Russia’s market of capital goods: Foreign-domestic substitution and the role of the Northeast Asia countries
Authors:   Economic Research Institute of the Far Eastern Branch of the Russian Academy of Sciences, Izotov Dmitriy A. 
Published: June 2023

The author analyzes the specifics of demand for capital goods in Russia, concerning mechanical and electrical machinery, equipment, and vehicles for land transport, based on estimates of the elasticity of substitution between domestic and imported products. Russian economy depends on imports of capital goods from the EU, especially of mechanical and electrical machinery and equipment. For these many types of goods, domestic producers could not compete with imports due to the resource curse and increased investment risks of Russian economy, which determined the economic inefficiency of producing these products on a large scale. Despite the relatively small share of domestic machinery and equipment in the Russian market, imported components and technologies were widely used for their production in domestic enterprises with both Russian and foreign capital. At the same time, as the assessment of the elasticity of substitution shows, some capital goods of domestic production have competitive advantages. Due to high barriers to imports, the use of foreign technologies and parts, as well as the implementation of state support mechanisms, some types of land transport, agricultural and road equipment successfully competed with imports in the domestic market. The Northeast Asia countries did not account for a large share of imports in the Russian market of capital goods. Negative values of the elasticity of substitution indicated complementarity between domestic and imported goods, while, for machinery and equipment within these groups, the share of non-EU importers of components, in particular from China, is increasing, indicating the possible success of geographic diversification, but only for some types of goods. Ceteris paribus, China will not be able to make up for the reduction in imports from the EU to Russia for various types of machinery and equipment. Real competition in the Russian market of European manufacturers with imports from the Northeast Asia countries, mainly from China, can be observed within some product niches. At the same time, part of the import from China was produced for the Russian market by order of Russian companies at enterprises located in China, taking into account the technical standards of the EAEU and on the basis of technical documentation developed by specialists from Russia. Estimates of the elasticity of substitution showed that, despite the government’s measures to localize the production of passenger cars in the Russian territory, these goods in general were not direct competitors with imports, in which the EU and Japan were in the lead. Under the current sanctions for the Russian market of capital goods, the main negative factors may include the following: limited alternative supplies; the difficulty of industrial production in the face of increasing barriers to the import of components; when importing non-original parts, a possible increase in the risks of using investment goods.