A One-Sided Drug Trade
Although the economic sanctions wielded by the West against Russia do not target its pharmaceutical industry or medical supply chain, the resulting ripple effects may adversely impact both. Since the early 2000s, Russia has had a keen interest in developing its biotech industry. This included both the agricultural and the pharmaceutical sector. While the agricultural sector was relatively successful and Russia rose to become the world’s largest provider of wheat, the pharmaceutical sector did not achieve the same level of growth. Russia relies heavily on the international market, mainly from its European trade partners, to cover the quantity and diversity of medical drugs its citizens consume. In 2019, Russia was importing 70% of the drugs the nation was consuming.[1] Russia’s pharmaceutical industry struggles to domestically produce an adequate amount of medical drugs and is therefore reliant upon imports.
One of the reasons for Russia’s lack of medicine manufacturing capacity is its dependence on the international supply chain for pharmaceutical precursors, namely active pharmaceutical ingredients (API). The relationship between Russia’s imports and exports of APIs can be seen in Graph 1 below.
Graph 1: The amount of imports, in purple, outstrip Russia’s exports, in blue, for active pharmaceutical ingredients. Russia’s pharmaceutical sector still relies on imported APIs for its drug production.
Although the value of imported and exported APIs have a similar trend from 2007 to 2021, the number of imports average to more than three times as much as exports. Russia imported 85% of its API consumption in 2019, which corroborates with the deduced information that Russia is heavily reliant on the international market to sustain its pharmaceutical sector and domestic medical drugs manufacturing. However, the total value of imports fluctuates within the recorded period in Graph 1, with increased imports in 2012 and 2018 while decreasing in 2015 and 2021. The fluctuation may reflect the mixed success of the national plans to improve the biotech and pharmaceutical industry. Russia’s Pharma 2020, one such national plan, promised to pump $4 billion into developing the industry[2] and explains the increase in Russia’s API demands from 2010 to 2013. The import regression from 2013 until 2018 is a visible sign of Pharma 2020 losing steam after its inception. The decrease after 2018 could be the effect of Russia’s Pharma 2030, an updated national plan. Although international movement and trade were hampered by the coronavirus in 2020, the foundation laid by Pharma 2020 should not be ignored. Major objectives of the Pharma 2020 plan included “localization and import substitution”[3] and Pharma 2030 leveraged these developments to improve Russia’s pharmaceutical sector. Despite these improvements, Russia still could not close the gap between its API imports and exports. Russia’s medical drugs trade data, shown in Graph 2, corroborate the mixed result of its national plans.
Graph 2: Russia’s import of medical drugs, in blue, far outstrips the amount that it exports, in purple, to partner countries.
The difference between Russia’s imports and exports for medical drugs is immediately noticeable in Graph 2. The statistic that 70% of drugs consumed in Russia were exported in 2019 is visible here and would seem to be the case for 2011 and 2013 as well. The peaks and valleys of this graph correlate to Graph 1, indicating that medical drug supplies share similar effects from Pharma 2020 and Pharma 2030 as the pharmaceutical sector’s API imports. However, there is less fluctuation of imports for medical drugs, showing a higher level of consistency for Russia’s dependence on the international market to sustain its supplies. The Russian invasion of Ukraine and resulting sanctions have indirectly reduced the supply of medical drugs such as insulin in Russia[4], emphasizing their dependency on imports.
Consequences of Sanctions
Russia’s dependency on the international market for its pharmaceutical precursors and medical drug supplies puts the nation in a precarious position when these sources are compromised. Russia’s invasion of Ukraine has engendered waves of strict economic sanctions against key Russian sectors and leaders by the West. The United States and many European countries have already rolled out sanctions against Russia on key technologies and banks, crippling its ability to conduct business. Aside from items listed on international export control regimes, however, these sanctions do not target the pharmaceutical sector directly and exceptions for medical supplies are in place.[5] This has not stopped Russian medical supplies from being affected. The ripple effects from these sanctions could have detrimental consequences on Russia’s entire economy, including its pharmaceutical sector and medical supplies. Already, pharmaceutical companies are struggling to import important ingredients.[6]
One such peripheral consequence is the devaluing of the Russian ruble, which will reduce Russia’s buying power for medical drugs and the pharmaceutical precursors for domestic drug production. Additionally, sanctions on Russian banks will cause disruptions and complications for payment transactions for Russian pharmaceutical importers and their trade partners. Major airlines and shipping companies have also suspended operations in Russia, severally limiting supply routes. These difficulties, along with moral and reputational pressure, may discourage establishing and continuing trading relationships with Russian entities. These discouragements may ultimately impact Russia’s ability to continue the high volume of medicine and API imports to meet the demands of its populace, who consumed 6,173 million packages in 2019.[7] A multitude of companies not named by sanctions are already withdrawing from the Russian market for a combination of these reasons.[8] Panic buying and hoarding of imported medical drugs induced by worries over sanctions has also reduced supply and artificially inflated demands.[9] India, one of the top ten sources for Russia’s medical drugs, is paying close attention to the Russian invasion of Ukraine and is considering how the ripple effects will influence its pharmaceutical exports to Russia and Ukraine.[10] Compounding the peripheral consequences listed is the sources of medical drugs that Russia traditionally imports from, which is shown in Graph 3.
