This paper argues that Russia has embarked on a difficult path to economic sovereignty and heightened security to withstand rising antagonism from the West that culminated with the application of punitive sanctions against Russia's positioning on Ukraine. With the aim of lessening economic dependence on trade with the EU, its major trade partner for decades, Russia tries to work out a patriotic model of growth based on two vectors: import and trade partner substitution. The pursuit of self-sufficiency in foodstuffs adds an important pillar to security concerns as reflected earlier in the 2010 Doctrine on Food Security. But import substitution will be costly and difficult to manage. Fiscal balances and exchange rates will need to adjust to the new challenges. Finding new partners eastwards is also complicated. Trade with China, in hydrocarbons or other commodities, requires massive infrastructural work that neither the government nor private investors can afford in a situation of financial stringency. Investment from China is slow to materialize as the economic slowdown also impinges on China's projects. Nonetheless important deals on gas and infrastructure have been agreed and are pursued despite difficulties. A favourable institutional framework aimed at attracting investors to the Far East is in place. It will be up to the local administrations to make the best of it and venture capital to run the risk. The outlook is long-term, but both Russia and China have learnt from history to be patient.

Russia, economic security, import substitution, development eastward, trade, investment, China

The goals, strategies and agents of change in today's ostracized Russia are framed into “economic sovereignty”, a concept used for the first time by President Putin at a Congress of the All Russian National Front (ONF) in April 2015. Putin laid down the context of the new policy framework. Heightened concerns for security in a hostile geopolitical environment required stronger engagement and commitment to implement the reform agenda enunciated in the 7 May 2012 decrees. Putin admonished people in charge to neither relax, nor complain, and assigned the ONF the monitoring and control of plans and procedures regarding self-sufficiency and import substitution policies.

Economic sovereignty fixes the paradigms of Russia's new order —that this paper characterizes as Militant Russia (MR). This is an order in fieri — a patriotic construct that is taking shape within the corporatist framework of enhanced security concerns. By this approach, militant means assertive, vigorous, active, but not necessarily bellicose. Militancy in the Latin meaning of “serving as a soldier” is understood as the collective pursuit of the Russian nation in defence of its own interests and goals. Features of Russian corporatism were discernible some years ago (see Malle, 2013b), but developments to date add new elements to this vision. While the search for a national identity anchored to historical values and tradition is still confused and incomplete, one can observe the emergence of a “militant nation” under the impact of ostracism from the West.

The semantics of Militant Russia helps highlight the vision of a nation that is not resigned to a subordinate role among regional powers; aims at independent statehood, strives to strengthen its own social and economic organizations; moves to fight international isolation by threading new partnerships and alliances. Used and abused labels of dictatorship, totalitarianism, authoritarianism, neo-authoritarianism are either inadequate or less heuristic compared to the characters of “militancy” in present-day Russia. Militant Russia is not a system, but a process permeated by cultural features and people's pride in national heritage that motivate their support for the leadership. MR embodies a vision of social cohesiveness; commonalities of values and national aims. Contrary to the Soviet Union where internationalism, at least ideally, played an important role in framing alliances and establishing durable links with opposition movements in democratic countries, MR stands in defence of the nation's own interests and prospects. Militancy is an irreplaceable attribute of defence should mobilization eventually become necessary.

In this vision patriotism, together with enhanced military and economic security, plays a primary role. Patriotism has become the symbol of national identity and readiness to defend the country for a large majority of Russians.1 While modernization cannot work “without the unifying force of civil patriotism,” in order to succeed, “mobilizing” patriotism should look to the future, not to the past. “Owing to the radical and irreversible changes in the external environment” there is need for re-discussing foreign policy strategies — separately from the issue of Ukraine, warns Andrei Kortunov (2015), Director General of the Russian International Affairs Council. Isolated from Europe, Russia turns to Asia. But forging new alliances will not be easy. The Russian Far East and the Asian Pacific Region beyond are largely unexplored territories and impervious cultures. In order not to be seen as a minor actor in the Asian countries’ race for development and growth, there will be need for a wise balance of militancy and restraint.

Facing a confrontational approach at Russia's borders with Eastern Europe, “economic sovereignty” policies are discussed in Moscow with focus on enhanced security. Underlying decision-making, security concerns demand adjustments to the model of growth in which the pursuit of efficiency becomes a lesser priority compared to the past two and a half decades of transformation to market. The pillars of the new order are a tighter security approach to economic structure and performance, sustainable partnership linkages eastwards and the upholding of mutual trust between the people and the leadership.

