Moscow Times
February 6, 2006
Editorial
Of Roads and Fools
At his news conference last week, President Vladimir Putin said the country's leadership was not planning a major renationalization of key industries.
Yet, the headlines tell us the opposite. The state itself or state-controlled companies either are planning to take control of several major enterprises or have already done so. In some cases, the object of the takeover functions in a different sector of the economy all together. And it is not only Gazprom that has noncore businesses that cost it more money than they will ever bring in.
The most recent example of the state's expansion plans is also the most stunning. The new top managers of AvtoVAZ, sent to Russia's largest car maker from state arms dealer Rosoboronexport, announced Thursday that they plan to spend billions of dollars to introduce as many as 12 new models in the next five years.
The projected $5 billion investment would fall under a federal program for developing Russia's car industry, which was drafted by Boris Alyoshin, head of the Federal Industry Agency, and apparently approved, at least in its preliminary form, by Putin.
With the bulk of the financing to come from federal coffers, all sorts of questions are raised about the wisdom of such an investment.
AvtoVAZ may be doing better than other Russian manufacturers of "indigenous" cars, but it is still steadily losing market share as Russians become increasingly reluctant to buy cars that are of inferior quality to Korean, Japanese and European models but which have come to cost almost as much or even more than the cheapest foreign makes.
AvtoVAZ and other Russian car manufacturers have in the past successfully lobbied the federal government to keep import duties high to stave off competition from imports. Now, however, Russia is nearing entry into WTO, which means import duties over the long term can only go down. At the same time, the ruble has strengthened beyond the level that preceded the 1998 meltdown, making imports that much more attractive.
What apparently have not decreased are AvtoVAZ's lobbying power and the state's desire to control whatever the Kremlin designates as a strategically important industry.
But rather than waste taxpayers' money on what Russians would describe as "the invention of the bicycle," the government should liberalize the passenger car industry in recognition of the fact that car production has no importance for national security. Those who already know how to make bicycles that are not only affordable but also reliable and safe should be allowed to do so. AvtoVAZ was given years to master this task but failed miserably, and even huge state investment and a continuation of a protectionist policy would be unlikely to help in the longer term.
Those who think otherwise should bear in mind Romania's effort to save one of its own strategic industries -- pig farming. After years of import tariffs and state subsidies, the industry still died after failing to compete with foreign pork producers, and this story has become a case study of how not to make policy for future policymakers.
If the government has a spare $5 billion to spend, let it spend it on retraining the workers in Tolyatti whose livelihood depends on AvtoVAZ. Or better yet, let it use the money to take care of the two traditional problems in Russia -- by fixing roads (or other infrastructure where the market economy fails) and keeping federal coffers out of the reach of those who pose the other problem.