the profile commission of the State Council, Alexei Dyumin, it is necessary to support the demand for industrial products through a tough option to stimulate import substitution.

Thus, the commission proposes to expand the so-called national procurement regime, which implies priority for Russian products (now used in public procurement), to state-owned companies.

It is also proposed to consolidate responsibility for non-compliance with quotas for the purchase of domestic products – up to “transfer to purchases” under the more stringent Federal Law-44 (an alternative is to use government directives “to adjust internal documents” of state-owned companies).

However, it was the option of “scaling up” the national procurement regime that found support from Deputy Prime Minister and Head of the Ministry of Industry and Trade Denis Manturov – according to him, this should be done “in stages, taking into account the pace of development and increase in the production of new products, as well as already made up investment plans of large enterprises.”

For the same purpose, it is proposed to revise the customs tariff policy – now duty rates make it more profitable to import finished products, rather than raw materials for production (according to Moscow Mayor Sergei Sobyanin, the problem is especially acute in the automotive industry). Thus, it was proposed to instruct the Ministry of Economy to “develop the necessary decisions” within six months and submit initiatives to review import duties to the EAEU. The idea was conceptually supported by Vladimir Putin: “Where it is justified, to raise duties on finished products and reduce barriers to the import of components – this must, of course, be done, but only those, of course, for which we do not have and are not expected to create our own production” . However, we note that stimulating the localization of production by raising duties may conflict with WTO rules, which will complicate the discussion of this measure in the EAEU.

In the proposed model of industry support focused on market protection, the main factor is the localization of production – in exchange for the development of production, the state is ready to reduce the risks of enterprises, while ensuring the growth of investment activity in the regions, which is necessary to support the economy in the face of a budget deficit. Import restrictions, however, are in themselves limited in applicability – they reduce the ability of enterprises to produce competitive products, increasing the technological gap, and protectionist measures often provide support for inefficient companies, therefore, they are effective only in the short term, with subsequent tightening of competition, which, however, the State Council does not discussed at all.

Evgenia Kryuchkova, Diana Galieva, Oleg Sapozhkov