Identifier
Created
Classification
Origin
09MOSCOW439
2009-02-20 15:20:00
CONFIDENTIAL
Embassy Moscow
Cable title:  

CATERPILLAR'S GIANT TRUCKS FALL VICTIM TO RUSSIAN

Tags:  ETRD EIND EFIN ECON RS 
pdf how-to read a cable
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FM AMEMBASSY MOSCOW
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INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHXD/MOSCOW POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEHNSC/NSC WASHDC
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C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000439 

SIPDIS

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

E.O. 12958: DECL: 02/19/2019
TAGS: ETRD EIND EFIN ECON RS
SUBJECT: CATERPILLAR'S GIANT TRUCKS FALL VICTIM TO RUSSIAN
CAR DUTY INCREASE

REF: 08 MOSCOW 3745

Classified By: ECON M/C Eric T. Schultz, Reasons 1.4(b,d).

-------
SUMMARY
-------

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000439

SIPDIS

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

E.O. 12958: DECL: 02/19/2019
TAGS: ETRD EIND EFIN ECON RS
SUBJECT: CATERPILLAR'S GIANT TRUCKS FALL VICTIM TO RUSSIAN
CAR DUTY INCREASE

REF: 08 MOSCOW 3745

Classified By: ECON M/C Eric T. Schultz, Reasons 1.4(b,d).

--------------
SUMMARY
--------------


1. (C) The giant trucks that Caterpillar produces for the
mining and construction industries have become an apparently
unintended victim of Russia's recent duty increases on cars.
The heavy duty vehicles, which cost about one million dollars
each, currently enter Russia under a customs code reserved
for "off-highway vehicles," the duties for which were
recently raised from the previous 5% ad valorum rate, to a
new rate of 25%. Russia does not produce these giant trucks,
therefore the duty increase provides no benefit to domestic
industries and only serves to raise costs for Russia's
already struggling mining and construction companies.


2. (C) Caterpillar is hoping that the issue can be resolved
through discussions with officials at the Ministries of
Industry and Trade and Economic Development, and at the
Tariff and Trade Policy Committee chaired by First DPM
Zubkov. However, even if the duty problem is resolved, tight
credit conditions and the strong dollar will still suppress
the company's Russia sales in 2009. END SUMMARY.

-------------- --------------
Giant Truck Swept Up in Wave of Car Duty Increases
-------------- --------------


3. (SBU) On February 19, ECON and FCS officers met with
Aleksander Cherepkov, Government and Regulatory Affairs
Manager in Caterpillar's Moscow office, to discuss how the
recent Russian duty increases on cars (reftel) had affected
the company's imports of heavy duty vehicles.


4. (C) Cherepkov explained that three types of giant
Caterpillar trucks, which are primarily used by the mining
and construction industries, had been affected by the recent
car duty increases: giant dump trucks that weigh over 50
tons used in mining operations, trucks that are used
underground inside mine shafts, and heavy duty articulated
trucks used at construction sites. He said Russian Customs

treats these massive trucks as "off-highway vehicles" under
the Russian customs classification 8704. The import duty in
that series of tariff line items had been raised from the
previous 5% ad valorum rate to a new rate of 25%.


5. (C) Cherepkov said no Russian companies produce comparable
equipment. Caterpillar's chief competitors were Japanese
producer Komatsu and the Belarusian Automotive Factory
(BELAZ). Cherepkov said that prior to the tariff increases,
BELAZ had dominated the Russian market with a 90% market
share, while Caterpillar held seven percent of the market,
and Komatsu three percent.


6. (C) Cherepkov said BELAZ enjoys some competitive
advantages over Komatsu and Caterpillar. Its trucks enter
Russia duty free under the Russia-Belarus single customs
union; its products are priced in rubles instead of dollars;
and BELAZ is a well known brand within Russia with a long and
continuous presence in the market. In addition, before the
duty rise, BELAZ trucks sold at a 50-60% discount compared to
the Japanese and American trucks.


