RUSSIAN OFFICIAL EXPLAINS DUTY INCREASES FOR CARS

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000541

SIPDIS

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

E.O. 12958: DECL: 03/04/2019
TAGS: ETRD EAGR ECON WTO RS
SUBJECT: RUSSIAN OFFICIAL EXPLAINS DUTY INCREASES FOR CARS
AND HARVESTERS

REF: A. MOSCOW 439

B. MOSCOW 334

C. 08 MOSCOW 3745

D. MOSCOW 101

E. 08 MOSCOW 3678

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

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SUMMARY
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1. (C) Alexander Rakhmanov, Director of the Department of
Automotive and Agriculture Equipment Policy at the Ministry
of Industry and Trade, acknowledged to us that the recent
duty increases for cars and harvesters were meant to protect
domestic producers from import competition and help them
weather the global economic crisis. Rakhmanov stated that
GOR financing programs for economy class cars would be open
to foreign car makers with domestic production operations.
However, the GOR would no longer subsidize financing for
purchases of foreign-produced agricultural equipment. He
noted that the GOR would consider additional protectionist
measures in these sectors over the next several months as
economic conditions warranted. END SUMMARY.

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Car Duties: Domestic Producers Asked for It
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2. (C) Rakhmanov said the GOR raised duties on automobiles to
improve competitive conditions for domestic car producers and
stimulate greater domestic production. Before raising the
duties, Rakhmanov said that the GOR had consulted with
several domestic and foreign automakers with production
operations in Russia. Many companies, including GM, had
urged the GOR to impose greater restrictions on used,
right-hand drive vehicle imports, claiming that they
suppressed sales of locally produced new cars. He noted that
there were nearly 600,000 used vehicles imported into Russia
in 2008, a situation that the GOR could no longer "tolerate."
Rakhmanov downplayed the impact of the "marginal" duty
increases on new imported cars. He said the GOR also wanted
to encourage further investment in domestic production from
the major foreign car makers through the new import duties.

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Financing Programs for Automobiles
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3. (C) Rakhmanov said that the February 10 announcement of
GOR subsidized lending for consumers wishing to purchase
inexpensive, domestically produced cars (Ref B),was intended
to help "budget" consumers afford a car. Rakhmanov noted
that the GOR would subsidize up to two thirds of the
"refinancing rate" on commercial loans under the program.
(N.B. As discussed in Ref B, Russia's four major domestic
vehicle manufacturers are in deep financial straits. Overall
domestic demand for cars has declined rapidly in the wake of
the global economic crisis. In January 2009, domestic
production of cars fell by 80% compared to January 2008; car
imports also declined, by 73%.)


4. (C) Rakhmanov said that the subsidized financing program
would not discriminate against foreign firms that produced
domestically. The purchase of any domestically produced car
that cost less than 350,000 rubles would be eligible for the
subsidy. In addition to the Russian manufacturers, Ford, VW
and Fiat would stand to benefit most from the program.
Rakhmanov acknowledged that the number of cars that could be
financed under the program was finite. The GOR would provide
no more than 2 billion rubles ($55.6 million) in subsidized
financing in 2009.

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Additional Measures
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5. (C) Rakhmanov said that the GOR was also planning to
support the automobile sector through GOR purchases of
domestically produced cars. The 12.5 billion rubles ($347
million) procurement announced on February 10 (Ref B) would

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be limited solely to Russian domestic producers, but foreign
firms that produce cars within Russia would still be able to
participate in earlier GOR tenders that were announced during
the 4th quarter of 2008. The GOR was also considering a
second tranche of state procurements of trucks and buses
later in 2009.


6. (C) Rakhmanov added that the GOR had no concrete plans for
any further direct equity investments in Russia's car
companies (besides the existing GOR stakes in Avtovaz and
Kamaz),but that direct GOR ownership might be considered in
the future if the company,s economic prospects or financial
conditions worsened. There were 750,000 people currently
employed in the automobile industry, with an additional 2.5
million jobs in related businesses and upstream industries.
The GOR would not allow the industry to collapse.

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Harvester Duty Increase Was Necessary
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7. (C) Rakhmanov admitted that the recent duty increase on
harvesters breached the November 2006 U.S.-Russia market
access agreement and side letters signed as part of Russia's
WTO accession process. However, he argued that the
conditions in the industry had materially changed since 2006.
Russian companies now produced all classes of harvesters and
the GOR believed that Russia, as a "key" agricultural
country, should continue to produce harvesters. While the
duty increase was admittedly an "unpleasant blow" to John
Deere and other major U.S. and EU producers, the GOR was
facing the grim prospect that domestic production of
harvesters would drop precipitously in 2009 without some
protection from import competition.


8. (C) Rakhmanov said he hoped the major foreign firms would
ultimately choose to set up production of agricultural
equipment within Russia, which would be a way around the new
duties. In that regard, he noted that the GOR was finalizing
a plan to offer beneficial investment terms to global
agricultural equipment manufacturers willing to set up
production and assembly operations in Russia.

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Financing of Foreign Agriculture Equipment Gone
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9. (C) Rakhmanov also confirmed that the GOR would no longer
subsidize the financing of foreign agricultural equipment
purchases, given the GOR's increasingly limited budgetary
resources (Ref A). However, the GOR would continue to
subsidize financing for domestic equipment purchases, and
would cover all but one percent of the interest rate on
commercial loans and leases for domestically produced
equipment. In addition, Rakhmanov said recent GOR infusions
of capital into Russia,s major agricultural banks were
subject to a condition that the funds only be used to
purchase domestically produced agricultural equipment, rather
than foreign equipment (i.e., a "Buy Russian" provision).
Rakhmanov, added, that the GOR might consider partially
lifting the financing moratorium for foreign agricultural
equipment for which there was no domestically produced
equivalent product.

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Extending the Duties
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10. (C) Noting that the increased duties on both cars and
harvesters would be in effect for an initial temporary period
of nine months, Rakhmanov said that the GOR would revisit the
duties in September 2009 and determine, based on market
conditions at that time, whether to maintain the duties or
let them expire. In particular, for the harvesters duty,
even if the GOR extended the duty beyond the nine month
period, Rakhmanov noted that it would ultimately return to a
lower level after Russia,s accession to the WTO.

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Comment
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11. (C) The duty increases on harvesters and cars are
blatantly protectionist. The former violates not only the
November 2006 U.S.-Russia bilateral agreement establishing a
substantially lower duty rate, but also the consultation
provisions of the EU-Russia Partnership and Cooperation
Agreement. The new "Buy Russian" financing policies for
automobiles and agricultural equipment are also problematic.
They will clearly harm U.S. imports of agricultural equipment
(Ref A). Russian officials are aware of the country,s
international trade commitments, but they are far more
concerned with shielding vulnerable domestic producers from
import competition and the global economic crisis, and
avoiding mass layoffs at Russian production facilities.
BEYRLE