As New Cold War Heats Up, Russia Preparing to Go It Alone?

There is nothing new under the sun. It has all been done before. – Sherlock Holmes (A Study in Scarlet)

Brief History Lesson

Leading up to the United States’ entry into World War II, Japan was reliant on trade with the U.S. and its European allies for about 75 percent of its foreign trade. Items like oil, gasoline, steel, iron, copper, and nickel constituted a disproportionately high amount of this figure. Thus, when the U.S. began imposing ever-increasing sanctions on Japan in response to its aggression in South Asia and alliance with Germany and Italy, the economic costs were devastating. Without an end to the sanctions or securing new sources of these materials, Japan would simply run out of the ‘stuff’ it needed to run its economy and military. Japan’s leaders ultimately decided to gain access to new sources through military conquest and the rest, as they say, is history.

Russia’s Economy Today – a National Security Perspective

Unlike Japan, Russia is blessed with many natural resources including oil and gas. A ban on oil exports to Russia would be like refusing to sell string to a spider. Russia also has a capable national defense industry, which adequately supplies the Russian military’s needs as well as those of other countries through international arms sales, where Russia is second only to the U.S.

But, despite its prowess in the ‘hard’ industries that were greatly prized during the 20th Century, Russia lacks a national capability in the ‘innovative’ industries – e.g., high-tech, pharmaceuticals – that have become the prizes of the 21st Century.

Indeed, Russia currently imports about 80 percent of all medicines consumed in the country, and the 20 percent that are produced locally rely on imported components. Strikingly, Russia imports 93 percent of its pharmaceuticals from countries that have imposed sanctions on Russia (although the sanctions have not covered pharmaceuticals). Here’s a chart illustrating Russia’s dependence on imports by industry and sanctioning country source:

rus-econ-dep

Russia Goes it Alone – Pharma Case Study

There are signs that Russia is responding to its reliance on imports of high-value-added products, and thus exposure to potential sanctions affecting those products. The best example is in the pharmaceutical industry, one of the areas where Russia is most reliant on imports from countries that have imposed sanctions in the past.

To be sure, the Russian government has sought to promote the development of a domestic pharmaceutical market. In 2011, the government launched a major investment program to support local industry, with nearly $4 billion in funding behind it. The purpose of the program was to ensure that 90 percent of Russia’s ‘vital medicines’ be domestically produced by 2020. Safe to say, Russia is not likely to meet these goals in four years. In 2013, the Russian government sought to boost this initiative by excluding foreign manufacturers of drugs from selling to government purchasers (around 99% of all purchases in Russia).

Many international pharma companies at the time did consider local production, typically  in the form of joint ventures with their distributors that already had some degree of local manufacturing capability. Most of these plans were scuttled, with some token exceptions like Abbott’s acquisition of Veropharm.

Foreign pharma companies’ disregard of Putin’s will did not generate much of a reaction, until now. In August, Pres. Putin ordered the government to conduct a review on prices of medicines on the domestic market. The consequent review, conducted by the Federal Antimonopoly Service (“FAS”), identified “criminal elements” as a source of excessively high prices of imported drugs. For those not already aware, FAS is kind of like Russia’s regulatory lifeline to the West. They are by far the most sophisticated, ‘Westernized’ agency in Russia, but nonetheless implement the orders of the government. FAS’s audit of drug prices thus far has no clear outcome. But the message to Western drug companies is quite clear – build up local production or go home.

PM Medvedev is also on the case. In a totally not staged visit to a pharmacy in Lipetsk, Medvedev made an ‘impromptu’ visit to a local pharmacy on his way to visit pensioners at a ‘rehabilitation center’, Medvedev asked consumers their thoughts on the drugs available. Medvedev was dutifully informed by consumers and pharmacists alike that Russian drugs are increasingly available and trusted by local consumers (the whole thing had a supremely Soviet feel to it). Recently, Medvedev has promised to shut down pharmacies that engage in violations of Russian law with respect to the pricing of medicines.

These aggressive steps in relation to imported medicines come against a backdrop of increased support for local producers. In September, the government announced a 100 percent increase in subsidies for local pharma manufacturers. Collectively, the purpose of these moves seems to be ensuring a transition from reliance on imports to reliance on locally-produced generics by 2020 (which seems ambitious). Within this goal towards local reliance, of prime importance is ensuring control over state purchases of medicine (the top purchaser of medical goods in the country by magnitudes).

What Does it All Mean?

For Russia observers, it is difficult to take these announced measures seriously. We’ve seen them all before (just like the wars against corruption, deofshorizatsiya, etc.). But it is important to consider the context in which these measures arise. Although there is definitely a local political need to show pensioners that the government is responsive to their concerns about drug prices, I would argue that the economic pressures on the Russian government’s budget and the threat assessment of a new Cold War has made this issue a real priority for Putin and the rest of the government.

A full trade embargo – like the U.S. kind of still has with Cuba – would be devastating to Russia, particularly if it could encompass European drug producers (most of whom are listed on U.S. stock exchanges or otherwise have substantial U.S. connections). With no vaccines, cancer and diabetes treatments, and other essential drugs, the Russian population would face a degree of hardship not known since WW2. Naturally, Russia is planning for the worst case scenario, and seeking to avoid this eventuality.

 

 

 

This entry was posted in Business, Business and Economy, Cold War, economics, FAS, Foreign direct investment, foreign investment, goskorporatsii, Government, Government of Russia, pharma, procurement, Russian economy. Bookmark the permalink.