State Corporations Give Preference to Imports

State Corporations Give Preference to Imports

Photo: http://www.eprussia.ru

Despite all the efforts of the authorities to make installation of Russian software on all gadgets mandatory – even with the help of legislative amendments -- these measures do not work. Moreover, in 95% of cases, the largest purchasers of high-tech products in the country buy only imported equipment.

According to 2019 statistics announced by Deputy Prime Minister of Russia Yury Borisov, the companies reporting to Rostec, Russian state-owned holding conglomerate that specializes in consolidating the corporation’s stakes in the strategically important companies, mainly in the defense and high-tech industries, were able to win less than 50% of the planned amount of government contracts for the supply of radio-electronic high-tech products for national projects. This happened, TASS news agency quoted Borisov, because of the obstacles created by the buyers. Price dumping by foreign manufacturers, as well as customers’ overblown technological requirements to the equipment constitute the main problems.In particular, Rostec planned to win contracts totaling 100 billion rubles ($ 153,092,000), but eventually, the equipment was purchased only for 45 billion rubles ($ 688,914,000). As a result, state purchase contracts worth 55 billion rubles ($842,006,000) went to foreign suppliers. At the same time, there were about 300,000 lots for the total amount of 850 billion rubles ($13,012,820,000) in the fields of medical equipment, telecoms and computer engineering.In fact, Borisov made it perfectly clear that the forces behind the bidding contests were the buckpassers. That is, the state corporations that have been repeatedly instructed to change over to purchasing of domestic equipment. Literally right now, there is a war between the Ministry of Industry and Trade of the Russian Federation, on the one hand, and the Ministry of Finance and Federal Antimonopoly Service of Russia (FAS), on the other. The agencies are still unable to reach agreement on a bill that imposes drastic restrictions on foreign companies’ engagement in the procurement of goods, works and services for state and municipal needs.Finally, Borisov proposed to make it compulsory for government customers to order at least 50% of products from Russian suppliers, including the items purchased while the works are performed, as well as to introduce quotas for the products manufactured in Russia. However, confrontation between the agencies and the red-tape practices has slowed down the solution of the problem so far.Meanwhile, according to Sergey Sakhnenko, Industrial Director of Rostec's Radioelectronic Cluster, the share of Russian high-tech products bought by state companies is only 5%, whereas a total of 95% are imported, respectively. "That is, a large proportion of public funds is actually spent on foreign producers," TASS quoted Sakhnenko. He explains for this by a number of problems including taxation, as the Russian manufacturers pay 6 to 7 times more taxes to the Russian budget than the foreign ones.The problem arises from the fact that the suppliers have to pay a number of other taxes when selling the goods of Russian manufacture, in addition to the tax on profits.Meanwhile, Sakhnenko made emphasis on the statements of state corporations that when they buy products from foreign vendors, they save the budget, are not true in most cases. Along with it, he is confident that in terms of the quality-price ratio, a lot of Russian products are not worse than their foreign counterparts and sometimes even better. "However, for some reasons, import goods continue to be purchased. As a result, the state funds trickle abroad, while the country loses taxes, jobs, and additional opportunities for the development of its industry," added Sakhnenko.The problem of high share of import purchases by state-owned companies has always stood apart, says Alexey Antonov, analyst of the Alor Group. According to him, the government has been looking for ways to resolve this issue for a number of years. In this regard, the goals of the National Project for Science should to some extent help reduce the share of imports and increase the share of authentic Russian technologies. For instance, legislative initiatives on the mandatory pre-installation of domestic software are also a part of the same story.However, despite all the efforts already made, the volume of imports remain big. As Antonov explained in an interview with wek.ru, this is primarily due to the fact that Russian high-tech still cannot be competitive. Foreign vendors can come up with more attractive prices and package proposals due to their capabilities. On the other hand, due to technological backwardness and impossibility to freely use Western technologies because of the sanctions, local companies have to spend more money in order to reach the leading positions. And if one takes account of the tax base and the lack of skilled personnel, there is the answer to the question why both the price and the demand are