Prime Minister Vladimir Putin held a meeting on additional measures to stabilise and rehabilitate the country’s auto industry
19 december 2008
Vladimir Putin's opening remarks:
Ladies and gentlemen, colleagues,
We meet today to discuss a set of measures to support one of the key sectors of Russia's economy, the auto industry.
Our guest speaker has just explained how the global economic crisis is affecting global auto making. Everybody knows that US carmakers, that have been setting market trends for decades, are on the verge of bankruptcy. You know that, too.
Car sales in Japan dropped by 18 in November, according to latest estimates, in Britain by 37% and in Spain by 49%.
Unfortunately, Russia is no exception. Production of cars fell by 7.2% in November, and of lorries and buses, by over 50% year on year.
Many manufacturers chose to suspend vehicle assembly in December 2008-January 2009. The industry's problems stem from plummeting consumer and commercial demand. Therefore, government action in this case should try to mitigate this alarming trend.
To begin with, I think the Government, natural monopolies and preferably the largest private companies should purchase predominantly domestic products.
I have just spoken with the Kamaz plant workers who told me they could build high quality vehicles. It's not a joke, it is the truth. They say they have professionals capable of manufacturing quality vehicles, but we need to accommodate them with market incentives inside the country.
At a time when domestic producers are forced to slash production, I think it especially unacceptable to spend federal funds purchasing foreign cars and trucks. Let me emphasise that I am referring to so-called "direct imports" here.
As for the new assembly plants recently established in Russia by major foreign automakers, we also regard them as part of the domestic auto industry.
In this sense, I am making no distinction between Volkswagen, Renault, Ford and Toyota plants, and Russian VAZ and GAZ.
Foreign assembly plants operating in Russia are entitled to government support as much as local manufacturers - naturally, assuming they comply with the required domestic content agreement. So what are my proposals?
First. To buy significant amounts of vehicles for state purposes annually.
I believe the Government should boost state acquisitions in 2009. I know that the auto pools of our social services are in bad need of renovation, along with those of the Interior, Defence and Emergencies Ministries. The federal ministries planned to allocate 15 billion roubles for this purpose next year. We'll channel an additional 12.5 billion roubles to the ministries, departments and other federal bodies for fleet purchases. The additional funds should be distributed in a way to both meet the agency's goals and to support domestic manufacturers. The purchases should be evenly distributed across the industry.
Second, the Transport Ministry will be instructed to establish a special leasing company under the federal target programme to modernise the country's transport system. A total of 40 billion roubles will be transferred to that company from several different sources for acquisitions of Russian-made vehicles.
Therefore, we need to put state auto acquisitions up for tender as soon as possible, so that state contracts can provide timely assistance to the ailing domestic industry. If possible, upfront payments under those contracts will be made to producers as early as the first quarter of 2009.
Moreover, upfront payments under state contracts will be raised to 50% of the contract amount from the current 30%. We'll also cancel all requirements to ensure the fulfilment of the contract - bank guarantees, insurance or other guarantees, in cases where vehicles are purchased directly from the manufacturer.
We'll have to eliminate distributors and other intermediaries, too.
I would ask department heads to use more long-term contracts where possible, so that businesses can better understand their long-term objectives and prospects for marketing their products. This is not always possible: with three-year contracts, we cannot always guarantee three-year funding, but this must be done where possible, and there are possibilities.
Second. As I said in Lipetsk yesterday, we must provide subsidies to help local self-government bodies to acquire new vehicles for the needs of public transportation, housing and utilities services, hospitals, schools and all other areas managed by the municipal government.
As you know, several years ago I initiated the idea of priority national projects. They are making good progress today. I want to put forward another initiative now: a programme to replace the municipal public transport fleet. The federal budget has earmarked an additional 20 billion roubles to finance this progrramme, with regional and municipal authorities to provide another 10 billion roubles as co-financers.
At yesterday's meeting in Lipetsk we agreed with representatives of municipal governments and some regions to jointly implement this project. Seventy percent of the funding will come from the federal budget and 30% from the local and regional budgets. In all, we must channel about 30 billion roubles into this programme. All these funds will be used to purchase Russian vehicles.
Third. It is now necessary to stimulate investment demand for commercial vehicles. Let me remind you that several days ago the decision was taken to increase Rosagroleasing's authorised capital by 25 billion roubles.
We have agreed with the sector's representatives that 5 billion roubles out of this amount will be spent to buy vehicles for agricultural producers. I would ask Yelena Skrynnik [Rosagroleasing's director general] to keep this in mind.
Credit lines in the amount of 43 billion roubles will be opened to leasing companies. We know that they are in a difficult situation now. I repeat: we will provide 43 billion roubles for this purpose. It is important that the loans will be contracted for a term of three years and at interest rates not higher that the Central Bank's refinancing rates. This will allow a resumption of operations.
