More Trouble to Come for Russian Car Owners

The government intends to apply world quality standards to Russian cars

Russian car owners still worry about their future. The government has recently raised customs duties on used foreign cars and introduced the mandatory car insurance nationwide. Now the government decided to apply world quality standards on Russian cars. Needless to mention that such measures will lead to a considerable price growth. Yet, foreign car producers are increasing the output of "Russian foreign cars."

The output of foreign cars in Russia in 2003 will increase five times in comparison with 2002. About 50,000 foreign cars will be produced in 2003, Russian Minister for Industry, Science and Technologies Ilya Klebanov said. The minister added, more than one million cars were planned to be produced in Russia in 2003. "The domestic car industry will be developing owing to the improvement of quality factors," Klebanov said in a statement. For the time being, the production of Russian cars is decreasing because they have to face a rather tough competition on the part of cheap foreign cars - used foreign cars, first and foremost.

Until recently, Ilya Klebanov was considered the main lobbyist of the Russian car industry. He took part in all customs policy changes regarding used foreign cars (the cars older than seven years). However, Russian Vice Prime Minister Boris Alyoshin has recently released an interesting statement, which testified to the change of the government's stance on the issue. According to Alyoshin, the government will support the domestic car industry, if Russian producers learn to manufacture high-quality competitive cars. It goes without saying that it is a matter of a very distant future.

Klebanov stated that the Russian Ministry for Industry and Science was planning to apply 160 various world quality standards to Russian vehicles. For the time being, only 40 percent of Russian cars meet such a requirement. Apparently, this is an exaggerated number.

From January 1st 2004,  all Russian vehicles will be outfitted with Euro-2 ecological standard engines. In 2006, Russia is to start using Euro-3 standard and Euro-4 is expected to be introduced in 2008.

The introduction of ecological standards is a very big problem for domestic car producers. Each new Euro standard automatically raises prices on cars by $1,000. Against the background of the growing competition with used foreign cars, it will exert a negative influence on the Russian car industry. More expensive Russian cars will have to compete with foreign cars from a higher price sector.

According to the research conducted by The Boston Consulting Group, Russian cars are facing a "younger" competition in 2003, although their main rivals in 2002 were foreign cars of seven years old. Experts do not exclude that the Russian government will have to use tough measures to find a way out from the current situation to the detriment of domestic car owners. To make Russian people buy expensive Russian cars, it is planned to raise the road tax for the vehicles older than ten years.

There is another variant too: to make car companies pay, not customers, but it is a very risky thing to do. A slightly wrong fine for a factory that breaks ecological norms might stop its production. If penalties are merciful, they will be useless. Most likely, customers will have to pay for ecology.

Once the tax is introduced, car producers will be able to reduce the competitive ability of foreign used cars,  because their efficient exploitation term will decrease. An owner of a ten-year-old foreign car will have to pay a bigger tax, although its gas emission may probably be a lot cleaner than that of a ten-year-old Zhiguly vehicle.