7. (C) Cherepkov said the CAT and Komatsu trucks on the other
hand were perceived by customers as a higher quality product,
because of their greater efficiency of operation,
reliability, and durability in tough outdoor and underground
conditions. He added that the trucks are costly: the price
tag for Caterpillar's most popular heavy duty truck, the 777,
is one million dollars, and Komatsu's equivalent truck has
roughly the same price point (Komatsu also prices its Russian
truck sales in dollars, rather than rubles or yen).
Cherepkov said European manufacturers Volvo and Liebherr,
which produced heavy duty articulated trucks used in
construction, had also been affected by the duty increase.

--------------
Duty Increase May Be Unintentional
--------------


MOSCOW 00000439 002 OF 003



8. (C) Cherepkov said that during a recent trip to Minsk, the
Belarusian Industry Minister had intimated to him that there
were some advance discussions between Russian and Belarusian
officials about the duty increases. However, Cherepkov said
he believes that the duty increase's impact on Caterpillar
may have been unintentional rather than an effort to assist
BELAZ, which will not be affected by the duty increase but in
any event didn,t need protection, given its dominant market
share.


9. (C) Cherepkov said Russian officials may have unwittingly
increased the duties across the whole range of off-highway
vehicles. He said they may not have realized that the duty
change would dramatically increase costs for Russian mining
and construction end-users, many of whom are struggling to
cope with the global economic crisis.

--------------
Next Steps
--------------


10. (C) We told Cherepkov that we had met recently with
Alexander Rakhmanov, Director of the Industry and Trade
Ministry Department for Automobile and Agricultural Equipment
Policy (septel). Rakhmanov had told us that the GOR was open
to considering specific changes to the recent duty increases
for special-purpose vehicles for which there was no
domestically produced analogue.


11. (C) Cherepkov responded that he was hopeful a resolution
could be found and added that, for the moment, Caterpillar
did not believe that any additional USG advocacy was
necessary. He said the company's next step would be to meet
with officials from the Ministries of Industry and Trade and
of Economic Development to discuss how to resolve the duty
problem.


12. (C) Cherepkov said there were a number of potentially
simple fixes. Caterpillar's trucks could come in under
tariff line 8705 ("special purpose vehicles"),where the duty
had not been raised and remained 5%; the GOR could agree to
grant Caterpillar a special duty exemption; or the GOR could
agree to return the duty rate for the subcategory of
off-highway vehicles weighing over 50 tons to the previous 5%
rate.


13. (C) Cherepkov said that if all else failed, as a back-up
plan, Caterpillar would consider bringing in all of the
components for these heavy duty trucks from the United States
and assembling them at the company's existing assembly plant
in Tosno or at a new stand-alone facility. However, it would
take some time to establish a domestic assembly operation,
and the company would need to receive GOR assurances of
favorable duty treatment for parts and components.

--------------
Caterpillar's Sales Will Drop in 2009
--------------


14. (C) According to Cherepkov, in 2008 the company booked
record sales of over 200 trucks in Russia, but for 2009 was
forecasting that sales would decline to about 60-70 trucks.
Cherepkov said Caterpillar was facing several headwinds to
its 2009 truck sales in Russia. Tight credit conditions, the
35% devaluation in the ruble against the dollar since August
2008, and the value-added tax of 18% that went into effect in
mid-2008, along with the duty increase, would all contribute
to the slump in sales. He said the duty increase would by
itself account for a loss of sales of at least 10 trucks,
which at one million dollars per truck, would be equivalent
to as much as $10 million in lost sales. He also noted that
since it had gone into effect on January 12, Caterpillar had
not imported or sold any of its giant trucks in Russia.

--------------
COMMENT
--------------


15. (C) Caterpillar's trucks appear to be an unintended
casualty of the haste and lack of transparency with which the
GOR acted when it decided to raise duties across a wide swath
of vehicles last December. It seems unlikely that the GOR
would have intended to dramatically increase costs for
struggling Russian mining and construction companies in order

MOSCOW 00000439 003 OF 003


to benefit a Belarusian producer that already enjoyed a
substantial market share within Russia. If that
interpretation is correct, then Caterpillar should get a fair
hearing from the Ministries of Industry and Trade and of
Economic Development, and we would expect to see one of
Cherepkov's "simple" fixes implemented.
BEYRLE