The car market is one of Russia's most dynamic industries. In the past five years, it has grown more than three-fold. In 2001, Russians spent less than nine billion dollars on new cars, whereas the figure for the end of 2006 was about $30 billion. Apart from Russia, only China has such a booming car market.

In quantitative terms, the growth of the Russian market over the same period was more modest - no more than 6.6% a year. But this figure conceals a dramatic change - Russians are giving up old and cheap cars in favor of modern and expensive foreign models. This trend will prevail at least for the next four or five years, experts from PricewaterhouseCoopers predict with confidence.

Russia is two to three times behind other developed countries in terms of car ownership per 1,000 people, but Russians are rapidly reducing this gap. Until recently, most people couldn't afford cars, but now the situation has changed. Economic growth has generated higher incomes and increased consumption. According to the Economist Intelligence Unit, in the past five years, per capita income has been going up at a rate of 8-10% per year. Consumer credits have become a catalyst for even higher growth. Since 2003, the scale of credits for the purchase of cars has increased tenfold.

What is the preferred choice of an average Russian city resident? Fifty-fifty, it is a foreign car with a price tag from $10,000 to $20,000. As distinct from the 1990s, this will be a new car rather than a used foreign model. A change in the customs and tariff regulations on used foreign cars is rapidly reducing their number on the roads. There is still demand for second hand, but now Russians tend to buy used cars which were sold as new in Russia, say, two years ago, rather than drive them from Europe.

Finally, the main difference from the past is that Russian consumers do not care much whether a Ford, Renault, or Hyundai was made in the European Union, South Korea, or at home as long as it conforms to their requirements. This lack of bias holds promise for foreign companies in this country.

A dozen foreign brands are already being assembled in Russia today. Three car assembly plants - Ford in the Leningrad Region, Renault in Moscow and a Chevrolet-producing joint venture with General Motors in Togliatti - are working at full capacity. The Korean Kia and Hyundai are expanding their operation as well. There are several turnkey car plants, including those with Chinese participation, and even more ambitious projects are in the offing.

In 2005, the Russian government launched a program of duty relief to foreign companies interested in starting full-scale production of cars in Russia. The companies commit to invest at least $100 million in the project and turn out more than 25,000 a year. Importantly, the share of Russian spare parts in car assembly must exceed 30% in five years after the start of the project.

The Kremlin's proposal has evoked response from several car industry majors - Toyota, Nissan, Volkswagen, DaimlerChrysler, and General Motors. Russian partners are promoting other famous foreign brands. In addition to car production, they are developing a whole industry of spare parts. In Russia, the Ministry of Industry and Energy, and the Ministry of Economic Development and Trade are the key departments in charge of the car industry. In their assessment, foreign investment on signed contracts alone amounts to two billion dollars. All in all, Russian plants will be turning out 800,000 cars by 2010, or half of all national car production.

Russia's WTO entry may have a strong impact on the prospects of foreign companies on the domestic market. Russia will have to reduce its import duty on new cars from the current 25% to 15% of the car price in seven years. This means the importers will be able to cut down the retail prices by 10%. On the other hand, foreign carmakers in Russia will lose 10% - part of the gain over direct imports. The companies, which are already building their plants in Russia, should be able to recoup their investment before the seven-year period expires. But those companies that have put off their decision to come to Russia may not be able to do so.

The list of foreign companies taking part in the development of the Russian car industry is not likely to become longer. As Russian ministers said more than once, Russia's WTO entry will put an end to all talk of benefits for foreign car makers.

The Economic Stratification Of Modern Russia
by Nina Kulikova - RIA Novosti economic commentator
Moscow (RIA Novosti) Jan 09 - The Russian economy has been on the upsurge for several years running. In an interview with RIA Novosti, Yevgeny Gontmakher, head of the Social Policy Center at the Institute of Economics of the Russian Academy of Sciences, talks about the effect of economic growth on the lives of ordinary people, and the situation in the social sphere.

