The Chain of Life: How Russia is Integrated into Global Production

© HSE University

HSE experts have analyzed the position of Russian non-commodity sectors in global production and opportunities for their revitalization. The researchers believe that long-term sustainable growth of its non-commodity exports can be achieved by repositioning and including them in the global value chain at some more advanced stages than the supply of raw materials and semi-finished products.

Global value chains along with foreign direct investments and transnational companies determine the growth of global production, primarily in non-energy sectors. This was the focus of the report, 'Russia in Global Production', presented at the XXI April International Academic Conference on Economic and Social Development.

The report emphasizes that prominent examples of countries’ repositioning themselves in global production chains relate to their inclusion into the global value chain rather than revised export patterns. In particular, rapid growth and technological revitalization in Asian economies are not associated with the revised export and import patterns as such, but with the inclusion of countries in global cooperative ties and attracting production stages from advanced countries (i.e., offshoring).

'Russia holds the position of a raw material supplier both in global production and the global value chain. However, we believe that, rather than merely supplying raw materials and semi-finished products, Russia should reposition and integrate itself into the global value chain at more advanced stages in order to spur non-commodity export sustainable growth in the long-term,’ the authors note.

© iStock

The researchers point to Canada as a telling example. The country has a strong economy with an extensive commodity sector. In global production, Canada is one of many suppliers of raw materials, and at the same time, the country has a complex economy that produces a wide range of goods close to the final consumers, thereby enjoying a strong presence at the final levels of the value chain.

The report notes that the key hurdle to sustainable growth of the Russian economy does not lie in the fact that its commodity sector is much larger than its processing sector in terms of exports. Rather, the problem stems from the Russian processing industries’ focus on relatively simple goods, Russian industries’ general lack technological engagement, and the sparseness of Russian exports in the commodity sphere.

'All this aggravates the risks of the middle-income trap for Russia since it determines the low potential for the industries “branching” and the generation of new product categories of high redistribution, formed through the use of competencies in related industries,' the study says.

In the authors' opinion, the key challenges for the Russian structural policy are renewal and increase of added value in the non-commodity sectors and increasing the depth of processing and integration into the expanding production chains in global production.

The report, 'Russia in Global Production', was prepared by experts of HSE Structural Policy Research Center and Institute of Trade Policy. The leader of the team is Yuri Simachev, Director of the HSE Economic Policy. The report was presented and discussed online on May 28.

© iStock

When opening the discussion, Yuri Simachev noted that the emphasis of economic policy usually centers around domestic demand support. However, the country’s entry into global markets provides more opportunities to build up the knowledge-based economy and use highly skilled labor.

'We should also recall the experience of developing countries that back in 1997 accounted for only 30% of the goods and services market, which employs highly skilled workers. But 20 years later, in 2017, this share rose to 50%. In other words, they came to account for pretty much the same share as the advanced countries,’ he says. And if we're talking about structural changes to the economy, we also need to look at exports differently, Yuri Simachev adds.

'I'd like to stress that when we're talking about production with high levels of processing, there's no way to get by without the global value chain... Is everything great there? Not really, there are some risks there, some problems. However, the global chain value give you the chance to get into the processes associated with complex products,’ the HSE Director of the Economic Policy states.

Anna Fedyunina, one of the report's authors and a leading research fellow of the HSE Structural Policy Research Center, highlights that following the results of peer inspections, the economic growth of the majority of countries depended upon repositioning in the global chains. 'The expansion of the engagement in the value chains by 1% extends the GDP terminal growth rates by 1% as well. And the contribution of the expanded trade to the GDP is five times lower—around 0.2%,’ she said. She added that repositioning oneself in the global value chain is complicated and provides no easy solutions and that conventional approaches should be revisited.

Foreign direct investment and the emergence of multinational companies contribute to the solution—we need changes in state policy in terms of support for exports and individual industries

'Now there is an opportunity for an H-like strategy for participation in chains— gaining competencies within the national economy and completing the chain national elements in order to improve efficiency and increase competitiveness in our own markets to enter the markets with higher added value,' Anna Fedyukina says. It is also important to become integrated into the chains by increasing imports for their use in subsequent imports.

An export company in the global market will be more competitive if it is integrated into global chains not only from the standpoint of sales but from the standpoint of purchasing in the global market as well, said Alexander Knobel, Director of the Institute of International Economics and Finance of the Russian Foreign Trade Academy. The liberalization of international economic activity in terms of imports is more important for the exporters than for the companies that operate only in the domestic market, he emphasized.

However, the current situation that has resulted from the global coronavirus quarantine raises a number of questions in terms of the global value chain. 'The pandemic has showed that the existing value chains disrupt modern safety requirements, providing the population with necessary and affordable medical drugs, equipment, and so on,' says Natalya Ivanova, member of the Russian Academy of Sciences and the Institute of World Economy and International Relations. Moreover, the economist showed that Chinese and Asian high-tech companies focus their production in their own territories, while American and European companies have geographically distributed chains. It is now being discussed as a circumstance that harms national security since there are problems of chains being broken in a pandemic situation, as well as potential information leakage and lost control over production. ‘We may assume with a high degree of confidence that high-tech industries will very likely become nationalized,’ Natalya Ivanova said.