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Russia: Kremlin Considers Foreign Car Policy

Moscow, 2 December 1997 (RFE/RL) -- Russia's government is set to back new protectionist measures that could hit international auto-makers, unless they agree to speed up production of auto components in Russia. The move, discussed at a cabinet meeting in Moscow last week, is aimed at deterring imports of partially assembled cars, or kits for final assembly at Russian plants, as well as factories in neighboring Belarus, Ukraine and Uzbekistan.

Foreign manufacturers tell RFE/RL they are surprised by the news. They are unsure whether the government is already committed to the policy shift, or is aiming to apply pressure for more Russian-made components in assembly projects.

Ford of the United States recently started assembly of cars for the Russian market in Belarus, and is considering assembly projects at more than one Russian site. General Motors is to assemble Opel cars in the Ukraine, and considering assembly and production at Togliatti, in Russia, in several years' time. General Motors has been assembling Chevy Blazer vehicles (a jeep-like, four-wheel-drive vehicle) at a plant in Tatarstan for a year already. The South Korean manufacturer Daewoo is producing cars from kits in Uzbekistan, with plans to do the same in the Ukraine and in Russia.

Every major foreign automaker believes kit-assembly (minimal final assembly) in Russia, or within the customs union of Belarus, Ukraine, and Uzbekistan, is a necessary stage, before major investment commitments can be made to full auto production on Russian assembly lines. None of the automakers is ready to risk the several hundred-million dollars required for this, except possibly Italy's Fiat.

November 18, a ministerial meeting chaired by First Deputy Prime Ministers Anatoly Chubais and Boris Nemtsov heard an appeal by the chief of the State Tax Service, Alexander Pochinok, and the heads of the Gorkovsky Avotmobilny Zavod (GAZ) and Moskvich companies. GAZ, which is based in Nizhny Novgorod, where it produces the Volga sedan, has been actively supported by Nemtsov, who was the governor of Nizhny Novgorod until he was appointed to his government post.

The meeting was told that foreign exporters of cars to Russia are trying to avoid tax by breaking them down into partially-assembled units or kits. Nemtsov was reported to have responded with a proposal to offer car makers tax relief, if they invest in component production in Russia. Along these same lines, Italy's Fiat signed a memorandum of understanding last month. It calls for an investment of more than $600 million by Fiat at the GAZ plant to produce Fiat models for sale in the Russian market. Fiat would gain, if Nemtsov and the Nizhny Novgorod lobby succeed in raising a protectionist wall that would lift the price of competing foreign makes.

Asked whether Nemtsov's proposal has this objective, his office declined to respond.

Before the cabinet discussion, Russian car industry officials told a meeting with foreign automakers that Russia's auto industry is developing faster than any other sector of the economy, with 12 percent growth in the number of cars produced this year (compared to 1996). Even with this increase, Russian experts said demand is still 50 percent greater than the Russian factories and the joint ventures with foreign automakers can currently supply.

General Motors and Ford, together with Fiat, Volkswagen and Toyota, were represented at the Moscow conference, which discussed foreign investment needs for the Russian car industry.

Andrei Kudriashov, deputy head of State Customs Committee, told conference participants that his agency is planning to introduce limits on imports of car-assembly kits. These may include quotas on the kits imported to Russia, and redefinition of the country of origin for cars assembled from kits in the Ukraine, Belarus and Uzbekistan. These cars would be listed as imports from the countries where the kits and components originate.

Kudriashov proposed a tariff offset deal for the car companies, if they agree to set up facilities in Russia for painting, welding, and car-body production. Foreign automakers say it is too early for them to respond.

Other Russian officials told RFE/RL the government is unlikely to decide the issue until March of next year. According to Alexander Prokhorovich, head of the auto division of the Ministry of Economy, "the government wants us to define what is a car produced in Russia. We expect to evaluate the need for protection by the first quarter of 1998." Only then, he said, is it possible that new duties will be imposed. But, "the volume of privileges will depend on the volume of investment," Prokhorovich added.