Old and new Moscow sit side by side as auto sector thrives

Old and new Moscow sit side by side as auto sector thrives

All this week's pomp and circumstance of former British Prime Minister Margaret Thatcher's funeral has rekindled myriad memories of what it was like growing up in the 1980s in the UK - and just how much the political landscape has changed.

From radical trade union reform to the extension of home ownership, from abolition of exchange controls to the wholesale transfer of State-owned utilities to the private sector, there was hardly an area of British political life Margaret Thatcher didn't affect.

But there was one more blast of breathtaking radicalism to come and that presented itself in the seemingly interminable 1980s struggle between the two titanic ideologies of unfettered, free-market capitalism and the forbidding political menace constantly looming across the Iron Curtain in the shape of the Soviet Union and its satellite client States.

Thatcher viewed the lifting the yoke of Communism from hundreds of millions of Eastern Europeans as almost a personal crusade shaped by her strict Methodist upbringing and, in tandem with her willing travelling partner, President Ronald Reagan, set about doing just that.

This all came flooding back to me watching Baroness' Thatcher's funeral and also by visiting the Russian Automotive Forum organised by Adam Smith Conferences in Moscow last week, where the former Prime Minister's legacy was highlighted.

Such was the speed of the USSR's collapse, the dissolution of the Supreme Soviet in 1991 and resignation of its last General Secretary, Mikhail Gorbachev, that many industries were plunged into turmoil.

Despite that maelstrom however, the Russian automotive sector fought back and, despite an expected slight dip this year to around 2.95m vehicles, is heavily tipped to overtake Germany as Europe's, if you count the vast country as part-European, largest auto market, a remarkable achievement in a relatively short period of time and one which appears to be accelerating.

From a 1.2m market at the end of the Soviet era, the country posted sales of 3m last year, proof, if any were needed, this country has arrived on the world auto stage.

Russian politicians - in common with their Western counterparts - are not slow to spot a rising star when they see one and hailed the industry at the Automotive Forum in Moscow as providing real opportunity both domestically and for export purposes - particularly now the country has acceded to the World Trade Organisation (WTO).

Quite how the WTO unravels in terms of concrete advantages for the auto industry has yet to be seen, but speaking at the Moscow Forum, State Duma [Parliament] Expert Council Committee chairwoman, Alfiya Kogogina, urged Russian OEMs and their increasing number of overseas partners to take advantage.

Kogogina added the Russian Parliament had also cooperated with OEMs to prepare new measures aimed at stimulating production following accession to the WTO. "I hope this year that package will be approved," she said, while also highlighting the critical area of suppliers in boosting domestic manufacturing.

To that end, Russia's Ministry of Economic Development has also concluded 63 agreements with companies producing component parts.

There's obviously one crucial area where all this general bonhomie ends up and that's in the employment sphere. "The share of market was almost 20% in 2012 - we are a huge employer," AvtoVAZ executive vice president, Oleg Lobanov, said at the Moscow conference.

That confidence is not misplaced. While the dizzying staffing numbers of Soviet times may be no more - GAZ Group used to employ untold tens of thousands and is still huge - AvtoVAZ is also clearly a Russian giant that is of immense importance to the economy as are the increasing number of overseas partners such as General Motors, Volkswagen, PSA Peugeot Citroen, Mitsubishi, Skoda and Renault.

That employment influence of the auto sector was given credence by recent comments from Nizhny Novgorod regional governor, Valezy Shantsev, in whose area GAZ is located. "For our region, the undertakings by GAZ are extremely important, simply because many people talk about investment and modernisation," he said.

"Every month productivity creates new jobs and new remuneration - that is the objective for any government - any State."

For its part, AvtoVAZ is looking to produce 1m cars by 2017 - and with a timely injection of cash from its Renault-Nissan partners of around $750m it could well look realistically at that number dependent on new model families being launched.

Don't underestimate the enduring popularity of AvtoVAZ's Lada though as Lobanov insisted: "People buy Ladas because they like our cars as they become more advanced and safe," he said.

The EVP also highlighted during the Forum how - unspecified - government support had aided AvtoVAZ in weathering the plunging economic climate of a few years ago to become one of Russia's heavyweight employers.

"The crisis showed if the government [did] not support us, a domino effect could have started and it is true, [it was on] the speed of change the survival of AvtoVAZ depended," he said. "We created a new model of functioning."

Of equal importance is the issue of localised component supply, set in concrete by Russia's infamous Decree 166 and its Auto Investment Programme, specifying minimum content and capacity requirements.

And while there's no avoiding that for foreign OEMs and component makers, it's interesting to note the European Parliament's take on the matter last year.

The good bureaucrats of Brussels, having pored over the requirements with a fine tooth comb, pithily noted: "Its [Russia's] regime for foreign investments in the automotive sector...was made more stringent in 2010 to the point it would have been, upon Russia's accession to the WTO, declared contrary to the WTO Agreement on Trade-Related Investment Measures (TRIMs) which forbids the investment measures in goods' production that can cause trade-restrictive and distorting effects."

However, in a rare moment of flexibility the Brussels Parliament decided to endorse what it said was the WTO's exemption of the Directive - thus kick-starting the engine of Russian automotive growth that that can be seen today - albeit given a mighty helping hand with localisation. 

And now it looks as if that localisation is here to stay as Ford Sollers president, Ted Sollers, noted at the Adam Smith Conferences event: "The issue is not whether localisation needs to be done," he said. The government makes the pace very fast - mostly it is a pace issue.

"It is not a problem of supply, but as the cost of Tier 2 gets more localised, it will get better. We would like to be there faster."

There's one other area, a by product if you like, of the roaring success of the Russian auto machine that is only now being seriously tackled and that is one of pollution.

Just walk around Moscow. You can smell the diesel in the air and although it may not just be auto fuel - the Russian capital must be one of only few cities in the world still to have what looks like heavy industry belching out goodness knows what from vast chimney stacks right in the centre - cars are nonetheless a massive environmental issue.

In fact, one Russian joked to me Muscovites couldn't cope in the countryside, being so used to breathing in such a cocktail of fumes.

The Cold War may be over but that is one concrete legacy that lives on.