Russia is adopting new methods to tackle the economic problems increasingly felt due to Western sanctions. The involvement of small and medium-sized enterprises in the implementation of state and military-industrial plans is becoming more common.

Here, centralized autocratic methods are mixed with market-based, youth-motivating tools. They are implementing and planning the controversial in the West but increasingly applied compensation for the exodus of Western companies due to the attack on Ukraine, the Russification of these companies, and the transformation of the international financial settlement system.

The Population Believes in Gold

In this context, work is underway on a cryptocurrency-based international monetary system that would "dethrone" the predominantly dollar-based Western currencies. The process is controversial; according to some sources, the government wants to expand the use of cryptocurrencies, while others say it aims to ban retail transactions. Either way, distrustful Russians are buying up gold by the hundred tons.

A recent bill suggests that the Central Bank of Russia (CBR) will set up a pilot clearing center starting September 1, 2024. The process is being coordinated with RoszFinMonitoring (RFM), the Ministry of Finance, and the FSB.

Believed in by the Russians, Once Pursued in the EU

The federal parliament is now considering for the second time the practice of domestic compensation (offset), which was long considered worthy of pursuit in the EU but is deemed desirable in the Russian economy. In this practice, the seller reinvests a portion (or all, or even more) of the money received from the buyer into a certain economic sector, namely one that is likely capital deficient and manufactures import-substituting products.

This practice, primarily related to military-industrial products in the EU, was once vehemently eradicated by Brussels regulators, arguing it contradicted free competition. However, Brussels now tolerates offsets and turns a blind eye to them.

Moscow is looking to introduce domestic offsets in state procurement, likely at companies producing dual-use (civil-military) or purely military products. Given the mention of "non-commodity" references in the proposal, analysts suggest it could involve tools powered by artificial intelligence (AI), IT services, or software. Globally, military system developers are avidly exploring the use of AI elements in military technology, from drone targeting to rapid formation of artillery elements and network-centric warfare techniques. Suggestions in the Russian legislature's upper house (Federation Council) include adding regional government structures to the state procurement list.

Russia views offset agreements differently than the West. According to the Urban Development Agency (AGR), an offset contract is made between the customer and the seller for the supply of a particular good. In this case, the selling company acts as an investor, agreeing to start production of the desired product in a newly built or modernized factory. The buyer guarantees the purchase of the said product.

Rebranded and Russified

Another approach, increasingly used, involves operating the production companies that withdrew from the Russian market due to the attack on Ukraine under a new name and Russian management, ideally with an unchanged product structure. The latest example is the Finnish quality tire manufacturer, Nokian, known for its winter tires and new technology developed to reduce rolling resistance and avoid carcinogenic raw materials (heavy volatile oils). Nearly twenty years ago, the massive, ultra-modern robot-operated Nokian factory was opened near Saint Petersburg, in Vsevolozhsk. Now operated under the brand name Ikon, with Russian ownership through Tatneft, Russia's fifth-largest oil company, the factory produces nearly six times as many passenger car tires as the Finnish parent company.

About ten to fifteen years ago, Hungary also imported the premium category, Russian-manufactured Nokian winter tires. When Nokian exited Russia, forty locations competed for its relocation, with Oradea (Romania) winning. The investment there consumes approximately 650 million euros (of which 100 million euros are funded by the EU). Hungary also bid, but the Finns - for political reasons, it is said - were not pleased.

Many Well-Known Brands Remain in Russia

In Russia, unlike with Nokian, the original owners of "prestige brands" like the French Michelin and the Italian Pirelli did not exit the market. Given the significant proportion of prestige car brands among the upper classes, there's a substantial demand for prestige car tires as well. According to Pirelli Russia, today the Italian brand is Russia's leading prestige car tire. Chinese brands have penetrated the lower, cheaper segment of the market. For a 245/40 R20 size - city SUV - tire, the Chinese version costs 9,000 rubles, while Michelin's is 50,000 rubles (one ruble: 4 forints). The price difference is significant, note industry sites, adding that the price of summer tires has increased by 11 percent over a year.