European Car Junk Heap Is Preparing To Move To Russia

30.11.2009 — Analysis

According to the NPP Association of Russian Automakers the supply of cars in the first half of 2009 has dropped by almost 70%. The crisis has affected all segments of the market - the production of domestic cars has dropped, the number of foreign brands assembled in Russia has decreased, the imports of new and used cars have declined. Experts reckon that the decrease of production of cars in Russia has not hit bottom yet. When peoples incomes are on a decline the demand for "iron horses" will be satisfied predominantly by used cars imports of which we will see growth thanks to the Customs Union being created in the post-Soviet area.

In January 2010 identical customs tariffs for legal entities will be introduced in Russia, Belarus, and Kazakhstan. The unification of duties for private citizens is postponed until 1 July 2010. Meanwhile in Belarus about a half of cars is imported by private individuals. Customs duties on imported cars in this country are ten times lower than in Russia. Dealers are concerned that in the first half of the year Belarusians will flood Russian regions with used 3-4 year old Audi and Mercedes cars which will be comparable in terms of price with new foreign cars assembled in Russia. A four year old imported car of the medium price category will most likely be cheaper than a new Lada - according to experts' calculations, to clear a car worth 10 thousand Euro with the engine size of 2,000 cubic centimetres through customs in Russia you have to pay more than 5,000 Euro, whilst in Belarus only about 800.

Some experts reckon that in this scenario JSC AvtoVAZ may simple cease producing and the official importers go out of business. Igor Korovkin, the Managing Director of the NPP Association of Russian Automakers, thinks that the problems will affect not AvtoVAZ as such but foreign companies which established the production of cars in Russia. It is possible that some legal entities disguised as private individuals will start importing trucks as well. Similar practices are well known all over the world. This is why the expert is convinced that rules for private individuals in Russia and Belarus must be identical but the Russian and Belorussian authorities have only just started discussing this issue.

Aleksandr Tsvetkov, the Director of a Ekaterinburg car showroom World's Cars, has no doubts that the negotiations with the neighbouring country will be successful: "I think that the number of used cars in Russia will not grow in 2010. They managed to squash the supply channel from Japan, the same will happen with Belarus."

The situation, however, is not as simple as that. According to Vasiliy Prudnikov, a Head of Department in the Embassy of the Republic of Belarus in Ekaterinburg, low customs duties for private individuals are dictated by the lack of the car production in the country. This has become the stumbling block on the way of the establishment of the Customs Union. The issue has to be resolved and there are many ways to do that. For instance, the number of cars imported by a single person in a year can be restricted. There are other points of view as well, Russian President Dmitri Medvedev speaks of a decrease of Russian duties on cars imported from Belarus while raising duties on trucks.

Igor Korovkin reckons that decreasing duties is a road to nowhere. All the previous work on the establishment of assembly of foreign cars in Russia will become meaningless. It will be easier to import cars than make them here. Dealers in a very short time will crash the production plans of foreign companies.

It cannot be ruled out, however, that the Russian Government is not trying to save all car makers. The used car part-exchange programme makes one think. According to the "Argumenty i facty" newspaper every second car used in Russia has been made over 10 years ago, so there are more than 18 million cars which must be scrapped. The oldest car pool is in the Far East, 80 to 87% of cars there are right-hand steering Japanese vehicles. There are about 9 million cars that can be referred to as "domestic veterans". If their owners decide to go for the bonus offered by the Government the State coffers will have to shell out 450 billion roubles. Since the Government cannot find this kind of money today, the authorities decided to experiment in 19 regions where about 40% of run down cars are concentrated. Experts have doubts that the treasury has the needed 200 billion roubles for that. 

It is a tradition in Russia altogether to support legal entities and private individual separately. In the Sverdlovsk Oblast, for instance, people are still pondering the question why the federal authorities have not permitted to start the industrial assembly of Chinese cars at CJSC AMUR. Vladimir Kukarskikh, the Deputy Head of the Union of Defence Industry Enterprises of the Sverdlovsk Oblast, claims that the products were in demand which promised the Urals plant further development. Muscovite officials cut the life of that business short and now AMUR is a bankrupt with vast wages debts. In order to support the employees somehow the State has placed some one-off orders for the conversion of outdated military trucks into fire trucks, but these orders do not promise much future. In the Union of Defence Industry Enterprises they reckon that the plant was "choked" because the industrial assembly of Chinese cars might have undermined the positions of AvtoVAZ.

Violetta Zhukanova, the Head of a dealer's Mazda department in Ekaterinburg, reckons that any incentives to boost new domestic car sales will have only a short term effect. Preferences of solvent people have been formed and only a force majeure might make them start using Russian Ladas now.

Vladimir Terletski