RUSSIA REACTS TO DUTY INCREASES ON CARS

C O N F I D E N T I A L MOSCOW 003745

SIPDIS

STATE FOR EUR/RUS
COMMERCE FOR MAC (MATT EDWARDS, JAY THOMPSON, JACK BROUGHER)
STATE PLS PASS USTR (KLEIN, HAFNER)

E.O. 12958: DECL: 12/24/2018
TAGS: ETRD EIND EINV ECON PGOV RS
SUBJECT: RUSSIA REACTS TO DUTY INCREASES ON CARS

REF: A. VLADIVOSTOK 137

B. VLADIVOSTOK 135

C. VLADIVOSTOK 130

D. MOSCOW 3669

E. MOSCOW 3678

F. MOSCOW 3563

Classified By: CDA Eric Rubin, Reasons 1.4(b,d).

SUMMARY
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1. (C) In the first sign of open discontent with GOR measures
to deal with the financial crisis, protests continue to mount
throughout Russia over increased duties on imported cars and
tighter restrictions on imported used cars (Refs A, B, C).
Thus far, the GOR has largely rebuffed the protesters, as
well as the pleas of foreign car manufacturers and Japanese
and EU diplomats. Civil society activists have told us that
in contrast to human rights activists, the protesters are
viewed as sympathetic, "mainstream" figures by the Russian
public, which complicates government efforts to respond to
the protests. End summary.

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Russia Raises Duties on Automobiles
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2. (U) In November, the Tariff Policy Commission, chaired by
First Deputy PM Zubkov, recommended that the GOR increase the
duty on imported automobiles from the current rate of 25% ad
valorem to a new rate of 30%, to provide protection to the
state-owned car manufacturer Avtovaz, which has been steadily
losing market share to foreign car companies. The commission
also recommended applying a prohibitive duty rate to all
imported vehicles older than five years (instead of the
current seven years),a measure largely aimed at tightening
the restrictions on the large volumes of used right-hand
drive cars brought into the Russian Far East and Siberia from
Japan.


3. (U) The new duty rates will become effective on January
11, 2009. While the order and the attached revisions to
Russia's tariff schedule are complex, it raises the duties on
almost all classes of vehicles to 30%, and makes equivalent
increases in the Euro-designated duty rates that are based on
engine capacity. (NOTE: Because of additional VAT and
excise taxes based on engine capacity on top of the duty
rate, the effective rate on an imported vehicle after
clearing customs is in many cases more than 50% of the car's
declared value.)

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Protests throughout Russia
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4. (SBU) Protests over the car duties and tighter
restrictions on used cars started in early December in the
Russian Far East and have since spread throughout Russia
(reftels). The protests marked the first major public
opposition to GOR policies enacted in response to the
economic crisis. In an apparent attempt to ease tensions in
the wake of the initial protests, Duma Speaker Gryzlov
announced on December 18 that the Duma would look carefully
at the question of car duties. However, the Duma has no
power to overturn the GOR Resolution that PM Putin signed and
Putin has given no sign that he is prepared to back down on
the increased duties.


5. (SBU) The protests have continued despite government
pressure and intimidation and despite counter rallies held in
the car manufacturing cities of Tolyatti and Ulyanovsk on
December 18, designed to undercut the demonstrators' public
appeal. Vladivostok journalists and social activists
publicly criticized local law enforcement's handling of the
most recent protests this past weekend. They presented video
and photographic evidence to the office of the Primorye Krai
prosecutor, showing that OMON police detachments used
excessive force against protesters and journalists.
Journalist's Union of Russia Chairman Vsevolod Bogdanov has
said he plans to appeal to the Russian parliament, claiming
that law enforcement agencies had broken the law. Primorye
Krai Prosecutor Senior Advisor Irina Nomokonova publicly said
a criminal suit against OMON officers is being considered.

