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25 July, 2012  ▪  Heorhiy Hryshchenko

Auto Stop?

A decline in manufacturing and the balance of trade reinforce Ukrainian car producers who expect privileges for having switched sides in politics

On June 6, Petro Poroshenko, the Minister for Economic Development and Trade, said that the government had almost approved the draft bill to raise the car import duty.  He did not, however, mention the new rate, but he did hint that Ukraine would follow Russia’s suit as he wondered, “Why is the Ukrainian market protected with a 6-10% duty compared to 20-25% for Russian car makers, which allows them to develop their production and draw more investment into the industry?” Earlier, news surfaced that those lobbying the move demanded an increase to 33.4% for 1-1.5 litre engine cars and 47% for and 1.5-2.2 litre engines, although recent data suggests that their appetites were tamed to 6.46% and 15.1% respectively, which will be added to the effective 10% import duty allowed by WTO rules.

CAR LOBBY IN POWER: TIME TO ACT

The “cold war” between Ukrainian car makers and importers has been raging for a while now, with the raise in duty having been debated for at least a year, ever since UkrAutoprom, the Association of Ukrainian Motor Vehicle Manufacturers, urged the Ministry for Economy and Trade to launch a special investigation. Earlier, The Ukrainian Week suggested that importers were the ones throwing rumours of an upcoming steep rise in imported car prices into the media as they tried to sell their dead stock, encouraging people “to get it, before it gets pricey.” Clearly, the expectation of car prices going up by several thousand dollars is supposed to fuel demand and send potential buyers scrambling to buy an imported car or obtain a loan for that purpose.

In 2012, though, new appointments in the government seem to have had their impact on the situation. “After taking a lot of time to think about it”, Petro Poroshenko, one of the most influential “orange” oligarchs, eventually joined the team in power. His interests in the car market as the owner of large car assembly plants, including Bohdan, a corporation that produces Bohdan buses used as public transport and which assembles the Hyundai Accent, Elantra XD and Tucson models, is plain to see. Moreover, he has not received any business privileges since he joined the team in power. This new heavy artillery in the government boosts the impact of Tariel Vasadze, a long-time lobbyist of the high import duty and the owner of ZAZ, Zaporizhzhia car building plant, who switched to the team in power last year. Obviously, Ukraine’s major car makers are interested in raising import duties as market distribution is virtually the only chance for Ukrainian oligarchs to preserve their profits without bothering to upgrade their facilities or product lines. The crisis has already knocked down their sales almost threefold and the threat of yet another decline is looming.

SEAMLESS ON PAPER

How likely are the higher duty campaigners to get their initiative passed and working, and how will it affect the car industry if they succeed? Extra duty on imported cars cannot be ruled out this time as Ukraine’s trade balance is declining, and this is coupled with difficulties in filling the budget. The first problem can be solved by adjusting the Hryvnia exchange rate, a move the Presidential Administration is reluctant to take before the upcoming election, or by making imports more and more burdensome by raising duty rates up to the ceiling. In theory, the latter option can boost both budget revenues and kickbacks to the party in power for protecting grey imports. If presented properly to Ukraine’s key top officials, these factors can play a major role in the passing of the decision to raise the duty currently being lobbied.

In practice, though, extra duties may have a negative impact on the state budget as energy import is the only segment that tops car import in terms of providing budget revenues. In 2009, a 13% extra on the existing 10% duty on imported cars knocked the revenues down 85%, eventually forcing the government to cede to car importers’ demands.

Hopes to decrease the trade deficit may crash too. Limiting imports is technically easy, but boosting exports is extremely difficult. After all, higher import duties on cars may have an adverse impact on the amount of Ukrainian exports. The major car makers are in the US, Western Europe and Japan, and limited imports from G7 states may result in more restrictions for Ukrainian exports to the US and the EU.  

Moreover, there is the pendulous Free Trade Agreement with the EU whose officials, including EU Trade Commissioner Karl De Gucht, have already made it clear that they are not happy with the possible customs duty innovations in Ukraine. Of course, those lobbying for higher duties may use Viktor Yanukovych’s anger at the demarches of European leaders, especially German and Czech, as a response to political repressions in Ukraine, and Party of Regions representatives have certainly been hinting at that. Yet, how reasonable is this sort of response and how can it affect the state and the oligarchs close to the government?

THE MOTHBALLED INDUSTRY

Moreover, most of those who proudly call themselves “Ukrainian producers” are actually not. The last car completely assembled in Ukraine was the Slavuta model produced by ZAZ last year. Today, its facilities assemble a renamed child of the Chinese car industry selling at a price almost equal to that of American and European cars. The Lanos, for instance, is nearly 62% Ukrainian, while the Sens is slightly more Ukrainian due to its Melitopol, not Opel-made, engine. Most parts of the so-called “Ukrainian” Skoda and Hyundai models are actually made at plants abroad.

Will this approach strengthen Ukraine’s car industry and make it truly modern, rather than the just a rebranded version of European innovations from 20 years ago, such as the Lanos labelled the “nation’s car” by its creators and designed on the basis of the 1993 Opel Kadett? Especially, when taking into account the fact that every generation of new car in the industry lives just five years. Ukraine is still a few decades behind other countries in its pseudo-Ukrainian industry of modern car making. So, should it continue to mothball its car industry rather than follow the example of the Czech Škoda brand, which has been fully reconstructed by the Germans?

Surprisingly, President Yanukovych’s son was the one criticizing the Ministry’s plans to raise the car import duty a few days ago. Perhaps, he said this for a reason. An established practice for his father is to keep his standpoint secret until the last moment to save space for manoeuvres in choosing which decision to support or presenting himself as the “nice Tsar” who stops “the plotting of the mean boyars.” 


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