Russian car recycling levy shreds free-trade hopes

MOSCOW Wed Feb 13, 2013 10:39am EST

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MOSCOW (Reuters) - A giant mechanical claw reaches down, grabs a small brown car and swings it into the maw of a huge shredder. Within minutes, the Soviet-era Moskvich saloon is spat out as a pile of twisted metal.

Scrap dealer Yuri Vorontsov hopes business at his Vtormet yard outside Moscow will pick up soon thanks to a new recycling fee on car imports. But he is still waiting to hear how the levy will help him compete with fly-by-night operators who buy up cars, strip them for parts and dump the hulks illegally.

As it is the plant, which can process up to 10,000 cars per month, is lucky to chew through 40.

"You can sell your car in any condition - if you look on the Internet it says 'we will buy any car, working or broken'. So what is going to happen; is it going to be properly scrapped?" asked Vorontsov. "No way."

Russia's trading partners say the new levy is a purely protectionist play under the guise of environmental "recycling". The European Union Trade Commissioner, Karel de Gucht, has threatened to invoke the disputes procedure of the World Trade Organization, which Russia joined only in August.

Fredrik Erixon, a director at the European Centre for International Political Economy think-tank in Brussels, called the import fee "blatantly discriminatory" and 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 told Reuters.

It was a disagreement over Russia's automobile market that almost scuttled its marathon talks on joining the WTO, when President Vladimir Putin in late 2010 granted subsidies to encourage 'localization' of auto production.

The dispute was resolved after Moscow signed up to a series of tariff cuts, lowering import duties on cars from 30 percent to 25 percent from September 2012, on the way to a final rate of 15 percent by 2016.

The new charge effectively takes import charges back up to 30 percent.

Moscow has shown no sign of changing behavior deeply rooted in an autarkic Soviet-era mindset, its critics say. Tensions with the United States have escalated over a Russian ban imposed this week on meat products containing the additive ractopamine.

MOUNTING CAR PROBLEM

Russian car sales reached 2.9 million units last year, worth $77 billion, and the country is on course to overtake Germany as Europe's biggest auto market in a few years. More new cars will mean - eventually - more cast-offs.

Moscow's central streets are jammed with premium models like the Mercedes favored by top apparatchiks, but Russians typically still keep their cars on the road for far longer than drivers elsewhere.

A third of the 35 million cars on the road in Russia were at least 15 years old as recently as 2011, market researcher AutoStat has estimated.

Annual scrappage rates run at 1-3 percent - less than half the 6 percent average in Europe, according to data from PriceWaterhouseCoopers.

Vorontsov's yard scrapped 12,000 cars in 2010 under a state-sponsored 'cash for clunkers' scheme created to fight recession, where car owners got a voucher towards a new car when they scrapped the old. But that scheme expired last year.

Now, when Russians do get rid of their cars, they have no incentive to go to regulated yards because of the red tape and extra cost involved, said Stanley Root, automotive industry leader at PwC in Moscow.

Scrapping is "becoming an urgent question", says Root, both to support the car industry's growth and to deal with the expected increase in unwanted old cars as rising incomes encourage middle-class Russians to trade up at a faster rate.

"If you want to secure the long-term sustainable growth of the car industry here, it is high time that attention was focused on implementing a scrap system," Root told Reuters.

WORDS BUT NO ACTION

The Russian government says the fee on imported cars, which ranges from 430 euros for a small car to 150,000 euros ($200,000) on a heavy construction vehicle, is one of the measures it is taking to address the issue.

But while the Trade and Industry Ministry has said the money will be used to set up state-sponsored car scrapping infrastructure, it has not given details of when and how this will be done. Cars manufactured in Russia will not be hit with the fee as long as producers set up drop-off points at their own expense to collect old vehicles for recycling.

Homegrown firms such as AvtoVaz (AVAZ.MM), the maker of the iconic Lada that is now majority owned by a Renault Nissan PENA.PA 7201.N joint venture, stand to benefit the most.

Importers will have to pay up-front fees worth around 5 percent of a car's sticker price.

"This levy is offsetting, clearly, the reduction of customs tariffs which has started since the accession to the WTO," said Frank Schauff, head of lobby group the Association of European Businesses (AEB) in Russia, which backs the development of a regulated, but not state-controlled, scrappage industry.

Foreign car makers say it is Russian consumers who will ultimately bear the cost.

"Across the entire industry the end consumer will suffer from this policy," said John Steck, president of Volvo Car Russia (VOLVb.ST), which imports every car it sells in Russia.

Denis Manturov, the minister of trade and industry, said in a speech last month that the government would not drop the fee. He added: "We are ready to consider the possibility of creating conditions for establishing recycling centers for foreign producers, but it will certainly take time."

Scrap dealer Vorontsov, a stocky man in his 50s with a matching white crew cut and stubble, is eager to see the dispute resolved one way or the other.

"The faster clarity comes, the faster it will become clear how an auto recycling system will work in Russia," he said.

($1 = 0.7387 euros)

(Editing by Megan Davies, Douglas Busvine and Sonya Hepinstall)

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