Russia’s car market reaches critical mass

Anticipating changes to laws and tax code in March, international auto producers jumped to sign new deals in Russia at the end of February

Business New Europe editor Ben Aris and Ministry of Industry and Trade official Aleksey Rakhmanov say the Russian car market has become an attractive prospect for foreign investors.

A string of investment deals reached in February means that the car market has reached critical mass and, according to experts, Russia will almost certainly emerge as Europe’s largest car market by 2015.

Global carmakers raced to beat a deadline to sign off on new investment agreements at the end of February that will exempt them from new tightened limits on imports; the Kremlin will hike duties for any producer that has not promised to increase production to 300,000 units and increase the proportion of domestic made inputs to 60 percent by 2020.

The race was started by changes to the tax code that came into effect on March 1. Under the new rules, carmakers may import components with 0-3 percent duty in return for investment agreements to build at least 300,000 cars locally per year. Previously, auto companies could avoid punitive tax rates on parts by producing 25,000 cars in country, so some had moved to build assembly lines in Russia, but made little further commitment. The latest batch of deals has seen the global brands teaming up with domestic producers to boost production.

Of the eight international manufacturers already working in Russia, six submitted proposals, and the new investment agreements are expected to be signed by June, said Alexander Rakhmanov, the director of the automotive and agricultural machinery department at Russia’s Ministry of Industry and Trade, who over saw the process.


“We didn’t expect such a strong response from the producers,” said Rakhmanov. “So now we are sure that Russia will be the number one car producer in Europe in the next years.”

Russia is underinvested with approximately €1,000 ($1,400) per capital of foreign direct investment in 2010 compared to between four- and eight-times as much for the Central European states. Yet the government’s investment strategy for the automotive sector has turned out to be highly successful.

The state negotiated attractive tax and import duty breaks for foreign companies willing to build factors in the middle of the last decade, and several automotive clusters have emerged—the biggest are in St Petersburg and Kaluga—while the production of foreign brands by Russian factories soared to the point where the international companies were (briefly) out-producing the leading domestic manufacturers Avtovaz and Gaz in 2008.

The new investment agreements are deigned to follow from the current agreements, which expire in 2020. The Kremlin is in a rush to finish reforming a sector that employs well over a million people. If Russia does accede to the WTO this year—after 16 years of knocking on the door—it will face a mandatory reduction on import duties for cars. Rakhmanov said that the production of passenger cars is already sophisticated enough to compete with international producers head-on.

“With cars, we are ready to compete, and WTO access will not have a big impact,” Rakhmanov said. “There is a seven-year transition period and that is more than enough time to finish the ongoing reforms. In buses and trucks the situation is different, but we are looking at various measures to prepare those sectors for accession.”

The investment policy for the automotive sector is starting to look like an unadulterated success—and one that is hitting the Kremlin’s key goals of modernizing and diversifying the Russian economy. According to Rakhmanov, it will become both an investment node for building out industry and also act as a blue print for other sectors.

“For every one job that we create in the automotive industry, we create another 16 jobs in ancillary sectors,” Rakhmanov said. “And the Russian market is still far from reaching saturation, but the market is already a developed one with some features of an emerging market.”

The new investment comes with needed international expertise and technology that will help drive Russia’s modernization. In return, the automakers get easier access to a growing market

"International car makers are pretty excited, because they forecast significant growth in car sales in the next decade. We expect that car sales will recover to pre-crisis levels by 2013," said Mikhail Ganelin, transport analyst at Troika Dialog.

Already the new investment deal has lead to a raft of joint ventures and a big increase in investment commitments. Ford and General Motors from the United States, Germany's Volkswagen and Japan's Toyota have all announced investments of over $1 billion to boost local production and stake a claim to markets ranging from St. Petersburg to the Pacific Rim port of Vladivostock.

Russian carmaker Sollers and Ford pledged on Feb. 18 to invest $1.4 billionn in a new assembly and distribution partnership by 2020. The investors hope to see Ford's market share double within five years. The deal halted Sollers’ negotiations with Italy's Fiat, although the Italian automaker has reiterated that it intends to hit the magic number of 300,000 locally produced cars, and is now mulling whether to go it alone or to launch a joint venture with another company.

Daimler has also tied up with Russian truck maker Kamaz to produce its hugely successful Sprinter van in Russia this year. General Motors has announced it will dramatically expand production in Russia to at least 350,000 vehicles a year in a deal with Gaz to build Chevrolets in Nizhniy Novgorod and with Avtovor to expand production in Kalinigrad, in addition to operating its own plant in St. Petersburg. Gaz is also in bed with Volkswagen to make 300,000 VW and Skoda cars annually. The companies are hammering out the final details of the deal.

And Sollers will team up with Toyota, which will become the first Japanese company to build cars in Russia's Far East after unveiling plans for a joint-venture with Japanese trading house Mitsui and Sollers to begin production in 2012.

The Russian consumer should also benefit. "Russia is a very big market and that is why foreign companies are flocking in. More competition will mean lower prices for consumers," and thus more sales, said Alexander Kazbegi, transport analyst at Renaissance Capital.

All rights reserved by Rossiyskaya Gazeta.

This website uses cookies. Click here to find out more.

Accept cookies