Russia's car market is believed to grow but will local manufacturers survive in international competition?

Russia to become Europe's largest car market by 2020

Emerging markets will account for 65 per cent of car sales worldwide by 2020 with Russia becoming the largest European and the fifth largest world’s car market.

With an annual sales growth of 6 per cent, Russia is set to overtake Germany in terms of car sales within the next seven years, Boston Consulting Group (BCG) has reported. By the beginning of the next decade, Russia is believed to reach annual sales volume of 4.4 million.

The reason for the fast growth is the growing middle class that buys new cars for the first time or upgrades aging models. Currently, there are only 290 cars per 1,000 Russians, while in Western Europe there are 560 vehicles per 1,000 people.

"Fundamentally it’s an attractive market in terms of cars per thousand inhabitants and therefore we are bullish long-term - but that doesn't mean that every year will be a good year," said Ewald Kreid, one of the authors of the report and a partner at BCG in Vienna.

The authors of the report predict that Russia can follow Brazil and China in transforming itself from a market targeted by foreign exporters, to one with a dominant share of locally-produced vehicles.

That would make it the fifth largest in the world by sales, after China, the USA., India and Brazil, the report said. Last year, Russia ranked seventh in the world after China, the US, Japan, Brazil, Germany and India. In 2009 it was tenth largest.

The emerging markets are expected to grow further, accounting for 65 per cent of global car sales in 2020, which is more than double the 28 per cent from 2000.

BCG’s prognosis differs substantially from that of the Association of European Busineses (AEB), which has recently reported car sales in Russia were falling for four consecutive months.

Russia’s manufacturing sector has been reported to be on the rise as both, local and international carmakers were expanding in the country. The overall production capacity is thus believed to reach about 3.3 million vehicles per year by 2016, up from 2.3 million in 2012.

However, the less technologically advanced Russian manufactures will probably experience problems, competing with the localised international producers. The BCG’s report says that by 2016, only 20 per cent of domestic parts manufacturers were likely to survive.

Russian car market has recently come under scrutiny of the World Trade Organisation (WTO), as the European Union has challenged the country’s car recycling policy. The USA has supported EU’s case today.

EU believes Russia is basically blocking imports of foreign cars by excluding domestic brands from the recycling fee.

Importing a car to Russia involves paying a fee to cover the future cost of recycling it, a form of a green tax. Cars produced in Russia, however, are not subject to the same charge, making it, in the EU's eyes, in effect an import tax.

Russia has introduced the policy only nine days after joining the WTO, prompting the critics to point to the country’s reluctance to meet its obligations.

Cutting import tariffs on cars was a major sticking point in Russia's 18-year negotiation to join the WTO. Moscow agreed to do so, but the EU says the recycling fee, collected up-front when a car is imported, effectively cancels out the tariff cut.

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