Russia took a step closer to World Trade Organisation membership last week when a working party on the proposed accession approved a protocol for moving forward which included obligations on goods and services.
Membership for the largest nation outside the 153-member WTO will now be put to a vote at a meeting of trade ministers in Geneva to be held between 15th-17th December this year.
There are concerns that foreign carmakers, including Ford, Renault and Volkswagen, which have invested in the automotive industry through joint ventures, could suffer from the removal of tax benefits that were promised in exchange for production agreements. The Russian government has already said it will have to change some of the existing contracts with international companies.
Under the agreements signed during the past summer those carmakers agreed to assemble 300,000 vehicles a year in Russia using a greater percentage of locally-made components. In exchange carmakers were guaranteed relief on import duties on components that would have lasted until 2020 but may now be lifted earlier as part of the WTO accession.
“Revoking of preferential tariffs for foreign OEMs producing vehicles in the Russian automotive industry as requested by the WTO would mean an expensive but necessary measure if Russia wants to join WTO and maintain a strong and positive investment image for the foreign countries,” said Frost & Sullivan’s Automotive & Transportation consultant, Vitaly Belskiy.
“However, opening the market to direct imports would mean a challenge for the market and that is why it is important to have a transitional period, which would allow Russian manufacturers to modernise and update production.”
Russian Prime Minister Vladimir Putin has sought to ease concerns and said that the government would compensate foreign carmakers. According to the Russia Times he said compromises had been reached and the government would take part of the burden to meet its obligations to investors.
Even without this reassurance the Russian automotive market remains highly attractive to global carmakers because of the relatively low level of car ownership in the country. There were around 224 cars per 1,000 people in 2010, according to Frost & Sullivan, with a strong potential for an increase to slightly over 290 cars per 1,000 people by 2015. 
Seven year turnaround
For the domestic manufacturers, the adjustment period required to modernise and update production will have to run in conjunction with a reduction of the import tariffs on cars and trucks currently in effect, something that is going to be painful experience for the Russian market according to Belskiy. The key challenge lies before Russian manufacturers of passenger vehicles who will have around seven years to invest in modernisation and increase production efficiency, he told Automotive Logistics. Import tariffs on passenger cars are set to reach 15% by 2019.
Furthermore, entry to the WTO may be a tipping point for modernisation in Russia, where car production is estimated to treble to about 3m annually from 2015 if the economy remains stable. The reduction in tariffs is not expected to have a strong impact on production plans as most of the global OEMs planning to invest in local production (except for Honda and Mazda) have already set up local production.
In the short to medium term customers are expected to remain quite price sensitive, which means competition will become an important tool to gain competitive advantage, especially in the <$10,000 segment (sales of passenger cars in that segment accounted for over 19% in 2010). “However, foreign OEMs, which have invested heavily in local production in the past are not likely to be flexible on the vehicle price,” said Belskiy.
According to Belskiy there will be qualitative changes over this period. “Operating under intensifying competitive conditions will mean a strong need for domestic carmakers to dramatically increase product quality and overall production efficiency,” he said. “However, it is still unclear what the compensation expenses for the OEMs and automotive component suppliers will be.”
Russia recently signed a free trade agreement with seven former Soviet republic states that should not conflict with the proposed WTO agreement as long as external tariffs are not increased. According to WTO rules, countries are allowed to set up free-trade agreements in some cases as long as they do not discriminate against goods movements from outside the agreement zone.
Pictures courtesy of WTO/Studio Casagrande