Elena Mikhailovna Milinova
Corporate Finance and Collaboration with Authorities Director of OJSC “KAMAZ”

- It is evident for everyone that in the present-day situation which takes place in Russian and world economies such branch of industry as automotive production is not in the position to function effectively without systematic support measures on the part of the Government. Nowadays, when discussing problems of Russian automotive industry special attention is paid to car production. In turn we would like to tell you about measures of government support of domestic truck makers which are having a bad time too which also requires government support. Trucks, specifically heavy-duty trucks are referred to the sector of capital goods. The supply for them is liable to deeper cyclic fluctuations than for cars. As a result, during the first months of 2009 the sales of trucks with a tonnage from 14 up to 40 tonnes in Russian market decreased by many times.

The forecast of truck market development in Russia and CIS as of the second half of 2009 and 2010 is not optimistic either. Unfortunately we expect further reduction of consumer demand since there is growth rate reduction of investments into the capital stock, enterprises shorten the number of investment programmes and rate of renewal of vehicle fleets decreases. We suppose that in 2009 the market of trucks with a tonnage from 14 up to 40 tonnes will decrease down to 50 thousand units. For example, in 2008 this index was 126 thousand units. At the same time we should take into consideration two main factors which put considerable pressure on the sales market of vehicles produced in 2009. Firstly, as of the beginning of the present year the surplus of vehicles made a total of 10 thousand units out of which there were 4 thousand of “KAMAZ” vehicles. Secondly, worsening of financial state of consumers who very often cannot effect leasing payments, brought about the launch of 2- and 3-year old cars with a considerable discount.

Taking into consideration these factors, sales of “KAMAZ” trucks in 2009 will make a total not more than 28 thousand units and in Russian market this index will be not more than 22 thousand trucks. As a comparison, in 2007 the total sales were 52.7 thousand units and in 2008 – 47.5 thousand units.

If we analyze truck markets in the USA, Europe and in developing countries over the past 30 years we will see that it changes by 8-year cycles and that is why it is reasonable to suppose that in 2 or 3 years the supply in Russia will recover. However, without government support the recovery period of Russian economy on the whole and supply for capital goods, particularly trucks, can take longer than expected. Of course, at present, in the Government and on the level of branch departments it is understood that we need strategies oriented both to stimulation of the supply for vehicles and to stabilization of financial state of automotive industry enterprises.

The main protective measures of the industry were planned in December of 2008. During the conference under the chairmanship of V.V.Putin in Naberezhnye Chelny the ambitious programme concerning support of automotive industry was adopted. Over the past half a year a lot of Government decrees and other legal acts arranging the implementation of the decisions taken were passed. The measures to be implemented can be divided into two main lines. The first one concerns sale of products of Russian automakers. Particularly, this is government order and subsidization of Federal Target Programmes, including those which aim at road building and infrastructure developing in the Russian Federation, increase in customs duties for import vehicles, subsidization of interest rates for leasing companies of automakers and subsidization of interest rates for exporters.

The second line is connected with the measures of financial support. Particularly, this is assistance in placement of bonded debts by automobile companies, administration of government guarantees on loans in Russian banks, subsidization of interest rates on loans intended for technical retooling and modernization, measures aimed at reducing the tax burden upon business.

At present, there are all prerequisites for renewal of truck fleet in Russia since it is older than that in developed countries. Out of total number of trucks with full mass from 14 up to 40 tonnes which are 1.8 million unites, about 400 thousand unites are older than 20; a bit more than 600 thousand units are from 10 to 20 years old. What does such an old fleet mean for Russia? Firstly, the engines on such vehicles do not comply with Euro 0 standard and, taking into consideration the fact that they are used in big cities, it leads us to think about ecology. Secondly, the technical state of such vehicles endangers a driver and passengers since most of these vehicles are not equipped with modern security facilities, which reduce the severity of consequences in case of a road accident. Finally, the cost effectiveness of used vehicles intended for commercial transportations is questionable. It is evident that level of costs for transport of one tonne of cargo on a used vehicle is much higher than on a new one and it affects the prime cost of cargo.

Over the past few years, against the background of the economic growth Russian manufacturers were late to expand plant capacities so as to provide the total volume of domestic demand. At that time, the stimulation of vehicle fleet renewal would have led to much heavier deficit, price rise, etc. At present, the optimal period for its modernization begins. Additional subsidization on the part of budgets of all levels will allow to extend the vehicle market and to support automakers. Thus, the beginning of the solution of the vehicle fleet renewal problem can be marked.

