Russia Giving Ailing Auto Industry $3.3 Billion Infusion

ST. PETERSBURG, Russia – The Russian government plans to allocate RR99 billion ($3.3 billion) in indirect subsidies for the country’s auto industry in 2014.

The payouts are included in an existing state program designed to develop Russian industrial production and increase its competitiveness.

The government support is earmarked for transportation of cars from the Far East, subsidization of interest rates on loans, compensation of banks’ expenses on preferential car loans and the development of limousines for state officials.

In addition, RR50.4 billion ($1.56 billion) will be invested in job support for domestic automakers, particularly AvtoVAZ, as well as RR25 billion ($77.6 million) to help the industry meet environmental standards through partial compensation for production and service of cars that comply with Euro 4 and Euro 5 emissions standards.

The state originally said the subsidies, to be granted until 2020, would not exceed RR72 billion ($2.22 billion). But an official with the Russian Ministry of Industry and Trade says the decision to significantly increase state aid is related to the decline of the Russian auto market, expected to continue into 2014.

The official adds the government has no plans to provide direct financial support to AvtoVAZ or any other local automaker because of World Trade Organization restrictions, and instead will provide the industry with certain supportive programs.

Russian analysts believe the government has chosen the right time to provide support to the domestic auto industry. Light-vehicle deliveries in the country declined 6.7% year-on-year through August, while sales by AvtoVAZ, the country’s biggest automaker, fell 13.1%, according to WardsAuto data.

Analysts with VTB Capital, one of Russia’s leading auto-industry analytic agencies, believe the amount of support reflects the government’s desire to compensate local automakers for utilization fees they will have to pay along with foreign producers starting next year.

Because WTO rules bar subsidies to local producers, they say, the government is considering ways to provide indirect, hidden support instead.

In addition, Finance Minister Anton Siluanov has said the ministry estimates recycling fees for cars manufactured in Russia during the next three years will total RR383 billion ($13 billion).

Russia’s government has given the domestic auto industry significant financial support in the past.

Deputy Prime Minister Igor Shuvalov, on orders from then-Prime Minister Vladimir Putin, saved AvtoVAZ from bankruptcy by providing up to RR75 billion ($2.3 billion) in subsidies for two years. Most of the funds were used to repay debts to suppliers and banks and helped avoid massive layoffs.

In addition, the Southeast Russia city of Samara received more than RR5 billion $154.5 million) to subsidize employment of 14,500 AvtoVAZ employees.

Representatives of AvtoVAZ and Russia’s other leading automakers declined to comment on the government’s planned support.

State subsidies for the domestic auto industry this year will be RR10.5 billion ($324.4 million), more than nine times less than what is planned for 2014.