This paper discusses two facets of the path to economic sovereignty, each bearing a durable impact on the nature of the system and its foreseeable development. Firstly, the Russian embargo on food imports and related policies are analyzed from a longer term perspective. The point is made that such an approach will entail economic policy adjustments unforeseen in the 2012 reform agenda. Secondly, the process of trade partners’ substitution is considered with focus on the need for Russia to find long-term trustworthy strategic partners in Central Asia and China as an alternative to both Eurozone and European Union countries. While costly compared to former prospects of turning Russia into a bridge between Europe and Asia, the paper discusses whether this policy may be profitable in a longer term by furthering the development of the Russian Far East and opening new markets to Russian commodities and military exports.

At the 2015 April Media-Forum organized by the ONF, Putin conceded the economic situation was evolving compared to 2012, but contested the notion of crisis dismissing the importance of the “so-called anti-crisis plan”. In his view, despite difficulties, foreign loans were honoured and, despite falling oil prices and ruble depreciation, there was no economic collapse.2 Changes in the model of growth were not discussed; vice versa, the room for progress was emphasized.

As a matter of fact, worrisome developments are putting pressure to adjust the model of growth to new constraints. This model is still based on open trade and free capital movements. The ratio of Russia's foreign trade to GDP is still comparatively high among the emerging market economies (EME) at 41.3% (2010–2014 average) similar to India (41.7%), not far from China (45.0%) and almost double that of Brazil (21.9%).3

Market criteria apply by and large to macroeconomic policies and the country has been pursuing further integration in the world economy becoming a member of WTO in August 2012. Sovereign funds backed up by oil revenues and prudent investments in foreign treasury bills have helped the economy to fend off the worst effects of the international financial crisis, providing a cushion against unexpected liquidity pressures in 2008–2009.

The repercussions on economic performance of falling oil prices and western economic sanctions, introduced in April 2014 and matched in August by a Russian embargo on imports of foodstuffs, have been painful, with a 2015 GDP fall of 3.7%. While it is difficult to separate the impact of different factors on performance, the official estimate of the cost of sanctions is $160bn.4 Pressures to move from market tools to more direct state intervention are increasing.

The precarious balance between promoters of market reforms and conservative opposition that survived the 2008–2009 economic crisis clashes against MR's priorities and ambitions. While autarky is ruled out, “economic sovereignty” is an eloquent rallying cry for the direction of change. The catchphrase is ambitious and out of reach for a resource-based economy exposed to highly variable international prices and highly dependent on western technology, but conveys the need for structural measures against shocks from either business cycles or confrontational policies. Economic sovereignty, thus, entails control on the reallocation of resources according to priority and a discriminating choice of economic partners. Import substitution is the approach to production that any company is supposed to be aiming to. Government and businesses must work in tandem. Powerful state companies and administrations are put under pressure to deliver on time and quality. Ministerial regulations have been approved tightening the screws on state entities trying to circumvent import constraints to their benefit.5 Developments to date suggest that this goal is pursued with determination by the authorities despite resistance from large companies both state and private.6 From constraint, import substitution has become a goal of MR for which social cohesiveness becomes crucial. The ONF created in 2011 and developed throughout the country under the impulse of President Putin may serve this purpose.7 But import substitution is also to make room for trustworthy trade partners out of Europe, and primarily in Asia. With stronger economic ties, military alliances may also develop in time to secure common progress. In trying to fend off the worst effect of isolation, security concerns become pervasive and condition socio-economic developments.

Sectors that matter for security are gaining pre-eminence for policy and growth. These include primarily the military-industrial complex (MIC) with its research and development sector, the modernization of which had been planned earlier (see Cooper, 2015), and energy that this paper briefly discusses below in relation to Gazprom's plans of supply to the East. We, however, focus on the security implications of the new approach to self-sufficiency in agriculture.

Import substitution policies have either been forced by sanctions from abroad, or stimulated by government restrictions on a number of imported agricultural products. The cost of replacing some 800 critical imports of civilian processing industry by 2020 is estimated at 1.5 trillion rubles (c. $30bn), of which 235bn (c. $4,7bn) should be financed by the state in the (optimistic) expectation that, due to higher tariff barriers, the largest part will be financed by private investors.8 Observable effects to date of import substitution policies are discussed thoroughly by Connolly (2015, 2016). This section concentrates on their MR strategic aspects relative to food products.

