Increased Tariffs on Foreign Cars Useless

Tariffs should be raised up to 70-80 percent

The increase of tariffs on new foreign cars up to 35 percent will be rather painful for consumers and inefficient from the point of view of attracting investments in the Russian car industry, experts believe. According to analysts' estimates, the real effect will occur if tariffs are increased up to 70 or 80 percent, as it was done in other countries. The suggestion from the Russian Ministry for Economic Development and Trade - a ten percent raise - will result in the ten percent price growth for consumers, although it will not be able to undermine the demand on import cars. Therefore, the raise will not intensify foreign investors' interest in the Russian market.

The idea to increase tariffs on the import of new foreign cars from 25 to 35 percent in two or three years is being discussed at the ministry for economic development and trade. The plan stipulates, new tariffs will be reduced to 10 or 15 percent in three or five years after their introduction. In addition, the ministry offers to simplify the procedure for obtaining permissions to build new car factories and to prepare construction areas for investors. Minister for Economic Development and Trade German Gref believes, it will create conditions for attracting investments in the Russian car industry.

The Vedomosty newspaper wrote, from January 1st 2004, it would not be possible to provide the free customs warehouse regime to foreign assembly productions on the Russian territory according to the new Customs Code (the free customs warehouse regime stipulates, spare parts for cars can be imported duty-free).

However, analysts believe that the ministry's suggestions will not be effective, because the 35-percent duty will not shut down or restrict the import of foreign cars on the Russian market. According to the research conducted by one of the world's leading consulting agencies, Boston Consulting Group, one should set the tariffs higher than 35 percent in order to give investors an opportunity to invest in the establishment of productions in Russia. In addition, one should shut the market down for used cars. BCG gave such examples as Spain, Brazil, China and Thailand - these countries raised tariffs up to 70 percent and higher. In Indonesia, tariffs on new foreign cars make up 150 percent, in China - 170 percent.

Elena Sakhnova, analyst of the United Financial Group believes, the increase of the import tariff to the level of 70-80 percent would be optimal for the Russian market, as far as the attraction of investments is concerned. One should do it at present time, not in 2006. "Other countries' experience shows, such actions are reasonable and justifiable. I do not understand, why we should wait several years, why not doing it already in 2004? There are foreign producers that operate in Russia, but the ministry for economic development and trade is virtually telling them, they would not be supported," Sakhnova said.

Specialists from Troika Dialogue believe, the tariff raise to 35 percent is useless. Foreign cars will simply become up to ten percent as expensive for consumers. In 2000, about 110,000 new foreign cars were imported in Russia, the import is expected to grow by 50 percent in 2003. Russia does not have enough capacities to produce foreign cars that would meet such a demand. All Russian factories managed to assembly only 20,000 foreign vehicles.

Experts also say, the increase of tariffs is a possible, albeit not a compulsory measure. "Investors look at the business climate on the whole, at fiscal privileges - if they exist, if there is a market growth potential, investors will come without any increased tariffs. However, this is not going to be good for Russian producers - they will simply raise their prices, although the quality will remain the same."

An official from the tariff regulation department of the ministry for economic development and trade said, the number 35 percent appeared on the base of suggestions to join the World Trade Organization: "There is no special analysis about the number - it was included in the negotiation position back in 1998, so it would be strange to raise it now," an official said.