Russia Drops Auto Trade Restrictions in Bid to Join WTO

The Russian government agrees to scrap trade rules requiring that foreign auto makers produce 350,000 vehicles annually in the country to secure reduced duties on imported components.

Moscow made the concession to obtain European Union support for membership in the World Trade Organization.

Russian membership in WTO could doom Lada marque.

A special WTO working party late last week approved all bilateral agreements between Russia and the organization’s 153 members, creating one package for anticipated approval at a Dec. 15-17 ministerial meeting in Geneva.

Russia likely would join the WTO within six months, depending on when it ratifies the deal.

The auto concession was a key part of final negotiations, with EU diplomats pushing hard against the Russian trade rule because it could force European auto makers to shift production there.

Under the agreement, the rule will be phased out by June 2018 and will apply only to existing foreign-owned plants. It will not affect foreign investment in building new plants.

In addition, import duties for foreign-made autos will be reduced to an average 12% from the current average of 15.5%, according to a WTO briefing note.

“In acceding to the WTO, Russia embraces a series of rules and commitments that are the foundation of an open, transparent and non-discriminatory global trading system,” says Stefan Johannesson, Iceland’s WTO ambassador and chair of the organization’s Russia-accession working party.

“This win-win result will bring Russia more firmly into the global economy and make it a more attractive place to do business.”

Russian Prime Minister Vladimir Putin said this summer he would defend the 350,000-vehicle rule. But Anders Aslund, a fellow at the Peterson Institute for International Economics in Washington, D.C., tells WardsAuto that the deal gives Russia plenty of breathing space.

“I think it was a sensible negotiated solution,” says Aslund, a former advisor to the Russian government. “Russia wants a car industry and it will have a car industry – 2018, that’s a long period of time.”

In the meantime, he predicts annual Russian vehicle purchases will rise from about 2 million now to 4 million by 2020, with manufacturing capacity increasing from 1 million to between 3 million and 4 million over the same time period.

Aslund predicts Ford, General Motors, Toyota and Nissan will make the most of any expansion opportunity, while Renault, with its joint venture in the traditional Russian auto center of Togliatti, also is well-placed. He foresees Russians driving more foreign cars as the old Soviet-era marques such as Lada are phased out.

Because GM and Ford already have a strong presence in the St. Petersburg region, the area could eclipse Moscow and Togliatti as Russia’s main automotive hub, Aslund says. “This is virgin land for the international car companies. Russia is one big bonanza for the automotive industry.”

Peter Cooke, a professor of automotive management at the Centre for Automotive Management at the U.K.’s University of Buckingham, agrees, saying: “The Russian market is expanding and will continue expanding. They have an aspiring middle class buying these cars.”

Cooke predicts that, as is happening in China, the Russian market will spread from major, relatively affluent urban areas such as Moscow and St. Petersburg to smaller communities across the country’s vast hinterland.

Foreign auto makers will benefit from consumers looking for established brands. “It gives them a certain comfort,” Cooke says, adding it remains to be seen how the Russian market will be divided between leasing and dealership networks.

Japanese and European auto makers will be challenged in efforts to expand their Russian manufacturing base.

“It takes time to get these facilities established,” Cooke says, adding shortages of skilled manual labor and middle management are potential hurdles.

Available manual laborers at new auto plants built away from major urban centers may only have agricultural experience and “it will take time to train these people to accept the critical discipline needed,” he says, adding management “could be their Achilles’ heel – they haven’t got the (practical) middle management in the quantity they will need.”

Cooke also says that if several auto makers expand at the same time, there is the risk of a revolving door of workers and management jumping from job to job, creating an inflationary cost spiral.

However, Aslund predicts auto makers will be able to attract Russian engineers and industrial workers who used to work for defunct defense and other heavy-manufacturing sectors.