How to Cope with the Consequences of U.S. Sanctions: The Euroinvest Experience
Russia is not used to sanctions. In 25 years, people will celebrate the 500th anniversary of the first restrictions imposed on our country.
In the late 16th century, the Livonian Order forbade 123 masters and scientists to travel to Russia at the invitation of the Tsar. Nevertheless, cap-and-trade sentiments are inappropriate; world experience shows that sanctions are a long-term tool for suppressing the enemy’s economy. The inevitable question then becomes, “what to do?” The answer to this should be sought out among those who have successfully passed the ‘time and import substitution test’.
When people talk about the modern sanctions war, they usually mean the period after 2014, when Russia was hit with a veritable barrage of restrictions in almost every imaginable sphere. This opinion has been reinforced because, since then, sanctions have become a systemic and regular phenomenon that impacts everyday people’s lives. Nevertheless, it is worth remembering that modern Russia has lived without sanctions for just under a month to understand the situation; more precisely, for 16 days, from November 21 to December 7, 2012.
Only 31 years after the collapse of the Soviet Union, the last restrictions that the US imposed on its geopolitical rival were lifted. This was the Jackson-Vanik amendment, which essentially meant that all competitive Russian goods became subject to a tax if exported to U.S. markets. Government loans and loan guarantees were also forbidden to Russia, and if the second part was not so critical for us, then the first part seriously hindered the export of high-tech goods, which have always focused primarily on the U.S. market. The amendment was taken out on November 21, beginning a new cycle a few days later oncethe Magnitsky list appeared.
This cycle is ten years old, during which Russia has broken the international record for the number of sanctions. Altogether, the country has about 6,000 restrictions in various fields. Some of them amount to a powerful multiplier effect for sectors that even Western countries have promised to avoid. For example, healthcare: there are logistical difficulties in supplying the latest medical equipment and problems in paying for foreign equipment and drugs. Some pharmaceutical companies have simply left the country. As a result, the industry has suffered dramatically, despite it not appearing anywhere directly.
Once again, the question is, what to do? The first half of the year took frightening proportions. Years of import substitution policy proved insufficient. we can now only rejoice that some promising scientific and industrial companies in our country can produce high-tech equipment. They were preserved not by miracle or chance, but by the efforts of executives and investors, who modernized technologies managed to keep our best assets afloat. One executive that met such economic feats was Andrey Berezin, the co-owner of Euroinvest.
Prospects For Isolation
The word ‘feat’ is particularly appropriate when looking at the prospects for the country’s development under sanctioning restrictions. No matter how hard some experts try to pretend everything is fine, practice stubbornly confirms the opposite. Exclusion from the international market entails serious, far-reaching consequences. As of yet, there has not been one example of sanctions leading to the destruction of the economy, but in the long term, countries lose enormously in the rate of development.
One of the most common canonical examples is Argentina. This country has always been one of the leading economies of South America, but a little earlier, about 100 years ago, it was utterly comparable to any European country. For example, the per capita GDP in Argentina was equal to that of Sweden, with the rate of economic development coming out higher. This was due to large-scale financial interaction with the U.S. and Europe, which in the XX century has been repeatedly reduced after a series of conflicts with the the States and Europe. Argentina received its first sanctions in the early 20th century, a large package after World War II, and another after the Falklands War.
None of the sanction packages brought about the collapse of the Argentine economy, but each slowed GDP growth by 1-2% year-by-year. Most of them were restrictions on foreign investment and provided access to other markets for Argentine farm products. The result can be seen in the same comparison with Sweden, but today the South American leader is more than twice as far behind.
The standard of living in Scandinavian countries has been steadily going upward; there is not a single parameter left on which to make a correct and favorable comparison. This is called a long-term perspective. Argentina is no longer a rival with anyone, and the Falkland War in the 21st century has become impossible to imagine because the weight categories of the opponents are too different. Many experts anticipate going down the same path if we fail to maintain relations with international leaders.
Andrey Berezin spoke on the consequences that sanctions develop: “No country can cut itself off from the rest, even strong states like China and the United States. The Soviet Union tried, but it failed. Industrialization was carried out on American and German machines. There were still international ties before and during the Cold War; there was imported equipment. That is, there was no complete isolation. At the same time, the Soviet Union had an excellent, the best education in the world, there was personnel, there was a labor organization.”
From this, it is clear to see that Berezin believes education is the key to getting out of the current situation. He knows what he is talking about; he has at least three successful import-substitution projects in the field of high technology that has been implemented in modern Russia to his credit.
