Pilot Scrappage Programme Under Way in Russia on 1 January; PM Confirms AvtoVAZ Aid

The Russian government has finally introduced its own vehicle scrappage scheme as a reaction to the country's light vehicle market halving throughout 2009. According to a RIA Novosti report the scheme was rolled out on 1 January on an initial trial process in the country's major cities Moscow and St Petersburg, with the full scheme being rolled out across the country in February. The scheme has been formulated by the Russian Industry and Trade Ministry to encourage consumers to trade in older, less fuel efficient passenger cars for newer models. In order to incentivise car buyers to scrap their older models, the government will provide a voucher for 50,000 roubles (US$1,650) towards the purchase of a new Russian-built vehicle. The scheme will last from 1 January 2010 until 1 January 2011. However, according to the Industry and Trade Ministry the project will only be properly up and running nationwide from February. A total of 9.95 billion roubles (US$300 million) in government funds has been allocated for the scheme.

In addition, according to a BBC report, Russian prime minister Vladimir Putin has ordered the issue of a loan worth 28 billion roubles (US$924 million) to the country's largest passenger car manufacturer AvtoVAZ, which would be now be facing bankruptcy without the consistent financial support of the Russian government over the past 12 months. The loan will be issued by the government through state industry investment holding company Rostekhnologii. The loan will be issued so that the company can meet its short-term financial obligations in terms of suppliers payments and staff wages. This will prepare the way for Rostekhnologii to increase its share in AvtoVAZ. The Russian government document outlining the conditions of the loan says it will only be issued after AvtoVAZ provides the Russian Ministry of Industry and Trade, the Ministry of Economic Development and the Finance Ministry with a programme for development with a mid-term outlook, including a long-term investment programme. The conditions for the loan include the signing of a memorandum between Rostekhnologii, AvtoVAZ and a group of banks, which includes Sberbank and VTB, on restructuring AvtoVAZ's debt. The Russian government and the company's shareholders, including French OEM Renault, signed a preliminary agreement at the end of November to provide a business plan and financial structure for AvtoVAZ in the short to medium term. The plan includes total investment from the Russian government and a new model plan instigated by Renault.

Outlook and Implications

The Russian government will be hoping to replicate the kind of success that has been seen in Europe through the 11 scrappage schemes that were introduced last year by various European governments. The most successful scheme was seen in Germany, which added over 700,000 units to the country's car market. However, the German scheme was underpinned by a extremely robust economy in which consumers had low levels of existing personal debt and high savings rates. The overall effect of scrappage schemes is still highly questionable as a result of the pull-forward effect on sales which the scrappage schemes tend to generate. The full-year 2009 German passenger car sales will be released this week, but it appears that the full-year sales figure will be in the region of 3.8 million units, an increase of 18.9% on 2008's levels. However IHS Global Insight forecasts that passenger car sales will slump massively to 2.75 million units. However, the pull-forward effect is unlikely to be that marked in Russia because the scrappage scheme is unlikely to have anywhere near the same effect of a scheme like Germany's. This is because the fundamentals of the Russian economy are not as robust and structural issues such as low levels of consumer lending remain. As a result IHS Global Insight currently foresees only a mild recovery in the Russian passenger car industry this year, rising from the 1.33 million units forecast for 2009 to 1.49 million units in 2010.

The Russian government will be hoping that this uplift in sales, however modest, will benefit AvtoVAZ. It is following through with its plan to provide fresh financing for the ailing company, but the full refinancing package remains dependent on a viable business plan being presented to the Russian government by AvtoVAZ and its 25% shareholder Renault which is charged with the difficult task of formulating new model plans for the OEM.