July 4, 2018 / 2:06 PM / 5 months ago

Brakes seen on Russian car market recovery after VAT hike

* Russia to raise VAT by 2 ppt in 2019

* Increase needed for Putin’s new economic goals

* To result in higher car prices, to hit demand - car makers, sellers

* Car market growth can slow down in 2019 - analyst

By Gleb Stolyarov

MOSCOW, July 4 (Reuters) - The Russian government’s plan to increase value added tax to compensate for President Vladimir Putin’s ambitious new economic goals is set to hit car sales which have only just started to recover from four years of stagnation, sellers say.

On Tuesday, lawmakers backed a proposal to raise VAT by 2 percentage points to 20 percent from next year, aiming to raise an additional 600 billion roubles ($9.5 billion) per year to pay for new roads and other projects ordered by Putin.

The increase in VAT will lead to higher car prices, hitting demand and sales, car makers and dealers say, with hopes for recovery in the industry waning.

“Production costs will rise automatically by 2 percentage points. The price increase for customers will also be automatic,” a Nissan Russia spokesman told Reuters.

Japan’s Nissan runs a plant with a capacity of 100,000 light vehicles a year in St Petersburg. Along with other local and foreign car makers, the company has suffered from poor sales since 2013 amid weak economic growth.

The fall in sales deepened in 2014 after the west imposed sanctions on Russia following the annexation of Crimea, with the fall in the value of the rouble causing a rise in the prices of cars and other goods.

Before that, the Russian car market was the fastest growing in Europe and foreign automakers were actively investing to meet booming demand. It only returned to growth last year.

In 2017, Russian car sales totalled 1.6 million units, up 11.9 percent from the previous year, but still only around half of the nearly 3 million units sold in 2012 when the market was booming.

This year, the Association of European Businesses expects sales of new cars and light commercial vehicles in Russia to rise by 10 percent, to 1.75 million units.

PSA Peugeot Citroen, which together with Mitsubishi runs a plant in the region of Kaluga with a capacity of 125,000 cars a year, said that higher VAT will result in price increases for the bulk of goods, potentially hitting overall consumption.

“If people’s income does not increase this may lead to falling demand which will affect the (car) business, not in the best way,” the company said in an emailed reply to Reuters.

Avtovaz, Russia’s largest carmaker, which is co-owned by France’s Renault, declined to comment, as did Sollers, Volkswagen, Kia, Hyundai and Toyota, other major car producers in the country.

UNPOPULAR MEASURES

The VAT hike is one of a number of planned unpopular measures which also include a rise in the retirement age. That has prompted opposition politicians to accuse the Kremlin of using Russia’s World Cup as a cover to avoid dissent while all eyes are on the country’s sporting successes and a de facto ban in place on political protests.

The increase in VAT will be felt across the economy with inflation expected to accelerate by 1.5 percentage points next year alone, and growth seen picking up after all the investments into the projects requested by Putin are made.

Konstantin Avakyan, head of projects at the dealer centre AvtoSpetsTsentr, one of Russia’s largest car sellers, said he expected car producers to increase prices to compensate for higher VAT, which could hit demand.

“A car is not the most used consumer good in Russia anyway... so the path of the car market’s recovery, which has only started to grow after four years of a fall, can significantly slow down,” he said.

Yet some analysts believe there could be a temporary increase in sales this year - ahead of the VAT hike - before a slow down from 2019.

“Expectations of the VAT rise may even slightly boost sales this year but will hit the demand next,” said Vladimir Bespalov, an analyst with VTB Capital. ($1 = 63.2097 roubles) (Writing by Katya Golubkova; Editing by Kirsten Donovan)

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