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. Last Updated: 07/27/2016

Rising Euro Raining on Ford's Parade

MTA worker assembling a car Tuesday at the Ford plant, which is expected to produce around 2,000 Focuses by the end of the year.
VSEVOLOZHSK, Leningrad Region - Ford Motor Co. is hoping to slash up to 22 percent of the selling price of its cars in Russia by producing them at a new $150 million plant near St. Petersburg set to open next week, but the sinking dollar may put a damper on the company's plans.

The price of components for cars produced at the plant in Vsevolozhsk in the Leningrad region could rise dramatically due to dollar depreciation, which in turn boosts the price of components imported from Europe.

"The cost of components is a big risk factor," Ford Russia president Henrik Nenzen said Tuesday at the plant.

Ford is officially opening the first 100 percent foreign-owned industrial project in Russia next Tuesday, but trial production already has started.

The plant is to produce some 2,000 Ford Focuses in 2002 and then gradually raise capacity to 25,000 cars per year, Nenzen said. The most affordable Ford model made at the plant is to be sold in Russia for $10,900, while the same model produced in Europe currently sells for some $13,900.

Ford's major reason for producing cars in Russia is to lower costs through an investment agreement that allows the company to import components duty free, but the savings shrink as the euro rises against the dollar.

The euro fell just under 1 percent Tuesday to 98.35 per dollar, but rose to its highest level in two years last week.

Nenzen, however, sounded a positive note Tuesday, underscoring Ford's long-term commitment to the local market.

"Russia has a population of 150 million people, that's a potential market that's bigger than Germany and Great Britain put together, and that's why Ford wants to get a strong position on this market early on," he said.

The 26-hectare plant has proved a boon to the local economy, directly employing some 800 people. Salaries "average from $350 to $600 per month," Ford said.

However, one employee -- who said he earns 6,000 rubles ($191) per month -- claims many of the plant's workers did not join the company because of the pay but for Ford's generous dental insurance package.

"A friend of mine had 30,000 rubles' ($970) worth of dental surgery done, worked for two months and then quit," said the employee, who asked not to be identified.

The plant was built under an investment agreement with the federal government signed in 1999. Under the deal, Ford was to invest $150 million in Russia and gradually shift toward using 50 percent locally produced components in its cars by 2007.

Ford in turn gained exemption from import duties on components from Europe and enjoys free customs warehouse privileges.

Ford has five contracts with Russian suppliers, whose products will account for 3 percent of components during the initial stages of production. Those components include rubber floor mats, windows and various plastic parts.

The plant will allow Ford to avoid hefty import tariffs on foreign cars, currently set at 25 percent of the official blue-book selling price of the model.

Nenzen is hoping the government raises import tariffs on used cars. "Used vehicles come in too easily; it's very hard to compete," he said.

"The most important issue for foreign producers is that import tariffs on new and used cars go up," said Troika Dialog analyst Andrei Kormilitsin. The would allow demand to shift toward new cars built in Russia, he added.

The domestic auto industry is currently lobbying the government to raise import tariffs on foreign cars to 35 percent.