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Analysis & Opinion
24.03.11 Last In, Last Out
By Tai Adelaja

The Russian government is set to extend its cash-for-clunkers program for the third time, as domestic carmakers lobby hard to keep the program afloat. The government plans to allocate another five billion rubles ($176 million) to extend the program until December, in addition to the 25 billion rubles ($881.4 million) already spent on the program to date, local media reported on Thursday. The scrappage program had widely been expected to end in May, although government officials had hinted at a possible extension until September, to allow the fast-growing but shaky domestic auto market to gain a firm footing.

Although it got off to a late start, Russia’s state-backed cash-for-clunkers program sparked a sales explosion on the domestic auto market when it kicked off in March, 2010. About 365,000 vehicles have since been sold under the program, which allows owners to turn in cars that are older than ten years and receive a 50,000 ruble ($1,751) credit toward the purchase of a new, Russian-produced vehicle. The government has so far issued 495,000 of the 500,000 credit certificates stipulated under the program. AvtoVAZ, the nation’s largest automaker has been the biggest beneficiary of the scrappage program, with the company's car sales approaching pre-crisis levels.

While AvtoVAZ has sold more than 50 percent of its Lada cars under the scheme, fewer than seven percent of the total sold were locally assembled foreign cars, the Kommersant business daily reported on Thursday. Because of its heavy reliance on the program for survival, AvtoVAZ has been at the forefront of intensive lobbying efforts to keep the program going, the newspaper said. The giant automaker makes no secret of the fact that ending the program could deal a blow to its sales. AvtoVAZ President Igor Komarov confirmed on Wednesday that extending the program would benefit AvtoVAZ, but added that other Russian automakers would benefit as well, Kommersant reported.

Andrei Dementyev, deputy Industry and Trade minister, said on Wednesday that the ministry "considers it possible to extend the state cash-for-clunkers program," with the government allocating an additional five billion rubles to fund the purchase of another 100,000 cars before the end of the year, Reuters reported. Car sales in Russia shot up 72 percent to 127,564 units year on year in January, and increased by a record 77 percent in February, according to the Association of European Businesses (AEB). AEB expects Russian annual car sales to return to pre-crisis levels of 2.9 million units during 2012 thanks to the government scheme and pent-up demand.

Alexei Rakhmanov, who heads the Trade Ministry's car industry department, told Reuters last week that the government has no plans to extend the cash-for-clunkers scheme beyond September, having helped put the country's automobile market back on course to match pre-crisis sales levels in 2012. He added, however, that the scheme was likely to continue until September when he expects all the 500,000 certificates to have been used for car purchases. "I imagine it will be finished soon as it is not needed. It would be like throwing money out of the window," AEB's chief executive Frank Schauff said last week on hearing that the government intended to scrap the program, according to Reuters. Dementyev said extending the program “is not of paramount importance” as the domestic auto market has returned to growth after the global economic downturn. However, he said the extension could uplift the Udmurtia-based troubled carmaker, IzhAvto. IzhAvto came within a whisker of collapse during the economic crisis, and late last year management of the company passed to Sberbank, its key creditor. The state-controlled lender has said it would like to sell it to a strategic investor.

During a meeting with Russian Prime Minister Vladimir Putin on Monday, Alexander Volkov, the president of Udmurtia, said the state-sponsored scrappage program has been of “particular help” to IzhAvto. He said it would be of “great help” if the program could be extended further. Putin promised to think about the suggestion. Should Putin give the nod, analysts say, AvtoVAZ will once again be the main beneficiary. Komarov said in December that the automaker would buy IzhAvto and invest seven billion rubles ($228 million) to turn its smaller rival around. Komarov said AvtoVAZ will be working with its French and Japanese partners to modernize the indebted carmaker in line with Moscow's drive to use foreign investors' know-how to revamp its auto industry. IzhAvto's factory, located in the city of Izhevsk in central Russia, is expected to assemble cars under the brands of Renault, Nissan and AvtoVAZ's Lada, while capacity will be increased by about a third from 220,000 to 300,000 cars a year by 2014.

The decision to extend the program has been taken in principle, and the Ministries of Finance and Industry are only awaiting the final directive from the prime minister, Kommersant said Thursday, citing unnamed sources. While the necessary five billion rubles was not earmarked in the 2011 budget, the newspaper said, it could be allocated by the prime minister. All the necessary instructions and documents to extend the scrappage program could be finalized by late spring, the newspaper quoted its sources as saying. Earlier this month, Rakhmanov said Russia may launch another cash-for-clunkers program to cover trucks older than 15 years and heavier than six tons starting in 2012, the Vedomosti business daily reported. If the government approves the plan, the state will spend 22.1 billion rubles ($760 million) to implement the program, which the paper says was based on proposals from the country's largest truck-maker KamAZ.

Industry experts said that despite growing car sales, the government is obliged to continue its efforts to prop up the domestic auto-market, as withdrawal of assistance could translate into a reversal of fortune in the auto industry. "Up to a third of the so-called massive demand for cars was spurred by the state-supported cash-for-clunkers program and sales could plummet by more than 30 percent if the program was to be stopped," Maxim Lobada, an automotive expert at the independent analytical agency Investkafe, said. "Recent events in Japan could also affect the fortunes of AvtoVAZ, which is in a partnership deal with the Renault-Nissan Alliance. Nissan has already suggested it might not be able to help in Russia in light of the recent earthquake, and the Russian government may have to fill the vacuum."

Mikhail Pak, a transport analyst at the independent investment group ATON, agreed, adding that extending the scrappage program is much more beneficial to the economy than injecting funds directly into auto companies. “The government currently receives additional revenues from oil sales and it is a good idea if some of this is used to renew the country’s outdated auto-park,” Pak said. “The program will also help AvtoVAZ to produce and market its new line of Granta models, which could hit the market sometime soon.”
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