Graph 3: Russia’s major source for medicine is from European countries as well as India and the US.
The countries in Graph 3 are the top 14 sources for Russian import of medical drugs. The European Union, which a vast majority of the countries on Graph 3 are a part of, is discouraging Russian aggression through sanctions. Sanctions implemented by these countries, although not directly targeting Russia’s medical drugs supply chain, could impede exports of medicines to Russia[11], whose medical supplies such as insulin, are running low. Top sources for Russian API imports, shown in Graph 4, also share a similar dynamic as medical drug imports, although with more leeway for Russia’s pharmaceutical sector. China is the largest provider of API for Russia, which is the source for most of its API imports. Other major exporters of API to Russia include several EU countries as well as the US and Ukraine, who are all implementing sanctions against Russia. Impediments of APIs imports from these countries would not have as significant of an impact as medical drugs due to China’s central role as Russia’s primary API provider. However, as Russia lacks the capacity to domestically manufacture a sufficient amount of medicine, it would need to seek alternative sources to maintain the medical supply that is indirectly affected by sanctions. Turning to China to aid in this endeavor would be one of the few options that Russia has remaining.
Graph 4: Russia’s top active pharmaceutical ingredient trade partners have China as a major provider and several EU members.
China is in an excellent position and has the capacity for the surge of drug and API demand, likely to result from Russia’s predicament. One of the staple characteristics of China’s biotech industry is its contract development and manufacturing organizations, which include the production and provision of medical drugs and active pharmaceutical ingredients. As Graph 4 and Graph 5 show, Russia is already one of the top ten importers of China’s API supplies. Aside from Korea, China’s API trade flow is one-sided, with more exports than imports. China’s pharmaceutical infrastructure would welcome this surge of demand from Russia because it is an opportunity to enhance China’s influence over Russia as well as strengthen China’s pharmaceutical sector. Imports from China is likely to increase due to the potential impact on Russia’s ability to acquire medical drugs from European partners, where it traditionally obtains these goods. Russia might either directly import medicines or lean on its domestic pharmaceutical sector to manufacture them, which requires increasing API imports from China. Ultimately, this could increase China’s leverage over Russia and alter the relationship between these two world powers.
Graph 5: China is a major export of active pharmaceutical ingredients. Aside from Korea, China’s API trade is mostly one-sided, skewed towards export.
Conclusion
Russia’s invasion of Ukraine has resulted in dire consequences in the form of international condemnation and economic sanctions. These sanctions target key technological sectors and Russia’s banking system. They do not directly target the pharmaceutical or medical sectors. However, these sanctions will have ripple effects on all of Russia’s economy and will be detrimental to even non-targeted sectors and a variety of important supplies. The pharmaceutical industry and medical supplies could be amongst those indirectly impacted by the sanctions. Despite sanctions not applying to medicines, Russia could be restricted from a major reliable source of medical drugs, impeded by the peripheral effects of sanctions, which it heavily depended on securing from European trade partners. Russia would be forced to find alternative sources or rely more heavily on its pharmaceutical sector to provide the necessary medical supplies to its citizens. China may be an appealing resource and trade partner for Russia. However, the reliance on China could shift their relationship and cost Russia some of its political influence. As Russia becomes a pariah on the international stage, China could expand its influence in Russia and regions where Russia’s influence wanes. China’s increase in influence may pose a significant threat to the national interest of the United States, especially in the economic and geopolitical realm. The competition between the United States and China may become more pronounced as Russia becomes further isolated due to its invasion of Ukraine. The vacuum created by Russia’s isolation could usher in a new geopolitical and economic balance of power defined by a United States and Chinese rivalry.
[1] https://investinrussia.com/data/files/sectors/russian-rharmaceutical-market-trends-2020.pdf
[2] https://www.nature.com/articles/nm0511-517.pdf?origin=ppub
[3] https://novamedica.com/media/smi/p/8691-the-pharma-2030-strategy-promoting-globalization
[4] https://www.themoscowtimes.com/2022/03/09/fears-in-russia-over-pharmaceutical-supplies-a76840
[5] https://www.bloomberg.com/news/articles/2022-03-14/pfizer-halts-trials-in-russia-but-will-continue-to-supply-drugs
[6] https://www.wsj.com/articles/western-drugmakers-are-still-providing-medicines-to-russia-11647081002
[7] https://investinrussia.com/data/files/sectors/russian-rharmaceutical-market-trends-2020.pdf
[8] https://www.nytimes.com/article/russia-invasion-companies.html
[9] https://novayagazeta.ru/articles/2022/03/10/boleznennye-sanktsii
[10] https://www.businesstoday.in/latest/corporate/story/russia-ukraine-war-can-impact-indias-pharma-sector-experts-warn-323814-2022-02-24
[11] https://www.reuters.com/business/healthcare-pharmaceuticals/drugmakers-device-companies-say-sanctions-may-hinder-medical-supplies-russia-2022-03-03/