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Russia: Analysts Say More Than Higher Import Duties Needed To Save Russian Auto Industry

Russia plans to introduce higher import duties on used cars in an effort to save its crumbling auto industry. Experts say much more will be needed, however, to achieve the desired results. They say Russia's auto industry is in need of substantial foreign investment and serious business plans. Higher import duties are also expected to deal a serious blow to the prosperous car "re-export" business in Lithuania.

Prague, 22 August 2002 (RFE/RL) -- Russian authorities plan to introduce higher import duties on used cars in an effort to help the country's financially troubled auto industry.

Last week, Russian Prime Minister Mikhail Kasyanov said import duties for cars more than seven years old should be increased by 10 percent. The measure is due to be implemented for a period of five to seven years.

Russian car producers say cheap imports seriously threaten the industry, but analysts say the new import duties will do nothing to improve the dire situation in the Russian car industry. It will also deal a blow to the lucrative car "re-export" business in the Baltic state of Lithuania.

Western cars have found favor with Russian consumers. One and a half million cars were sold in Russia last year, but only 1 million of them were produced in Russia. The remaining 500,000 were imported, a 120 percent increase over the previous year. Sales of Russian cars, meanwhile, increased by only 9 percent.

Valerii Mironov is an analyst at the Development Center, an independent think tank based in Moscow. He told RFE/RL that higher import duties alone will not be enough to save Russia's car industry. He said there also must be an emphasis on producing a quality product. "If the authorities proposed this measure for a definite period, and if the factories had plans in five years to produce a car that would be able to compete, it would justify the increase of the tariffs," Mironov said.

Mironov said Russia's car manufacturers have no realistic business plans for the future. He said the Russian car industry can extricate itself from its current crisis only by cooperating with Western carmakers. The quality of Russian auto parts must also improve.

Avto Vaz, Russia's largest car factory, is located in Tolyatti and is the only Russian car factory that still functions normally. The Moscow car factory Azlk, which produced Moskvich cars, has closed. Gaz, another big factory that produced Volga cars in Nizhnii Novgorod, is also experiencing serious problems.

Though Russian cars are relatively cheap -- a new Lada costs between $5,000 and $6,000 -- they are notoriously inferior in quality.

Vladimir Shulga, an engineer at Avto Vaz in Tolyatti, told RFE/RL that the quality of Ladas, which are produced there, still lags far behind German Volkswagens or Czech Skodas. He told RFE/RL that the factory produces 700,000 cars a year, almost all of which are sold inside Russia.

Shulga said the factory is in relatively good shape and that average salaries are between $200 and $300 per month, compared with the average Russian salary of $113. Shulga said, however, that imported used cars of superior quality are pushing Russian automobiles out of the market, especially in western regions of Russia, as well as in Moscow and St. Petersburg.

A Western used car often costs as much as a new Russian Lada but is almost always of better quality. For example, advertisements in a Moscow newspaper list a 1994 German Audi 100 for some $7,000, a Swedish Volvo 850 produced in 1993 for $3,500, and a Mazda Demio produced in 1996 for nearly $6,000.

Businessmen in neighboring Lithuania have taken advantage of the Russian demand for used cars. Used cars are a few thousand dollars cheaper in Lithuania than in Russia because dealers usually buy them wholesale or directly from the owners. They also buy damaged cars and repair them in Lithuania for later resale.

Birute Vesaite, a member of the Economic Committee in the Lithuanian parliament, told RFE/RL that "re-exporting" used cars is a profitable business. "One hundred fifty-four thousand six hundred used, and 6,000 new, cars were imported into Lithuania during the [first] seven months of 2002. Two-thirds of them were exported [mostly to Russia]. There are 2,000 companies that are involved in this business. If we suppose that at least five people work in each company, we will get 10,000 [employees potentially affected by the Russian import duties]," Vesaite said.

Many Lithuanians work in the country's numerous car maintenance services, while others work in open markets where the cars are sold. Analysts believe some 30,000 Lithuanians depend in some way on the re-export business for their livelihoods.

Vesaite said that in the first seven months of this year, the car re-export business brought big profits not only to the companies doing the re-exporting, but to the Lithuanian budget, as well. "During these seven months, 150 million litas [$43 million] of value-added tax was paid by those who import cars. Import taxes make an additional 6 million litas [$1.7 million] and excise taxes for luxury cars total nearly 4 million litas [$1.1 million]," Vesaite said.

The chairperson of the Lithuanian Association of Small Businesses, Laima Mogeniene, told RFE/RL that an increase in Russian import duties could strike a mortal blow to many small Lithuanian businesses. "The businessmen who re-export cars from the West are different. Some are bigger, [and they] transport several cars during one trip. Others are very small, and they would be forced out of business," Mogeniene said.

Vesaite said the Lithuanian Ministry of Foreign Affairs will be making an effort to convince the Russian authorities not to increase the import duties.