Russia's embargo on imports of foodstuffs came unexpectedly in the aftermath of industrial, financial and individually-targeted sanctions enacted by major powers in the course of 2014 to condemn the annexation of Crimea and pro-Russian separatist fighting in Ukraine's territories bordering Russia. The embargo encompassed a number of perishable products and was interpreted as a tit for tat measure aimed at hurting small producers in the expectation that they would put pressure on their respective governments to revise, mitigate or cancel altogether their sanctions against Russia.

More importantly, however, from a systemic point of view, the embargo forced Russian producers to put in practice the precepts of security strategies laid down earlier, in the aftermath of the 2009 international economic crisis and when Russia's GDP had fallen by 7.8% year-on-year. Import substitution including foodstuffs was greeted by nationalists as a long-awaited chance of economic modernization.9 In this light, Russian counter-sanctions acquire a new dimension. Indeed, if conceived as a symmetrical reaction against the array of OECD members’ sanctions, the Russian embargo looks trivial, particularly if compared to the cascade effects of banning foreign airlines from flying over the territory of Russia or cutting hydrocarbons supplies, both discussed in the country and, with much concern, abroad.10 Second, in the light of the small GDP share of agriculture in OECD countries (less than 2–3%) and the even lower share of food exports to Russia, the Russian authorities would have been naïve to expect the embargo to be very costly, socially painful and politically damaging.11 Finally, one would think that the political drawbacks of a measure easily described as self-inflicted punishment bound to bring about shortage and price increase, should have been taken for granted by the authorities.12

More plausibly, as purported in this paper, the embargo was thought of, and carried out, as a timely, and unduly delayed (according to some), implementation of security guidelines approved by Medvedev's decree on 12 May 2009. The previous decree signed by Putin as Acting President on 10 January 2000 in which agricultural stagnation and imports of foodstuffs were mentioned cursorily as one of many possible economic threats was cancelled.13 On the basis of Medvedev's 2009 decree a Doctrine of Food Security was worked out and approved on 1 February 2010,14 following concerns for people's well-being and possible unrest during the financial crisis. In Medvedev's decree the global financial and economic crises are comparable for their cumulative damage to application of military force on a large scale. Food shortage was listed as a major danger to avert thanks to biotechnology and “import substitution of basic foodstuffs”. Among many fundamental concerns the consumer price level was listed third. The Doctrine of Food Security laid down monitoring indicators of consumption and production. Per capita consumption of food and calories was chosen the object of monitoring.15 On the side of supply, together with the volume of output, imports of primary and processed agricultural products and fish were listed for monitoring. Substitution with domestic output was also discussed with regard to technology, machinery, equipment and other resources for the agro-industrial complex and fisheries. The task of examining the state of food security and the right to issue recommendations were mandated to the Security Council.

The Doctrine's framework inspires today's agro-industrial policy and is referred to when justifying state support to farms and food processing. Arkady Dvorkovich's report to the government on food security late April 2015 suggests that the share of domestic output of basic staples must conform to the 2010 Doctrine's principles. In five years Russia should achieve almost 100% food security in meat, vegetables and fruit, and in about 7 to 10 years in dairy products. The Doctrine fixes precise quotas: domestic output should provide 95% of consumption of grain, 80% of sugar, vegetable oil and fish, 85% of meat, meat products and edible salt,16 90% of milk and dairy products and 95% of potatoes.

Plans are ambitious and resources are scarce. Nonetheless, food security may finally have obtained priority status close to that of military output and energy. It is also gaining support from farmers’ lobbies.17 High agricultural subsidies maintained by the US and the EU for decades despite WTO's recommendations also provide for food security. After decades of food dependence Russia appears to be aligning itself with world powers’ practice. The embargo of foodstuffs approved in 2014 is supposed to encourage the consumption of traditional staples, enhance import substitution when feasible and provide for food reserves. To counter imports, including agricultural machinery and foodstuff from EU countries, through the members of the Eurasian Economic Union (EAEU—see below) the Ministry of Economic Development (MED) aims at introducing import substitution policies in state procurement (already in place in Russia) within the EAEU.18 The authorities may even consider, as they did, tax or other constraints to the export of grains to boost foodstuff reserves, and even destruction of illegal imports that is continuing in 2016. 19 If banning the import of foodstuffs aims primarily at increasing security, as suggested in this paper, it is likely that, no matter the fate of sanctions against Russia, the authorities will not hurry abolishing the embargo on basic staples any time soon.20 But they will need to adapt economic policy to this challenge.