A number of measures were taken in Russia which concern support of the industry by means of the system of government purchases. Within the framework of the implementation of the Turnaround programme of the Government of the Russian Federation, in 2009 federal executive bodies allocated 12.5 billion RUR for the purchase of vehicles. In 2009 the subsidies which make a total 20 billion RUR were allocated from the federal budget to the constituent entities of the Russian Federation for the renewal of vehicle fleet and refuse collection and street-cleaning vehicles of regions and municipalities provided they will jointly cover 30% of the total purchase sum. In May, 2009 the Ministry of Industry and Trade of the Russian Federation passed the list of all vehicles to be purchased using the subsidies, where there are vehicles made by traditional domestic automakers, including “KAMAZ” vehicles and also vehicles of foreign brands assembled in Russia. For the purchase of vehicles and road-building machinery with their further transfer on the basis of leasing agreements to the enterprises which are engaged in maintenance of federal roads, it was agreed to increase the authorized capital of OJSC “State Transport Leasing Company” up to 10 billion RUR from the federal budget resources. In 2009 OJSC “STLC” is going to inter into agreements for the purchase of 4 thousand units of vehicles with 40 mechanical engineering plants situated in 20 constituent entities of the Russian Federation. The list of those who has already signed the agreements includes OJSC “KAMAZ”, AMO “ZIL” and “GAZ Group”. The additional purchases of vehicles and farm machinery for the transfer on the basis of leasing agreements to the enterprises engaged in agriculture concern it too. For the purchase of the necessary vehicles in April of 2009 it was agreed to allocate 5 billion RUR from the total amount 25 billion RUR allocated from the federal budget resources and intended for increase of the authorized capital of OJSC “RosAgroLeasing”.

Besides the direct support measures of automakers, the Government also implements a number of Federal Target Programmes aimed at increasing of demand for trucks. At about ten out of 54 FTP carried out in 2009 are, more or less, demand-stimulation-oriented. Among such programmes we can name the programme “Modernization of Russian Transport Infrastructure”, FTP “Accommodation”, the programme of Sochi development as a mountain climate resort and others.

Subsidization of interest costs of leasing companies which take out loans in Russian lending agencies in 2009 for leasing transactions with domestic vehicles is also referred to the measures of demand stimulation.. The bill which makes amendments in the Federal Law “On the Federal Budget for 2009 and the Planning Period of 2010 and 2011” provides for the appropriate budgetary allocations in the volume of 1 billion RUR.

Besides, Russian exporters of such vehicles can expect the subsidization of interest rates on loans originated for production for export. 6 billion RUR were allocated for these purposes in 2009.

Speaking about the measures which aim at stabilizing the financial state of enterprises, the most important of them for OJSC “KAMAZ” is support of placement of bonded debts by Russian automakers. Now we face the task of subsidization of a number of key investment projects on the implementation of which the preservation of competitiveness of our goods in 5-10 years depends. The minimum amount of necessary investments for the next 2 years is 9 billion RUR. The characteristic feature of automotive industry is long pay-back periods of projects being 5-7 years. Currently, the raising of long-term funds is impossible without government support. To say more, there is the problem concerning the cost of financial resources. Automotive industry is highly competitive and economic efficiency on net profit 5% for it is normal. It is evident that interest rates on loans on the level of 18-20% per annum make this business inexpedient and the projects unprofitable. In January of 2009 the Government of the Russian Federation made a very important resolution which concerns allocation of 2.5 billion RUR for subsidization of interest rates on loans originated by automakers for technical retooling and modernization.

One more important line of financial support is government guarantees on loans because it can help enterprises to release additional collateral value and it can also help banks to reduce risks. The Government is ready to guarantee to banks 50% of amount of the loan and for the rest an enterprise takes out an asset-based loan. OJSC “KAMAZ” has the positive assurance of the Inter-department commission with regards to administration of guarantees on the loans taken out in Sberbank, VTB and GazPromBank for an overall amount of 4.6 billion RUR.

We cannot but mention the strategies aimed at reducing the tax burden for enterprises. For this purpose the Government adjusted the present schedules of the restructured federal income tax and charges payable and also off-budget funds insurance premiums payable. The payment dates of principal amounts for 2009-2015 were carried over for 2011-2017. For all enterprises in 2009 the tax burden was reduced and the profit tax was reduced down to 20%. The enterprises which invest into equipment got additional amortisation allowances. The system of tax allowances for primary scientific researches was implemented. The funds allocated by companies for trainings of their employees were exempted from taxes. Import of plant and equipment was exempted from VAT and it will considerably reduce expenses on modernization of production. The increase of the Consolidated Social Tax was put off till 2011. And finally, for the support of Russian exporters during the period of financial crisis the term of the document-gathering process for substantiation of VAT zero rate application for export transactions was temporary extended up to 270 days with the appropriate postponement of determination of taxation base. It helped enterprises to reduce the present deficit of working capital.

