European trade representatives have reiterated their dismay at Russia’s imposition of a recycling tax on imported vehicles. The tax means they are effectively paying duties on imports that in many cases would be higher than before the country acceded to the World Trade Organisation (WTO) and agreed to lower import taxes on foreign vehicles.

In an article this past week by Reuters, Fredrik Erixon, a director at the European Centre for International Political Economy think tank in Brussels, said Russia was running "highly protectionist" policies.

"Russia is going to find itself being sued by a lot of different countries on a lot of issues," Erixon said.

Replacing import duties with recycling charges

The Russian Federation became member of the WTO last August. Import tariffs on vehicles dropped immediately from 30% to 25% as part of the accession, with a further reduction to 15% scheduled on full compliance by 2018 (read more here).

However, at the time the Russian government announced it would be introducing a new vehicle recycling tax designed to remove older, more polluting vehicles from the road and fund the $2 billion the country needs to invest in adequate vehicle disposal.

Under the new system, which came into effect last year, each vehicle is subject to a tax covered by the carmaker or importer and designed to cover the cost of recycling. However, the carmaker will not have to pay the tax if they set up their own drop off points and undertake to dispose of the car according to the required standards at the end of its lifecycle.

According to some commentators, this set up makes it difficult for a foreign carmaker without a base in Russia to handle its own disposal, meaning they have to pay an up-front fee equivalent to 5% of the sale price of the vehicle to cover the cost of recycling, which effectively takes import charges back up to 30%.

Russia does currently lack the proper means to recycle its growing vehicle fleet. Dominik Buszta, senior Consultant at Frost & Sullivan, said there are few modern vehicle recyclers in Russia and the infrastructure needed to recycle cars “is a myth at the moment”.

But he added that by introducing the new recycling tax the Russian government has increased not only its revenue but is clearly trying to push foreign OEMs to decrease the number of imported cars and encourage them to produce more vehicles in Russia.

Russian vehicles sales, which recovered to near their pre-crisis level in 2012 at around 3m units, are expected to surpass Germany as the largest market for new vehicles over the coming years. However, recent sales growth has come largely at the expense of domestic Russian OEMs. The government’s policies have thus been aimed at supporting and modernising the Russian automotive industry.

“[The] automotive sector is a strategic sector for the Russian government [and] the growing popularity of foreign brands is likely to result in a decrease of Russian brands,” noted Buszta. “Hence it is expected that the Russian government will protect its market.”

The clock is still ticking…
EU trade spokesperson John Clancy this week pointed to a European Commission meeting held last December at which European commissioner for trade, Karel De Gucht, highlighted the decree on fees for recycling cars as one of four issues of particular concern for trade between the EU and Russia, and “the spirit of open competitive markets”.

“Europe understands that there is an environmental need to encourage car recycling,” said De Gucht. “We have effective legislation in this area ourselves, though it does not involve fees on this scale or as the main way to achieve its goal.”

He went on: “Nonetheless, we have very grave concerns about the fact that the Russian legislation levies fees on imported vehicles alone. This discriminates against European producers and clashes with the most basic WTO rules. It also means cars imported from Europe are paying higher duties to the Russian government than before WTO accession. This situation is clearly unacceptable.”

De Gucht said the EU would not wait forever to reach an agreement on the outstanding issues, which also included a unilateral decision to raise tariffs on hundreds of other imported products, a ban on live animal imports and what it saw as a discriminatory lowering of duties on wood exports. “The clock is ticking,” added De Gucht.

Two months later, and it would appear that the clock is still ticking on what the response from the EU or Russia might be, according to Denis Schemoul, analyst on Europe Vehicle Production Forecasts at IHS Automotive. The Russian government’s priority remains to support domestic production, he said, including protecting the benefits of Decree 166, which is the government's policy to encourage automotive manufacturing within the Russian Federation

“If tensions with the EU on this topic develop, Russia may adapt the legislation, but all in all they will stick to the direction defined by Decree 166 in order to support the local industry,” Schemoul told Automotive Logistics News. “In case car importers would benefit from the recycling tax break at some point, they will not be able to leverage it because of the lack of infrastructure and recycling system.”

Five international OEMs, including General Motors, Renault and Ford, signed agreements in 2011 as part of the regulation, which committed them to investment in plant capacity for 350,000 units per year and increased localisation by 2016 in exchange for lower or zero import duties on parts. Although agreements are fixed until 2018, the Russian government has said it may have to change some of the existing contracts prematurely that would have lasted until 2020 in the wake of the WTO accession.

Foreign OEMs must adapt
Although Buszta said that international pressure from the EU or WTO members could eventually lead the Russian government to lower the fees of the recycling tax, he thought it unlikely that the tax would be eliminated anytime soon.

“Despite the fact that the Russian government has declared that a new taxation is temporary, it is not expected that Russia will cancel it in next few years,” said Buszta. “Foreign OEMs will have to adapt to a new situation."

The European Automobile Manufacturers Association said it would be issuing a statement on the situation very shortly.