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. Last Updated: 07/27/2016

Doubts Hang Over State-Backed Car Loans

The government will unveil a subsidy for interest rates on car loans this week, an initiative intended to revive moribund demand for Russian-made cars, but questions about the program's feasibility and target market cast doubt on its chances for success.

Prime Minister Vladimir Putin ordered the Industry and Trade Ministry on Feb. 9 to develop within a month legislation setting aside 2 billion rubles ($55 million) to make car loans more affordable. The ministry said last week that the program could affect 150,000 sales this year for approved models costing less than 350,000 rubles ($9,700).

An Industry and Trade Ministry spokeswoman said the program would most likely operate through state banks Sberbank and VTB because of their extensive networks.

The combined sales of all 30 models on the ministry's list was about 950,000 cars last year, so the subsidy would not have a great effect, even on the few models that qualify, said Sergei Udalov, an analyst with Avtostat.

"It might shake up demand a little bit, but only for people who were planning to buy a car anyway," he said. "But we should not expect lines forming for these cars."

Only 11 percent of Russians are planning to buy a car in the next three years, and of those, almost 40 percent have no idea how they will pay for it, while about a third want to get a car loan, according to data from polling agency VTsIOM released Wednesday,

A diagram on the ministry's web site says a car buyer could save 42,467 rubles over a three-year repayment if a 30 percent down payment on the 350,000 rubles is made and the Central Bank refinancing rate stays at 13 percent.

The subsidy would cover two-thirds of the refinancing rate.

But analysts said the ministry's math did not appear to add up. Subsidizing 150,000 loans by the proposed amount would require about 6 billion rubles, while the planned expenditure of 2 billion rubles would only cover about 47,000 cars.

The market for auto loans has contracted drastically since last year, when about half of all cars were bought on credit. This year, their share in total sales has dropped to 10 percent to 20 percent, said Yevgeny Novikov, head of Rusfinans Bank's auto credit department.

Interest rates at Rusfinans Bank, which specializes in car loans, start at 9 percent for five-year dollar loans on new foreign cars, with a down payment of at least 40 percent. Ruble loan rates are at least 20.5 percent and can hit 29 percent for used cars.

Predictably, most of AvtoVAZ's Lada models made the list of approved models, as did several domestically produced foreign cars, including the bestselling Ford Focus and runner-up Renault Logan.

But the list also includes the Volkswagen Jetta, the base model of which costs about 580,000 rubles.

"We understand that this model with a certain engine and options can cost about 350,000 rubles, and Volkswagen can choose whether to bring the price down to the maximum level to qualify for the program," the ministry spokeswoman said.

Martin Jahn, deputy CEO for Volkswagen Group Russia, seemed surprised by the ministry's proposal.

"As far as I understand, the list includes the cheapest locally produced models and support will be provided up to 350,000 of the car's cost," he said. "It's only fair that if we build such a big factory in Russia that our models are also on the list," he said, referring to the company's plant in Kaluga.

The ministry spokeswoman said some models cheaper than the Jetta, including the Chevrolet Lacetti assembled at the Avtotor plant in Kaliningrad, were not included because they were essentially assembled from kits produced abroad. It is unlikely that the sum or the list of models will be expanding in 2009, she said, but the ministry may consider new, qualifying models.

"It's a measure that directly affects consumers who are the most hurt right now," she said.

But analysts were divided over whether the program would help those who most need it.

"Few people would have the down payment, while the interest rates skyrocketed and the requirements for lenders are much stricter now," said Udalov, of Avtostat.

Ivan Ivkin, head of consumer lending at Promsvyazbank, said there was logic behind the program since the consumers buying approved cars mostly fall below the middle class. "Commercial banks are less interested in those clients, since they have a higher risk of default and are more likely to be fired right now," he said.

The subsidy is a good first step because financing was traditionally strong in Russia for cars under $15,000, said VW's Jahn. Seventy percent to 80 percent of people were approved for car loans before the crisis, a figure that has fallen to 30 percent, he said.

Both Jahn and Udalov said Russia would benefit by developing scrapping and trade-in incentives, which would increase demand and help replace the aging cars on Russia's roads. "Unfortunately, there is no existing system to do that," Udalov said, adding that a bill proposed before the crisis had been put on hold.