In spite of the fact that the industry now is in difficult situation, I think that enterprises should not be just recipients of government subsidies. The effective way out of the crisis situation is possible only in case of improvement of the overall efficiency of internal funds management, reduce of costs, optimization of main business processes of a company. Not all representatives of the industry have clear-cut strategies of recovery. OJSC “KAMAZ” has already been approved such strategy. We think that it administrates a reliable guarantee to the Government that we will make the most use of the funds allocated for the support of our company. At present, OJSC “KAMAZ” fulfils all obligations connected with raising of support funds. All necessary reports are timely furnished to government institutions. We take an active part in formation and discussion of offers which concern a way out of the crisis for automotive industry within the framework of working teams of public authorities and industrial groups.

If we speak about concrete requirements, I can give you the following example. At the beginning of June of 2009 the amendments to The Regulations of the Administration of Government Guarantees on Loans were approved by a Government decree. As a result, new requirements were added which concern restrictions of bonus payments to the managers of an enterprise, provision of financial visibility, fulfillment of social obligations including those which concern risk groups of employees. We consider such requirements to be absolutely fair and we are ready to fulfill them to the full extent. I can assure you that OJSC “KAMAZ” is ready for further dialogue with the Government with regards to the position of a productive and socially responsible enterprise.

Unfortunately not all decisions taken by the Government are equally effective when integration. There are measures which are just partly fulfilled and there are those which are far away from being implemented. At the beginning of June of 2009 in the State Duma during the meeting of the Automotive industry Expert Council under the chairmanship of A.E.Khinshtein, the state of execution of protocol orders of the Government of the Russian Federation in the sphere of automotive industry support was examined in details. The result of it leaves much to be desired.

To our way of thinking, the primary task as yet is to seek consecutive implementation of the already planned activities. The business is ready to facilitate it and to take part in the formation of offers and search for optimum ways of their implementation.

The work on several main lines should really be launched. The decision to increase import duties for foreign-made cars made in December of 2008 in conjunction with devaluation of the Ruble provided competitive advantage to Russian-made trucks. On the results of 5 months of 2009, the share of OJSC “KAMAZ” in Russian market in comparison with the same period of 2008 increased from 32% up to 52%. The share of “URAL” trucks during the same period of time increased from 12.8% up to 20.9%.

Unfortunately, the shrinkage of market is still going on. Additional government order will not be able to compensate to the full extent the reduction of demand on the part of industry. In connection with this, to provide demand for domestic vehicles from the October of 2009, we should prolong import customs duties on continuing basis on the whole range of trucks. Though, it is necessary to say that the present level of tariffs for import of trucks is not ultrahigh. It just equalizes the fee in the Russian Federation and in the countries of the European Union, making equal competitive business environment for both European and Russian truck makers.

For effective stimulation of the demand we need additional strategies intended for the renewal of vehicle fleets. First of all it can be integration of differentiated rates of the transport tax. Besides, there is a number of factors which point out the necessity of technical restrictions concerning the use of old cars. In the present market situation when the demand for trucks reduces, the necessity of renewal of vehicle fleet may become a very effective incentive for the purchase of new domestic vehicles in return for the old ones. However, the point is that in the present regulatory and legal framework there are no measures which stimulate a car owner to change an old car for a new one. For example, in some countries of the European Union there is Car Allowance Rebate System. In Germany the amount of such premium is €2500 and in France it is €1000.

If we look at the Russian Federation law, we will see a number of gaps which do not allow to carry out effective activity of old vehicles disposal. Particularly, there are no ecological standards for recycling enterprises, there is no system of removal from the register of old cars and also there is no system of penalties for the last owner of a car who did no transfer it for disposal. Practically, the life period of a car in our country is unlimited and this makes our country a kind of a “car dump”.

Therefore, for stimulation of the vehicle fleet renewal, there must be amendments made in the regulatory and legal framework which would concern the obligatory disposal of vehicles. It would be reasonable to consider an issue concerning allocation of government subsidies to establishment of enterprises engaged is disposal of old cars and also concerning the Car Allowance Rebate System.

The separate line of government support to be intensified should be oriented to the export of domestic vehicles. Nowadays, a number of protective activities for national exporters operates in the countries of the EU. The experience of Spain is model because a large system of support means of export and foreign investments including those with the use of private-public partnership was established over the past few months. It includes means of consulting support, programmes of lending and insurance of foreign trade operations and others.

Speaking about the measures which were implemented by the Government of the Russian Federation within the framework of the Turnaround programme as of 2009, it is necessary to prolong them for the next period and probably to fix them on continuing basis.

Thus, the practice of the subsidization of interest rates on loans intended for production of export products, and on the loans intended for technical retooling and modernization and for financial backing of leasing activity must remain in 2010 too.

Amendments in the rules of the Tax Code of the Russian Federation to the extent of charge and refund of VAT for export products could become effective incentives for the growth of export sales. Particularly, to accelerate the refund of export VAT it is reasonable to reduce the term of desk audits down to 1 month instead of the present 3 months. Besides, it seems to be justifiable to prolong, on continuing basis, the 270-days period of documents gathering in order to receive the right for the zero rate of VAT. Let me remind you, that at present, the extended term for gathering of documents is valid only till the end of 2009