Tougher security rules will have an impact on policies since there is a need to a) provide investors in agricultural output and processing with the necessary long-term horizon; b) boost the output of primary products; c) reign in currency appreciation relying on a weak ruble as a protectionist measure against imports from non-OECD countries instead of subsidizing farmers for which there is now little fiscal room21; d) stimulate the development of internationally competitive large-scale farms and agricultural processing.22All in all, the macroeconomic policy coordinates will need to adjust to security concerns at least in the short to medium term. Plans for 2016–2018 include subsidies to agriculture of up to 290bn rubles by the Federal Government and of up to 66bn rubles by the regional structures.23

A competitive exchange rate suits economic authorities and investors better than a strong currency.24 In this context, an appreciation of the ruble linked to an increase in oil prices would find the Central Bank less inclined than in the past to sterilize current account capital inflows to stem inflationary pressures.25 The inflation targeting regime is unlikely to be brought, if it ever was, to capacity and, while remaining volatile, there is no sign that the exchange rate may significantly appreciate any time soon, particularly after devaluation of the yuan by China in August 2015 (see Weafer, 2015; Wolff, 2015). Thus in the foreseeable future, macroeconomic stabilisation and disinflation may be sacrificed to changing priorities.

Results to date show that imports of foodstuffs decreased remarkably, probably more due to the depreciation of the ruble and falling disposable income than self-inflicted embargo. Despite the sharp fall in GDP, agricultural output increased in 2015.26 State subsidies to the agro-industrial sector increased either through direct grants or indirectly through privileged credits backed by state. One third of the regions benefited from such schemes.27 Only time will tell how structurally effective such policies might have been.

Sanctions and embargoes cannot prevent altogether trade flows through third, particularly if bordering, countries, as repeated skirmishing on foreign trade with Belarus suggests.28 But higher transaction costs help reduce the comparative costs of home-made staples. Improving food processing and catering of home-made products and fostering competition against large scale international retailers in the field are already occurring. Start-ups may find some state-backed support.29 Foreign retail investors are already moving to find local suppliers. This may lead with luck to people's pleasure in rediscovering traditional tastes, though there could be limits to food patriotism when prices grow fast.30 In some regions price control demanded by social organisations is already in place.31 Ceteris paribus, this may contribute to shortage in the short run. But the material and moral coordinates of MR's food security are in place: hardly anybody would dare to fight them.

The security approach to economic sovereignty is patriotic, but not autarkic. In this light, Russia's turn to Asia is of a great significance, as noted by Russian policy advisors and quite a few dispassionate foreign observers,32 for this vision may durably effect not only the strategic allocation of resources, but also partnership in trade and investment and joint defence agreements. The May 2012 decrees focused on the accelerated development of the Far East and increased openness to China and the Asian Pacific Rim as a whole. Three years ago the idea of Russia bridging Europe with Asia appeared if not attainable in the medium to long term at least a far-reaching goal that both western and eastern economic partners could be interested in (see Malle and Cooper, 2014). This idea is now dead.

Moving eastwards is presently a tighter concept, as it entails Russia turning away from Europe to give pre-eminence to deepening its foreign relations with Asian countries and China.33 As a point in case, it is worth noting that a free trade agreement between Vietnam, among the many other Asian countries that manifested interest, and the EAEU has been approved by the Russian government on 25 May 2015.34 Rather than eastwards plus westwards, as conceived earlier, this is a continental shift of dramatic dimensions and consequences for all. Putin and Xi Jinping standing side by side at the 9 May 2015 Moscow parade for the celebration of victory in WWII with the glaring absence of all western leaders and/or high level representative officials is striking proof of the tremendous turn in foreign relations observable to date. This represents a milestone in smoothly developing bilateral relations the pace of which accelerated as a reaction, according to a Chinese expert, to the strategy of containment adopted by the US, disrespect of other countries’ sovereignty and NATO's expansion to Eastern Europe.35

The divide was initially marked by the ostensible disinclination to attend the Sochi Olympics by most western leaders. This decision was preceded by the condemnation of the Eurasian Customs Union (ECU) as a revanchist attempt to recreate the Soviet Union, and followed by various efforts to disrupt the enlargement of the Eurasian integration project.36 The reasons for mounting hostility against Russia at that stage are unclear. On the one hand, projects of regional economic integration had been carried out by many countries earlier, including the US with NAFTA. The ECU project was largely based on the EU model and regulatory framework. The EAEU was inaugurated in 2015 as a supranational entity with equal rights for all members. Decision are taken by consensus at the Highest Council body.37 On the other hand, nationalist overtones are better assessed if compared with those of other EMEs, such as Turkey, for instance, or contextualized in Russia's transformation to market and peoples’ pride in recovery and growth after the painful 1990s.