By the way, state authorities could also use leasing programmes. This would make it possible to buy more vehicles and spend comparatively smaller budget funds this year by leasing them. We must make the respective amendments to the legislation without delay. This will sure be done.
Fourth. We must effectively help auto producers to attract funds.
The government has already submitted budget amendments to the State Duma to provide state guarantees for loans attracted by key companies in nationally vital industries. Auto industry enterprises are undoubtedly among these. We intend to compile a list of several hundred strategic enterprises. At first, I spoke about 300 companies. Government analysts are drawing up this list now, and it may include up to 400 or 500 companies. On the whole, this system must cover as many as 1,500 enterprises. I repeat, this includes auto industry as well. It is expected that these enterprises will be able to attract up to 70 billion roubles using state guarantees.
In 2009, the Government will also help the producers to float bonds worth up to 60 billion roubles to make these bonds more attractive. They will be issued under state guarantees, and the Central Bank will open refinancing for the banks that will buy out these bonds. I hope that the Central Bank will take state guarantees and the refinancing scheme into account when compiling their Lombard lists.
Fifth, a major task is to restore consumer demand. We must support the people. We proposed the following measures: subsidise interest payments on three-year loans to citizens for new car purchases. I want to underline that those who want to buy a car, should do it in 2009 because this regulation will apply only in 2009. If one buys a Russian car - meaning cars produced in Russia, especially those in high demand which cost no more than 350,000 roubles - the subsidy will equal two-thirds of the Central Bank's refinancing rate. This means that if a person buys a car in 2009 with a three-year loan contract, we will help him to repay this loan by refinancing interest payments at two-thirds of the Central Bank's rate.
And finally, you know that we have increased import duties on used foreign cars in order to support Russia's car manufacturers. We understand that this measure affects the interests of our citizens, in particular those who live in the Far East. I regularly visit this region, meet with its people and I understand their concerns.
I think these concerns are reasonable. I often hear people saying, "In the Far East, Russian cars, for example Lada, cost two to three times more than in European Russia." I have to admit that this is a fair remark. We live in a united country, and all its citizens should live in equal social and economic conditions. Of course, it is impossible to reach total equality at once. But such extreme disproportions should be eliminated.
Let's examine why Russian cars cost so much in the Far East. First: high transportation costs. One needs 43,000 roubles to transport one car by rail from the Far East to European Russia while the transportation of a car from European Russia to the Far East may cost up to 70,000. Of course, it is unfair.
But at the same time, we should support our auto makers, like these workers who attended our meeting today. We need to provide them with jobs. We also have to guarantee taxes for the Russian federal budget and regional budgets to be able to solve social problems. And we have to think about the interests of our citizens living in the Far East who want to buy Russian cars.
To do this, I propose abolishing railway transportation charges for Russian cars manufactured in any part of Russia to the Far East. The Russian Railways' foregone income will be compensated by the state budget.
By the way, I can say that about 350,000 cars were transported from the Far Eastern Federal District to Russia's other regions from January through October 2008. 15,000 cars were registered in the Far East by State Road Traffic Safety Inspections. This means that people living in the region need about 15,000-30,000 cars annually. The rest of the cars were sold by car dealers throughout Russia.
In general, we have to support and will go on supporting any business acting under the Russian legislation. But we should keep in mind that only several thousands people at best are engaged in commercial operations with cars, making super profits, while the auto industry provides work for over 1.5 million people. In our current difficult economic situation we must primarily think about them.
In the last few years the Russian auto industry has enjoyed high growth rates and attracted essential investment. Thousands of new jobs were created, and competitive production developed. Also, there have been sufficient improvements at Russia's traditional domestic assembly plants.
If we do not support the auto industry today, we will lose much of what has been achieved with great difficulty during the last few years. Therefore, we need to implement our decisions efficiently and in a timely manner.
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Vladimir Putin's closing remarks:
Let's sum up.
In general, I've spoken about the measures which we plan to carry out. We'll add some of the proposals made here to the draft protocol.
Allow me to recall what these measures are about. They provide a 50% advance payment on government contracts for the purchase of cars and other vehicles produced in Russia. Bank guarantees and insurance are not required if they are bought directly from producers.
The federal authorities will earmark an additional 12.5 billion roubles for the purchase of vehicles. Allow me to recall that in a tentative estimate, the federal bodies already have about 10 billion roubles at their disposal. Hence, the final figure will be around 22 billion-23 billion roubles.
The initial tenders will take place in the first quarter of the next year, including with the possibility of signing three-year contracts. Three-year contracts may be concluded where three-year budget allocations have been made. This does not cover every scenario, but there are several possibilities. For instance, the Defence Ministry has the right to sign such contracts.
Now let's turn to leasing companies. They are in a very difficult position. We'll give them up to 43 billion roubles for at least three years. I think this is an important element for support.