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Foreign Car Makers Rebuffed
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6. (C) Our contacts in the car industry report that there is
also general opposition among the foreign carmakers to the
increase in the duty on imported vehicles, even among those
that also have domestic production operations, such as GM and
Ford. Chris Caulfield, Ford's Russia CFO, told us that the
duty rise would increase the cost of Ford's small and
medium-sized imported cars by about six percent, and by an
even higher percentage for larger vehicles. GM, Ford and
Chrysler strongly supported a letter from the Association of
European Businesses to First Deputy PM Zubkov objecting to
the proposed increase in duties. Heidi McCormack, GM's
Executive Director for Russia, told us that she expected that
the GOR would continue to ignore foreign companies' concerns
and move ahead with duty increases.


7. (C) John Stech, CEO of Chrysler Russia, told us that the
strengthening of the dollar against the ruble since August
was also having an impact on sales, though less for luxury
vehicles for which demand was not particularly
price-sensitive. For most vehicles, however, sales were
down. Taken together, the duty increase and weak ruble would
be a "double whammy" increase in costs for the foreign car
producers. While Chrysler had not yet decided on general
price increases, other manufacturers, including Ford, Toyota,
Volvo, Mazda and Hyundai, had already announced price
increases for 2009, which would likely further suppress
sales.


8. (C) In Stech's view, however, neither the weakening ruble
nor the duty increase would lead to a major increase in
Avtovaz's sales. The Lada's starting price of $5,000 was
already half the price of most economy class foreign models,
except for a few very low-end Chinese brands. Recognizing
that the Lada was an inferior product, most consumers would
still choose to buy a higher-quality foreign model. However,
with tight consumer credit conditions (Ref E),the average
Russian consumer would now likely have to save longer to buy
a car.

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Diplomats as Well
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9. (SBU) With used Japanese cars supplying the bulk of the
car market in the Russian Far East, Japanese diplomats have
attempted to persuade the GOR, so far without success, not to
raise duties or tighten the restrictions on used cars. On
December 4, Japanese Minister of Economy, Trade and Industry
Nikai sent letters to Economic Development (MED) Minister
Nabiullina and Industry and Trade Minister Khristenko.
Japanese Vice Foreign Minister Ito also raised the issue with
Deputy FM Denisov and Deputy Economic Development Minister
Klepach in separate meetings on December 8 and 9. Thus far,
Russia has not offered any substantive response to the
Japanese demarches.


10. (SBU) The EU Mission has also protested the increased
duties. The EU has objected to the duty increase not only on
the basis of Russia's G20 commitments, but also based on
Article 16 of the EU-Russia Partnership and Cooperation
Agreement (PCA). That article provides for consultations
with the EU before a decision is made to raise duties, a
commitment that Russia ignored in this case. In addition,
the EU has argued that an increase in duties was not in
keeping with the WTO standstill principle, under which
countries in the final stages of WTO accession traditionally
refrained from any duty increases. The EU Mission told us
that MED officials tried to downplay the duty increase,
claimed other countries were also supporting domestic car
industries, and that the EU had not always honored the
consultations article of the PCA -- though they had been
unable to cite any examples.


11. (SBU) Our own efforts to remind Russia of its G20
commitments not to erect protectionist measures were shrugged
off by the Economic Development Minister with the comment
that "some countries," including Russia, are authorized to
raise duties in special circumstances to protect vulnerable
domestic industries (Ref F).

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COMMENT
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12. (C) As the economic crisis deepens, the GOR is likely to
face an increasing number of situations where its policy
choices create losers as well as winners. The protests over
the increased duties on imported cars and tighter
restrictions on imported used cars pit Russian consumers,
especially in the Far East, against the domestic car
manufacturers. The protests demonstrate that managing the
reactions of the losers, especially when they are domestic
constituencies, will be a major challenge. Further
complicating the picture for the GOR, civil society activists
have been quick to make the point to us that the automobile
protesters, in sharp contrast to human rights activists, are
seen by the Russian public as sympathetic "mainstream"
figures.
RUBIN