Both Sochi and ECU initiatives had been conceived at the time of high GDP growth rates that Russia has not yet been able to recover since the 2008–2009 crisis and may have to be sacrificed in the years to come to the need to revisit the model of growth. Steps to strengthen the Eurasian Customs Union (limited to Russia, Belarus and Kazakhstan until mid-2014) were gradually undertaken in the aftermath of the crisis by a laborious process of tightening regulations on trade, technical/sanitary product specifications and compromises on customs’ barriers and transit, while the cost of enlarging the alliance to poor partners such as Kyrgyzstan and Tajikistan turned into a reason for postponing their entry to better times, as was explicitly reiterated by the authorities in charge of ECU, rather than rushing to incorporate them, a move eventually justified by an expansionist and/or defensive strategy. The whole process of Eurasian Integration, originally proposed by Nazarbaev in the early 1990s, was slow, marred by uncertainties, difficult negotiations with weaker but demanding partners and, all in all, very costly for Russia. Economic prospects from integration with more advanced countries and efforts at improving security in Central Asia by bribing in poor countries framed the whole strategy. Not a militant one at that stage.

Ukraine that had been enticed by Russia to join the ECU with a number of promises and privileges declined the offer in 2013 unleashing —together with the breakdown of government structures, political and economic linkages, people's unrest and separatist movements — additional reasons for Russia's acrimony against the EU and the Anglo-American community overt partisanship. Russia's altogether peaceful annexation of Crimea, after a cleverly organized pro-Russia referendum, enhanced Russians’ militant mood and passions.38 The frozen armed conflict in southeast Ukraine is to become a permanent source of tensions in Europe compelling Russia not to disengage from the region (see for this outlook Trenin, 2015a; Ishchenko, 2015; Karaganov, 2015; Lukyanov, 2014a). But that will not prevent a rapidly growing reallocation of resources aimed at deepening its relations with Asia. Understandably, policies and commercial agreements are driven by economic interests, but security concerns remain paramount primarily with regard to Central Asia (as discussed in Malle, 2013a).

Russia is engaged on a process of political and economic transformation in the direction of a model of “economic sovereignty”. This process is linked to economic and political ostracism enacted in 2014 against the country by major international powers as a consequence of developments in Ukraine. While the country rejects autarky, and is determined to maintain large openness to foreign trade as demanded by its economic structure, a selective approach to partnership is being developed. This paper discusses the current process as Militant Russia—an order that emanates out of a blend of patriotic sentiments and security concerns. While policies are still based by and large on a market approach, major concerns regarding the policy of containment and isolation from international markets are laying the ground for a pervasive security approach to growth and development. In this context, MR rediscovers in culture and history its own values and identity of which to be proud.

Two elements of the Russian “sovereign economy” have been discussed in this paper: enhanced import substitution in areas of concern to security; increased focus on Asia for the redirection of commercial flows and establishment of new partnerships. Both need militant support from society that cannot be taken for granted and will need policy determination on the part of the authorities.

Some preliminary conclusions are drawn. First, food security is being upgraded to priority for the first time, complementing military and energy security. The Russian embargo on basic foodstuffs and agro-processing technology is primarily a means to achieve self-sufficiency in targeted areas no matter how costly. Second, Russia's turn to Asia is planned to last but will need to be sustained by appropriate strategies. The path is insidious and fraught with problems, but to a large extent is obligatory. Some steps have already been taken for the diversification eastwards of gas and oil supply, despite overwhelming skepticism at home and abroad; other policies are at the stage of MoU and/or preliminary agreements that will need further negotiations before being implemented. A Free Trade Area between Russia and China is being discussed between high level Russian and Chinese officials, while a number of Asian countries manifest their interests in the existing five member-Eurasian Economic Union that went into force on 1 January 2015 or other FTA structures.

The militant path to economic sovereignty is likely to produce fundamental changes to both state organization and the model of growth. A lower dependence on the West combined with stronger ties with the APR and China will need to be built almost from scratch and be made sustainable. Changes will take time and be costly. All the more, to be endurable, they need to be based on a security approach to new partnerships and people's sustained empathy. The perception of any new threat can only reinforce Militant Russia. The analysis of these developments suggests that Russia may rapidly, albeit painfully, reach a point of no return to past economic relations and political alliances.

The author is grateful to Ron Amman, Richard Connolly, Julian Cooper and Andrei Yakovlev, for valuable comments.