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. Last Updated: 07/27/2016

Automakers Skeptical Of Tax Breaks

Industry analysts have responded cautiously to a recent presidential decree that allows the government to offer import tax breaks to big foreign investors in Russia's auto industry.

Analysts said the tax breaks may be hard to win because they will depend on meeting tough targets for locally made components.

The decree, which President Boris Yeltsin signed Feb. 5, offers customs tax breaks to foreign entities investing at least 1.5 billion rubles ($250 million) into auto production. Automakers must form a joint venture with at least 10 percent Russian participation.

To retain the privileges, the producers must, within five years, use at least 50 percent Russian-made parts in their cars.

"The decree will give a stimulus to developing not only the automobile industry, but other sectors of the Russian economy as well," Deputy Prime Minister Yakov Urinson said at a news conference Thursday.

The decree does not specify what customs benefits are on offer, and investors must work out individual details with the government, Urinson said.

Patricia Isayeva, an automotive industry expert at United City Bank, said the government will likely decide benefits on a case-by-case basis, and the decree sets the stage to reward those who produce cars in Russia, rather than importing parts and assembling them in Russia.

"It's giving the possibility to support serious projects," she said. "If you want to screw-assemble 10,000 cars per year -- and say it's important for the country -- you won't be taken seriously anymore."

Companies that stand to benefit from the decree include Italy's Fiat, which is negotiating an $800 million car plant joint venture with GAZ in Nizhny Novgorod, and General Motors' Opel division, which has plans to produce its models at Tolyatti's AvtoVAZ plant. Ford and South Korea's Daewoo also have deals in the works.

General Motors praised the decree but said it may be difficult to obtain 50 percent of parts locally.

"A 50 percent goal is noble, yet difficult -- especially in a developing market like Russia," said George Baker, vice president of GM Overseas Distribution Corp. "The greater the incentives, the greater likelihood that we reach the localization goal."

The government has extended carrots to investors before. In 1994, it promised tax holidays for investments of more than $100 million. The gesture has turned out to be unreliable and difficult to enforce.

Walter White, a partner of Steptoe & Johnson, said the best news for foreign investors would be a realistic tax regime.

"Companies are less interested in specific exemptions and more interested in having a tax structure that works," White said.