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. Last Updated: 07/27/2016

Foreign Automakers Line Up to Enter Russia

Automotive giants DaimlerChrysler, Toyota and Volkswagen are lining up to build assembly plants in Russia, as the government is moving to lift the last barriers keeping out international carmakers.

This week the Cabinet is expected to finalize a plan that will eliminate tariffs on key car components, exposing the domestic car industry to the full brunt of global competition.

The industry has bitterly opposed the measure, with the main trade union claiming one out of five auto workers could lose their job.

Yet the government maintains that the ailing domestic industry is unable to fulfill consumers' spiraling demand and will end up benefiting from the radical change.

"We have the opportunity to turn car imports into investments in the Russian car industry," Industry and Energy Minister Viktor Khristenko told President Vladimir Putin in a meeting last week, RIA-Novosti reported.

Last year, 550,000 new and used cars were brought into the country, and 128,000 cars were assembled domestically by foreign carmakers, Khristenko said. By comparison, production by domestic manufacturers was just over 1 million.

Once the measure on foreign car parts goes into effect, the number of foreign models produced in Russia could jump to 900,000 by 2010, Khristenko said. In that same space of time, domestic demand is expected to rise to 2 million to 2.5 million vehicles annually, up from 1.76 million in 2004.

As the Cabinet wraps up work on the decree, negotiations to build domestic assembly plants are in full swing with three major carmakers: DaimlerChrysler, Toyota and Volkswagen.

Foreign companies have long been pushing for the change, with Daimler, Renault and VW appealing directly to Prime Minister Mikhail Fradkov earlier this year. Severstal-Avto, which is set to begin production of an SUV with South Korea's SsangYong Motors later this year, was the only domestic carmaker to sign the petition.

Earlier this month, Renault's subsidiary Avtoframos opened a $250 million assembly plant in Moscow to produce its low-budget Logan model. The French carmaker became the second joint venture in Russia after General Motors, which makes the Chevy Niva with AvtoVAZ.

Ford makes its Focus model at its own factory near St. Petersburg, and foreign brands such as Kia, BMW and Hyundai assemble cars at the Avtotor plant in Kaliningrad.

For months, the government has been mulling plans to open the way for more foreign carmakers, meeting stiff opposition from the domestic industry, which even threatened to go on strike.

When it became clear the government would not budge, the Union of Russian Automakers demanded that foreign carmakers be obliged to buy half their parts from Russian producers after five years in the country -- a condition under which Ford has been operating in exchange for importing components duty-free.

"We are not opposed to slashing tariffs on car parts and to setting up assembly lines," said Yevgeny Levichev, president of the Union of Russian Automakers.

"But we have made our condition. It is not a whim but [the result of] international experience," he said, adding that a host of countries, such as Argentina, Brazil and China, introduced strict measures to protect domestic carmakers. "Why do they say we can't [make cars]? We can! We just need the right conditions."

In his report to Putin last week, Khristenko said foreign carmakers opening plants will be obliged to produce a minimum of 25,000 cars annually. Under his ministry's proposal, foreign automakers would have to buy 30 percent of their parts from Russian suppliers within six years.

Andrei Fefilov, who heads the union of automotive workers, said the government decree would send jobs abroad. Of 650,000 people employed in the Russian auto industry, at least 120,000 will lose their jobs, Fefilov said.

"This may lead to the collapse of the industry," he said.

The government insists that Russian carmakers will gain from the lifting of tariffs as they begin to supply carmakers and start using foreign parts in their own cars.

Market watchers praised the initiative.

Yelena Sakhnova, an automotive analyst with United Financial Group, said that foreign carmakers would have set up shop in Russia in any case, but the lifting of tariffs would work as a catalyst.

In the four years it takes new market players to reach maximum capacity, Russian automakers should work to come up with competitive models, she said.

"We can't fence ourselves off with an iron curtain and stamp out the same components for a hundred years," said Andrei Koterev, an analyst with Severstal-Avto.

If domestic carmakers play it right, the introduction of more foreign competition could lead to a "renaissance" of the industry through new investments and know-how, he said.

Other foreign carmakers, which are enjoying booming sales in Russia, are likely to enter the market, Koterev said.

Tatyana Natarova, a spokeswoman for Nissan in Russia, said scrapping the import tariffs would urge foreign carmakers look more closely at assembling cars domestically as importing becomes less profitable.

Nissan, she said, has long been studying the possibility of opening a Russian plant.

But the competition is not waiting.

DaimlerChrysler, Toyota and VW have all confirmed that they are in talks to open plants in Russia, though they refused to provide concrete details.

Local media has reported last week that DaimlerChrysler may sink $100 million into a factory near St. Petersburg.

Svetlana Ganeyeva, head of investment policy of the Economic Development and Trade Ministry said last week that Toyota was about to sign a memorandum of understanding to build a plant in Shushary, near St. Petersburg, RIA-Novosti reported. Ganeyeva said annual output would eventually reach 100,000 vehicles per year.

Another official, Deputy Economic Trade and Development Minister Andrei Sharonov, told Vedomosti on Friday that Volkswagen was planning to open a factory in Stupino, south of Moscow, also with a goal of 100,000 vehicles per year.

Until the government concludes its plan on opening the market, it is unlikely that any final deals will be announced. The Cabinet is expected to sign off on the plan as early as this week.