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Russia might apply scrappage fees to domestic auto producers

Russia is likely to make all auto producers in Russia pay the same scrappage fees as those currently paid by importers, Minister for Economic Development Andrey Belousov was quoted by Interfax as saying. He added that the government was now working on mechanisms to compensate those producers which would suffer as a result of their investment project economics deteriorating because of these payments, including foreign assembly in Russia, according to the newswire.

Scrappage fees for imported vehicles were introduced from September 2012 to compensate for the reduction of import duties on vehicles after Russia's accession to WTO. All importers pay the fee upfront at customs, while domestic producers (including foreign assembly in Russia) just provide guarantees that their vehicles will be scrapped when their useful life expires. In our view, the decision to change this system is driven by the desire to avoid further criticism from WTO members, primarily the EU.

At the same time, we believe that the government will remain committed to protecting the domestic auto industry and will offer compensation mechanisms which mean the current level of protection is maintained. Given these considerations (which were indirectly confirmed by Belousov's comments), the fact that no final decision has been taken and many details are still missing, we would treat this statement as neutral for domestic auto producers at this stage. The final decision could potentially affect profitability levels and the competitive positions of domestic producers.

Vladimir Bespalov
VTB Capital analyst

Russia, WTO

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