Reconfiguration of Cooperation Ties of Russian Manufacturing Firms Under Economic Sanctions

Abstract

This paper is focused on one important direct consequence of economic sanctions introduced in 2022: namely, on the necessity to change the suppliers of raw materials, components and equipment in Russian manufacturing firms that historically had long-term cooperation ties with the partners from Europe. The main goal of the paper is to investigate the immediate response to the break of contracts and cooperation agreements, namely, (a) what firm-specific features are associated with the managerial decision to change the suppliers,  (b) what is the scale of import substitution and (c) what is the geographical structure of new cooperation partners.

This study is based on the results of the representative survey of 1860 Russian manufacturing firms. It was conducted with CEOs in 2022 and covers firms with more than 10 employees. The survey reports the information on a variety of firm characteristics such as size, age, location, ownership, international trade, cooperation ties, investment and innovation, etc.

We provide the empirical evidence that sanctions shock of 2022 turned out to be extremely painful for the current supply structure and forced enterprises to look for solution to compensate for gaps in cooperation chains. We tested several hypotheses to identify those characteristics of the company that are associated with the reconfiguration of suppliers of raw materials/materials, parts/components or technological equipment. In the econometric analysis, we use probit regression controlling for firm size measured as number of employees, industry heterogeneity and regional territorial effects.  Our finding confirmed that it was systematic importers who turned out to be the most vulnerable and affected group because of the imposition of sanctions, and it was this group that began to actively seek a replacement for contractors who had cancelled cooperation. The most technologically advanced firms and active innovators were found to be in the group of those who immediately replaced suppliers in the first months after the imposition of sanctions. Another finding is a significant positive role of the supply chain digitalization. 

We have shown that it was European suppliers that Russian firms most often changed in 2022: 80% of firms that changed foreign suppliers indicated Europe as the region of previous supplies. At the same time, in 2/3 of cases, the reason for the replacement was the unilateral refusal of the partner from further deliveries – i.e. the replacement was forced. This was only partially offset by switching to Russian suppliers, although it should be noted that the share of such replacements (from a foreign supplier to a domestic one) turned out to be higher than expected. According to indirect data, enterprises managed to find an alternative within Russia for 30-40% of European partners but most of the changes in the network of foreign suppliers were not related to import substitution as significant part of the imports have switched to China.