Now about the interest rate. Allow me to recall that it should not exceed the Bank of Russia's refinancing rate. A total of 7.5 billion roubles will be spent for this purpose in the first quarter next year.
We have covered Rosagroleasing - five billion roubles out of the allocated 25 billion roubles. I remind you that 20 billion roubles will be earmarked for municipal purposes from the federal budget, and we expect to get 10 billion roubles from regional budgets. The total sum will be 30 billion roubles.
Now let me review the financing guarantees we discussed. Up to 70 billion roubles will come from the commission which we have set up to enhance the stability of the Russian economy by using government guarantees. This is about collateral. With government guarantees no additional collateral is required, and financiers have confirmed this. We are fully aware of the fact that most forms of collateral have depreciated. We will compensate for this with government guarantees.
As for the interest rate, this decision was made not only by the Government but also by the Central Bank, and is based on general economic situation and macro-economic statistics. Our economy differs considerably from the so-called developed economies, for instance, from the economy of the United States where they print dollars themselves. We are compelled to live with a different frame of reference. Our currency revenues from traditional exports are dwindling. This means that the flow of capital into the country is decreasing, and capital outflow is on the rise.
The Central Bank has to counter this trend. We should all understand in what environment we have to operate. Nonetheless, the commission can adopt exclusive decisions to support individual industries. We need to consider this. We must support the demand, which should be a key support approach in our efforts with all types of vehicular equipment... As for light vehicles, as I've already said, we'll help people to buy them by co-financing two thirds of the Central Bank's interest rate. I believe this will help our car-makers considerably.
Bonds of Russian auto assembly plants are designed for funding purposes and for investment projects of up to 60 billion roubles with a term of five years. I think they are a good tool, and should be used by all means. I'd also like to recall that I am referring to a refinancing opportunity through the Central Bank. In this context we are hoping that the bank will consider the government's position in compiling its Lombard lists and other activities. I believe everyone understands the financial and economic consequences of these actions. The objective is to assist the auto industry with affordable resources.
If someone does not know how to work with these bonds, define their value, or issue them, please address the Government, the Central Bank, or the Bank for Development and Foreign Economic Affairs (Vneshekonombank). You'll get support there.
Mr Alyoshin [AVTOVAZ President], who worked in the Government before, knows the ins and outs of bond financing, all the doors, and everyone personally. I don't think he will have any problems.
Boris Alyoshin: I am not coping, Mr Putin.
Vladimir Putin: How can that be? You were a Government official - and yet you don't cope while many others do! There's Sergei Chemezov [KAMAZ Board Chairman] sitting next to you. He's always there. Ask his advice! Why should you sit whispering, the two of you? Go to a graduate school, learn something about securities, ask [Finance Minister] Kudrin's advice - you have been friends for years! You don't even need to address his deputy Novak. If you have problems contacting him, tell Mr Chemezov to inform me. I'll surely arrange all the contacts you need.
As I see it, AVTOVAZ vitally needs public demand because the niche we are discussing - 350,000 rouble cars - belongs mainly to your commodity group.
We were right to tackle corporate debt rescheduling. The matter concerns taxes and insurance fees to extra-budgetary funds-a question we have always avoided in the past. We are ready to go to such lengths to keep our automotive industry afloat despite a social undercurrent to the problem.
I repeat, the Transportation Ministry has sufficient resources, as its arms continue purchasing and supplying special-purpose vehicles. Their total expenditures on those goals exceed 40 billion roubles a year. We will try to concentrate this money in a specialised leasing company to be spent solely on purchasing Russian-manufactured special-purpose vehicles. As for streamlining import duties, I have mentioned them already.
What is there to add to this discussion? I will definitely take stock of guarantee paperwork deadlines. I think the Finance and Economic Development ministries and the entire economic block should work on the issue and offer a simple procedure for quick decision-making.
Let us now move on to the investment programmes of our infrastructural monopolies-Transneft, Gazprom, and some others. I, too, think that we should do everything we can to preserve those programmes, but we all know that said investment programmes depend on tariffs, whose rise we have to put the brakes on. Current developments demand it. Those giants should cut their investment programme expenditures not by shrinking tariffs but by using cheaper resources-not financial but material-with no investment cuts. By this, I mean that metal, construction material, and some other prices should go down given the present circumstances. We will work with this goal in mind. We will also try to compensate the missing profits of infrastructural monopolies-much like we are paying 50 billion roubles to Russian Railways. We will do the same for other companies and introduce necessary amendments depending on the economic situation at the beginning of next year.
I want to say by way of conclusion that the automotive industry is one of the essential Russian economic branches. The measures our meeting has blueprinted are far from exhaustive. We will monitor production and social developments closely. We will join forces with regional authorities to respond to the social situation that depends on automotive industry, as well as respond to the economic situation. If need be, we will make further decisions to support the Russian automotive industry.