The introduction of tighter vehicle emission regulations in Russia is set to squeeze Russia's indigenous carmakers.

Euro II emission standards for all Russian-made cars are expected to commence from July 2006 and non-compliant vehicle production in Russia will be forced to cease. Analysts say the move will force the market exit of some models and that taking steps to meet the new standard has added significant cost to some local vehicle makers.

JD Power Automotive Forecasting analyst Carol Thomas says that the extra costs incurred by local producer AvtoVAZ may have put US$500 on the price of its cars sold in Russia.

The extra costs for local producers come at a time when they have been facing increased competition from imports and from foreign brands who have recently set up assembly operations in Russia.

Local producers with 'basic but sturdy' products have traditionally enjoyed a big price advantage over foreign brands in Russia. But their price advantage is narrowing according to JD Power's analysis which suggests that Russian consumers with higher incomes are increasingly attracted to foreign brands. That has raised the entry-level segment's effective price range to US$6,000-US$10,000 and brought foreign brands and models, such as the Renault Logan, into the budget segment fray.

The locally made Renault Logan in Russia sells for US$9,000 against US$7,500 for the AvtoVAZ Karina, according to JD Power.

WTO entry would add further to the pressures on local makers as import duties would be reduced, though Russia would get a seven-year transition period upon WTO accession. Analysts say high duties on used cars will likely remain in place beyond the WTO transition period.

Euro III and Euro IV emission standards are expected to be introduced in 2008 and 2010 respectively.

JD Power forecasts that the foreign brand share of the Russian new car market will rise from 43% in 2005 to 70% by 2011, with 'most' Russian manufacturers expected to stop producing cars. But the forecaster notes that there are indications that the Russian government will not allow giant local producer AvtoVAZ to go under.

The Russian car market is currently benefiting from strong consumer spending growth in Russia on the back of economic growth boosted by high energy prices. There is also a growth in supply as local production by foreign makers increases. Better availability of consumer credit is another positive factor; an estimated 25% of AvtoVAZ car sales are now secured on credit.

JD Power forecasts that the Russian car market will be heading towards two million units pa in the early part of the next decade and could reach five million units per annum in the long-term at maturity.

Dave Leggett