so low becomes clear.Obviously, Rostec’s position is largely explained by its desire to occupy a bigger market niche than it does now. In general, this is in line with the plans of the authorities. Therefore, in the future, a pivot towards domestic producers is highly likely. However, in any case, the industry can hardly get rid of predominance of imported technologies. According to Antonov, this is not a fast process, but when it comes to both money and immediate effect, the choice is usually made in favor of the market operators that have more understandable working principles and more affordable prices.Antonov also adds that the system of state purchases in this sphere is adjusted to help domestic developers, therefore, it is necessary "to regulate it correctly," or, in other words, to establish artificial barriers for preventing the entry of western manufacturers. Rostec pursues the same goal.Vyacheslav Maksimenko, the head of partner programs of the Lineyka investment and educational platform, believes that the initiative is quite good and in the long term it can become a valuable tool. However, he points out that the low share of Russian high-tech products in government procurements is historical in nature. This is due to several factors. First among them is underinvestment by Russian companies in R&D and renovation of production facilities. Number two is the completely different trend in Germany, China, Japan and Korea, Russia’s largest trading partners where the output of such products has become extremely competitive thanks to the economies of scale.Antonov says that last year, the increase in non-resource exports in Russia turned out to be far lower than expected. Contrary to the plans for 7.4%, the increase measured only 2%, which is unlikely to be recognized as an asset against the background of GDP growth of 1.3% and the global economic growth by more than 3.0%. Given the data of the Federal Service of State Statistics (Rosstat), at the end of 2019, the volume of industrial production increased by 2.4%. This was due to the contribution of the food industry, as well as chemical and metallurgy industries, which showed slight growth. In contrast, machinery manufacturing recorded a decline by 2.6%. Therefore, Rostec’s desire to correct the trends is understandable, as it was created to support the development and modernization of the industry and it incorporated both defense enterprises and the producers of high-tech.In most developed countries public procurements and the public budget offer the guidelines for development and implementation of industrial policy. Besides, they help a significant increase of the share of high value-added products. However, at the moment, everything in our country is slowing down at the stage of updating the strategic planning documents and a set of industrial policy instruments, Maximenko adds. Meanwhile, Rostec’s statement that in terms of quality and price Russian products are not worse than the foreign ones is not true, says Alexey Gavrishev, a partner of BMS Law Firm. Certainly, there are some samples of products of this kind, but mostly, foreign high-tech products are of better quality. This concerns medical equipment, telecoms and computer technologies.The statement that Russian companies pay taxes is not an excuse because the quality and efficiency of equipment plays a key role when choosing high-tech products. It is important to develop Russian high-tech companies with the help of improving and modernizing their technologies but not by coercing anyone to purchase Russian products, Gavrishev says."I beg to differ with Mr. Sakhnenko," Irina Kapitanova, a member of presidium of the Opora Russia business association said in an interview to wek.ru. “I think that simply there isn’t as much high-tech equipment in Russia as large state corporations need. If claims are made that these high-tech products are manufactured in Russia, they can sometimes also be found on Aliexpress. Why it happens is a complicated question. In my opinion, brain drain is the main reason for that. The creators of this kind of technologies move abroad, and this is understandable. There are all the necessary conditions for this. The weather over there is warmer, the atmosphere is calmer, salaries are higher, and the environment is the same everywhere.”Therefore, according to Kapitanova, as a first step, the government should create similar environment in Russia. Technologies are the main products of the 21st century. And so far Russia is hopelessly losing this battle. There is one absolute leader in the world, and the others are just catching up with it. However, Kapitanova is confident that we have all the conditions for catching up. The appointment of the new technology-oriented prime minister gives us hope that there will be changes in this area, too. And after that, the government procurements issue will be solved.Kapitanova also disagrees with Antonov: according to her, Russia still has the main resource this sector depends on -- skilled personnel.

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