Publication: Monitor Volume: 4 Issue: 86

Russian trade policy would appear to be more successful in attracting foreign investment into the country’s automobile industry. High tariffs on imported autos and auto components, combined with tariff waivers for major foreign investors, could yield large increases in direct foreign investment by a number of leading auto firms.

In order to qualify for the tariff waivers, foreign producers must invest at least 150 million rubles ($25 million) in a joint venture with a Russian auto manufacturer over a five-year period. In addition to this foreign investment, the Russian economy benefits from local content rules, according to which the share of the automobile components in any single car produced in Russia must rise from 10 percent in the first year of the joint venture to 50 percent in its seventh year. According to one source, the value of the tariff waivers could add up to as much as 33 percent of the capital invested. (April 29, Itar-Tass) The tariff exemptions expire in seven years.

According to Deputy Minister of Economy Sergei Mitin, 5-7 major joint venture proposals in the automobile industry are currently in various stages of preparation and negotiation. Proposals that have been formally submitted to the government include: a program by Fiat and the EBRD to invest in GAZ in Nizhny Novgorod; Daewoo’s proposal to invest in the “Doninvest” financial-industrial group in Rostov-na-Donu; and Ford’s program to invest in the “Russky Diesel” factory in Vsevolozhsk, together with the Leningrad oblast government. Joint-venture proposals by Volkswagen and Renault are also currently under discussion. (Russian news agencies, May 2)

These policies show that, while they may complain about the EU’s discriminatory trade policies, Russian officials are themselves quite willing to protect domestic producers. This is apparent in Russia’s high tariffs on imported autos, and in the fact that tariff exemptions are only granted to foreign companies that invest in joint ventures with Russian auto firms (rather than setting up independent greenfield plants). Still, Poland and the Czech Republic have used similar policies to revitalize their domestic automobile industries, and the large size of Russia’s domestic market makes the adoption of such a strategy seem quite sensible. However, it remains to be seen whether the highest cost of auto imports and the loss of greenfield investment outweigh these gains.