Is Russia Ready for Operation “Utilisation”?

25.12.2009 — Analysis

In October 2009 Viktor Khristenko, the Russian Minister for Industry and Trade, made an announcement that the next year will see the start of the Russian pilot project to scrap cars over 10 years of age. Russian authorities are planning to support the domestic automotive industry by this measure, giving the Russians an incentive to get rid of old bangers. The RusBusinessNews correspondent has established, however, that this will not reduce the number of rusty cars on Russian streets and courtyards.

The essence of the experiment boils down to the following: starting in 2010 the owner of an expiring car, on top of the money paid by the commercial structure doing the scrapping, will also get the certificate worth 50 thousand roubles from the State. This could only be used for the purchase of a new domestically produced car. Only old cars registered to the current owner for at least a year will be accepted for scrapping.

According to Victor Makushin, the President of MAIR Group, one of Russia’s largest scrap metal procuring companies, at the moment there is more profit for the owner in dumping an old car than in scrapping it. Even before the crisis old cars were not interesting in terms of value of scrap metal. A regular car weighs 1-2 tons, a ton of ferrous metal scrap would fetch about 250 dollars today, remembering that the old car has to be transported to the location where it is going to be scrapped. According to the expert’s calculations, transportation costs would take all or almost all potential revenue for the company.

Rostislav Goldshtein, a Deputy of the State Duma, reckons that the rusting cars made in the USSR are not fit for scrapping as their parts are hard to separate, whilst utilization of some of the components is hazardous in terms of environment. Russia lacks specialized utilization facilities which must satisfy a multitude of requirements, first of all those of environmental nature.

The idea of the support for utilization is not new. In Canada the Car Heaven programme has been running for about 10 years; the programme was launched by the Clean Air Foundation with the support from the Canadian Government and General Motors Corporation (GM). Within this programme cars manufactured prior to 1995 are collected. The programme involves only voluntary contributions from citizens – the cars are not purchased directly. Any Canadian having parted with an old car can receive a coupon for 1 thousand dollars towards any new GM car, a 300 dollar rebate on the purchase of a bicycle, or a free six month transit pass.

In Germany the Federal Office of Economics and Export Control (BAFA) is overseeing a programme which offers a 2.5 thousand Euro eco-award to people scrapping cars made at least 9 years ago. According to Ferdinand Dudenhoeffer, the Head of the Center for Automotive Research (CAR), out of 3.8 million cars sold in Germany in 2009 about 2 million were purchased with the support of this supplement from the State.

The US Government has allocated about 2 billion dollars for the programme for stimulation of car utilisation. The participants are given a 3.5 to 4.5 thousand dollar bonus towards a new car. This public money was used up in just a week! Officials did not expect such boom and had to consider further funding for the project.

In China a similar programme was introduced in 2009 within the State anti-crisis policy. According to Qi Jingmei, a Senior Economist in the Department for Economic Forecasting of the State Information Centre of PRC, the project for the replacement of old cars by new and some other mechanisms of support provided by the State allow for the substantial improvement of the prosperity and the status of the country through the creation of new jobs.

In Russia the experiment has not started yet, it has, however, already initiated a host of rumours, conjectures, and interpretations. The Communicative Technologies Department of Russia’s Ministry of Industry and Trade informed RusBusinessNews that media has already published information on the introduction of additional exactions from citizens who decide to part with an old car. In reality, however, companies taking the expired vehicles only levy a fee for the utilization of assemblies containing environmentally hazardous substances. The size of the fee for this service is set by regional authorities but according to the law the sum must not exceed 3,000 roubles. This practice will remain in the future too but it has no bearing whatsoever on the pilot project.

It is planned to spend about 10 billion roubles out of the federal budget in 2010 so that the experiment might reach almost 200 thousand Russian car owners. According to Alexei Rakhmanov, the Director of Department for Automotive Industry and Agricultural Machine Building of Russia’s Ministry of Industry and Trade, about a half of all cars in the country are over 10 years of age. According to the data provided by the Ministry of Nature currently the territory of the country is littered with 400,000 abandoned or partially dismantled vehicles.

The project will cover 19 subjects of the Russian Federation, including the Sverdlovsk and Chelyabinsk Oblasts. The number of cars locally (at least 2% of the Russia’s total) and a high concentration of automotive business in the area have served as key inclusion criteria.

According to data provided by the press service of Ekaterinburg’s Deputy Mayor Victor Konteyev out of 400 thousand cars in the Urals megapolis 42% are older than 7 years.

Yevgheniy Kharlamov, the Press Secretary of the Mid Urals Prime Minister informed RusBusinessNews that about 10 potential sites were specified as part of this project within the region where it is planned to perform the intake, dismantling, and utilization of used up cars. Scrap metal processing facilities of UMMC and ChTPZ Group are among them.

According to Evelina Grigoryeva, the Manager of the Public Relations Directorate of CJSC ChTPZ Group, in order to participate in the programme the Ekaterinburg regional branch of Meta Ltd., a company for the collection and processing of metal scrap (a part of ChTPZ Group), has submitted documents and obtained a license to collect, process, and sell nonferrous metal scrap. Domestic car dealers are expressing concerns regarding the particulars of the project implementation mechanism.

The Favorit Motors car dealer informed RusBusinessNews that the mechanism of cashing in the certificates is so far unclear. According to experts’ estimates processing of all the documents needed to get the subsidy from the State budget and the transfer of the funds would take 1-1.5 months. Assuming that 200 to 1,000 discount certificates holders might come to a dealership monthly then the dealer, in order to be able to pay them, would have to take out bank loans amounting to 350 thousand to 1.6 million US dollars.

Vardan Dashtoyan, CEO of the Rolf Group Retail Division, suggests tying up the subsidies for the utilization with the subsidized car loan programme. Then it would be possible to use the granted 50 thousand roubles as the down payment when getting the subsidized loan for a new car. There are many more unresolved nuances in the project still. This is probably why, according to the latest data from the Russian Ministry of Industry and Trade, the experiment will start no sooner than in February. The postponement of the timeframe from the 1 January 2010 is due to the particular mechanism for the implementation of the programme being not ready.

Mikhail Bendyak