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. Last Updated: 07/27/2016

Auto Sales Stall on Tax Hike

Even though foreign automakers have bravely mounted exhibitions for this week's 3rd Moscow International Motor Show, executives say that high import taxes have put a stop to growth of car sales to Russia.

The high taxes are also hurting legitimate dealers by driving sales into a semi-legal gray market where cars are smuggled across the border tax-free, the executives say.

Import taxes have grown progressively over the past 12 months to between 165 and 215 percent, depending on the size of the car.

"This time last year we were expecting growth, but that was before we knew about the taxes," said Jim Miller, Ford of Europe director for Eastern Europe. He said that Ford expects to sell slightly fewer cars this year than in 1993, when sales were 2,000 autos.

Wolfgang Vollath, managing director of BMW's office in Moscow, also said that sales through official dealers would fall about 30 percent to 300 cars this year as a result of the taxes.

But sales of cars through gray channels, which Vollath believed accounted for about 10 times the official sales, would increase and keep exports at about the same level.

Vollath said that according to reports from dealers in Europe, 1,500 BMWs would be sold this year to gray market operators who he suspected intended to smuggle cars into Russia. "The possibility exists of getting around the taxes. But we as automakers cannot do it," he said.

Thomas Dee, CIS regional manager for Chrysler Automotive Services GmbH, was among the few automakers who reported a growth in sales, from 900 to a predicted 2,000 this year. Most of the increase was thanks to the Jeep Cherokee and Grand Cherokee models, which have become the fashion status symbol for Russia's new rich.

But Dee estimated that official sales do not tell the whole story and according to his estimates, there are about 15,000 Chrysler jeeps on Russian roads.

He said that most of these were gray market sales through fringe companies that often avoid paying import taxes. "I do not know how these small companies do it...the documents and the engine numbers. I don't even want to think about it," Dee said.

He said that thefts of Chrysler jeeps in Europe had also risen, and he suspected many of the cars were destined for Russia.

Olivier Riviere of French automaker Peugeot also said that after strong growth, sales had stopped dead in 1994 and would probably end up at last year's level of 1,500 vehicles.

He said that Peugeot was now devoting most of its energy to fleet sales to organizations which could arrange tax exemptions.

The Russian Customs Committee has amended regulations for car imports several times over the past year to try to cut down on tax avoidance.

Earlier this year, it linked import taxes to engine size, trying to prevent importers from understating the price of their cars. It also closed another scam by canceling tax exemptions for individuals importing vehicles allegedly for private use.

The high import taxes are primarily designed to protect Russia's large but inefficient local car industry, which in the past two years has lost about 10 percent of Russia's 450,000-car annual auto market to foreign competition.

The taxes have given Russian cars a price advantage over imported vehicles. A basic Russian-made vehicle now sells for between $6,000 and $14,000 new, compared to a minimum of $20,000 for a Ford.

Automakers predicted that, as a result of the taxes, imports to Russia would stay at last year's level of about 45,000 cars, still less than half the imports to Poland, a country with a third of the population.