Government subsidies keep Russia’s inefficient car producers on life support

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/42

The economy ministry last week released a study that found that Russia’s car industry received state subsidies of about 400 billion rubles (nearly €9 billion adjusted to annual average exchange rates) from 2009 to 2015. Last year, one in three cars in Russia was purchased with state support. The report stated that the subsidies have prevented large reductions in production capacity but allowed non-competitive carmakers to remain in the market. The economy ministry estimates that in the coming years as much as a third of the Russian car industry’s annual production capacity of 3.3 million vehicles will be idle. Most of this production is not competitive in export markets and domestic demand is only expected to recover slowly. Even so, the economy ministry is not advising to cancel subsidies to carmakers, but rather redesign the support to be more efficient. The car industry accounts for about 0.5 % of Russian GDP and directly employs about 500,000 people.he economy ministry last week released a study that found that Russia’s car industry received state subsidies of about 400 billion rubles (nearly €9 billion adjusted to annual average exchange rates) from 2009 to 2015. Last year, one in three cars in Russia was purchased with state support. The report stated that the subsidies have prevented large reductions in production capacity but allowed non-competitive carmakers to remain in the market. The economy ministry estimates that in the coming years as much as a third of the Russian car industry’s annual production capacity of 3.3 million vehicles will be idle. Most of this production is not competitive in export markets and domestic demand is only expected to recover slowly. Even so, the economy ministry is not advising to cancel subsidies to carmakers, but rather redesign the support to be more efficient. The car industry accounts for about 0.5 % of Russian GDP and directly employs about 500,000 people.

About 1.5 million new passenger cars were sold last year in Russia which is about half of the peak levels before the current crisis. Car sales have declined already for three years and in the first nine months of 2016 were down 15 % y-o-y.

Last year, 1.2 million cars were produced in Russia, and another 350,000 cars were imported. Imports as a share of consumption have declined notably over the past decade as the result of foreign car makers putting up assembly plants in Russia. Majority of Russian production today is assembly work. The average degree of localisation is only about half, however, because local component production simply does not exist. Imports have also been reduced by high import duties that Russia must gradually lower in coming years under its WTO commitments. Russia also introduced a vehicle recycling fee in a 2012 which has been contested in WTO.

Russia last year exported about 100,000 passenger cars. Car exports have fallen for two years and in the first half of 2016, they fell further 30 % y-o-y. Demand has been weak in Russia’s main export markets, the CIS countries. Exports to Kazakhstan this year collapsed with the introduction of vehicle recycling fees. Russian brands are mostly not competitive outside the CIS and the export competitiveness of Russian assembly production is hampered e.g. by high logistics costs.

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