A Glimmer of Light in the Healthcare Industry
One of the critical assets of the St. Petersburg businessman is the Svetlana group of companies. It has one of the most extensive holdings in Russia, engaged in developing and producing electrovacuum devices and microelectronic products. At the time of the purchase in 2012, it was an enterprise with a preserved scientific base, though a fragile financial performance. Like many other Soviet industrial enterprises, Svetlana had difficulty entering the market due to a lack of marketing specialists. It is not enough to have competitive products if you cannot sell them.
Andrey Berezin acquired a controlling stake in Svetlana and quickly got down to business. The first thing he did was to readjust the sales system: a year later, the company’s net profit doubled. Non-core assets generating tens of millions of rubles in losses were optimized, such as idle warehouses, unused hangers, and outdated and degraded production areas.
It should be noted that the optimization was carried out with great success. Euroinvest was originally a development company that could implement neighborhood development projects in accordance to European standards. Therefore, Svetlana’s non-core assets yielded a high profit, channeled into several waves of the investment program to upgrade the company’s technical facilities. Consequently, several billion rubles were spent on purchasing equipment and upgrading personnel.
At this stage, Euroinvest had an idea to create an enterprise specializing in venture investments: Euro Venture. This subsidiary began to select the most promising developments for Svetlana’s employees and help them enter the market. In fact, after a large-scale investment program, the holding got its grant competition; the first winner was a robotic complex for noninvasive irradiation of tissues during oncologic surgeries.
In our country, there are simply no analogs to this device; this device allows you to diagnose cancer early and to carry out surgery to remove the tumor while simultaneously irradiating the affected tissues. The basis of the device is Svetlana’s patented X-ray tube, which, through the efforts of its employees, has turned one know-how into a high-tech complex. It has now entered the stage of clinical trials, and at a very high level at the Petrov Scientific and Medical Research Center.
Inevitably, this is not the Concern’s only project, but it is the first one, created from 10 years of hard work by Andrey Berezin. He makes it clear that it just won’t happen. The development of such products, even if there was a base to use, requires many years of work, which should have started not yesterday but the day before yesterday. Furthermore, the state needs to take this factor into account, looking for and supporting those companies which have already passed the test of time and need support to accelerate their developments to the market.
Energy of Movement
Andrey Berezin’s second project started later. It is the Rigel plant that produces lithium-ion batteries, a defense plant whose products are supplied, among other things, for nuclear and diesel submarines. In Svetlana’s experience, unprofitable assets were also sold here, and then several stages of the modernization program were carried out. The company’s task is to improve product quality and enter the civilian market, including import substitution.
There is an old joke that the optionality of their execution compensates for the strictness of the laws of our country. The Government’s plan to bring the share of civilian products in the DIC to 50% by 2030 is one requirement. Some enterprises are just physically unable to do it due to the specifics of production, but the majority is still trying to find a solution. For instance, Rigel is involved in one of the numerous Russian projects of creating electric cars.
Many Russian companies have approached this task differently, but our manufacturers have not yet found a car that can effectively run with an electric motor. The main problem, as can be easily guessed, is batteries. An indicative story is the failed Yo-mobile project, where the energy source changed with every presentation. At first, it was a battery, then a hybrid engine, and there were even mentions of ionic cells, which are hard to imagine in this role.
The situation at Rigel is different. After upgrading production, they took on the project with double the energy. Even all the events of 2022 have not canceled this intention. An agreement with Almaz-Antey was renewed in September, providing a whole line of electric cars. The first of them, E-Neva, has already been presented to the general public. Even Deputy Prime Minister Denis Manturov was at the wheel; they would hardly get so close to the prototype without being sure of the future launch of its production.
Currently, the announced deadline for launching mass production is 2024. While there are already reservations that the deadline may move, it’s still not a ten-year project. This makes the reality clear surrounding import substitution; with a multibillion-dollar industrial giant with government support behind it, a high-tech project takes several years from prototype to market launch. Such flagship projects should appear in all spheres today to bring to the market a replacement for all the brands that went away in an adequate time. At the end of this period, the niche market needs to be filled.
Beautiful Far Away
Import substitution to combat sanctions is an urgent need. Without it, there are already difficulties with the supply of even the most essential goods. Working from scratch, however, could take decades. That is why the state needs to seek out people like Andrey Berezin and his Euroinvest across the country and support their most promising projects. In this case, domestic products in short supply may appear in a few years, which is the most optimistic forecast we can perceive in today’s conditions.
Import-substituting developments are already underway:
- The Svetlana robotic complex for the diagnosis and treatment of oncological diseases
- E-Neva with a Recond battery
- Microcircuits by Recond
- Semiconductors by Recond
- Svetlana ultra-short pulse ice thickness meter
- Microfocus X-ray unit Svetlana