Question: Mr. Gontmakher, what could you say about the positive and negative trends in Russia's economy and social sphere in the outgoing year?

Answer: If we take average figures, 2006 has been quite successful. Russia's GDP is expected to be about 7%, and inflation has been kept under 9%; real per capita incomes have gone up by about 10%. We have seen a different pattern in economic growth compared with 2005 - machine building and other industries serving the raw materials sector have made some progress; the consumer market, trade, and banks rallied owing to bigger per capita incomes.

To make the economy more competitive in other sectors, we have opened special economic zones, and are setting up venture and investment funds. It is no longer possible to say that Russia is addicted to oil exports.

But it will be harder to say who has lost and who has benefited from this economic growth, because the distribution of its results in Russia is extremely uneven. Rosstat (Federal Service of State Statistics) estimates that the correlation between the incomes of the wealthiest 10% and the poorest 10% is 15 to 1, which is enormous. Moreover, some of the richest people do not declare their incomes. In effect, this is Latin American type of distribution. In this respect, we are more like Columbia or Brazil rather than Europe or North America.

Q: What does this stratification mean in practical terms?

A: Russian population is divided into several strata, whose lifestyles are poles apart. About five percent are wealthy people who can afford anything they want - luxurious housing, vacations, and prestigious schooling for their children. Another 10% to 15% work for the first group.

These are top managers at their businesses, financiers, prosperous lawyers, and private physicians. They have good salaries of several thousand dollars per month, and can afford many things, for instance, a mortgage for an apartment. Another 25% belong to the so-called middle class.

They can afford some things but far from everything. For example, they cannot participate in a mortgage system with current prices for housing. On average, their income is a thousand dollars per a family member per month. Nonetheless, there are grounds to say that these three groups have more of less gained from the economic growth in the last few years.

All the others - at least 50% - have gained zilch. About 15%-20% of these are people with no ambitions, who are not willing to work hard to improve their situation. However, the remaining 30%-35% are pensioners or the disabled, as well as healthy working members of society, primarily those who work for budget-dependent organizations. Their salaries are very small.

Russia's problem is that it is a divided nation. Income stratification means stratification in consumption and way of life. It appears, that there are several living standards in a single country with one and the same government. All these differences have not been reduced this year. They have been frozen at best, or perhaps have even increased.

Q: Will the Russian government's national projects resolve this problem?

A: National projects owe their existence to huge oil revenues. Our Stabilization Fund has topped two trillion rubles, and the public knows about its existence. Those social groups which have not benefited in any way from the recent economic upsurge want to know why they have been left in the lurch.

In principle, the government has chosen the projects correctly - education, medical care, and housing are the worst sores. But the funding is not sufficient - for 2007 the government has earmarked 240 billion rubles for all projects put together. Moreover, there are certain problems with making effective use of this money.

The housing project has not been very well thought out. Development of the construction industry should have come ahead of mortgage. Russia has 50% to 70% less per capita square meters of floorspace than industrialized countries.

Today we build less than 50 million square meters of housing per year instead of the required 100 million square meters. Mortgage is a very effective and progressive mechanism, but its introduction alongside the shortage of housing has generated skyrocketing housing prices.

The healthcare project has its flaws as well. It was necessary to raise the salaries of GPs, but this increase has further reduced the number of badly needed specialists. It looks like the amount of money earmarked for the project is not sufficient. The decision to provide one third of polyclinics with new equipment was certainly correct, but its implementation leaves much to be desired. Part of the money has been wasted, because the requirements of particular institutions have not been duly considered.

Education is the most successful project, but it is mainly oriented to the front-rankers - innovation universities and colleges, advanced schools and a few trailblazers among teachers. This is a very narrow part of our education system.

On the whole, there are many good ideas in national projects, but they have not brought about any breakthroughs. In effect, this is patching of the most yawning holes. I think that the format of national projects has to be fundamentally changed. It is too late to do this in 2007 because the budget has already been endorsed; so all hopes are for 2008. Perhaps, when a new political cycle begins and a new president is elected, he or she will pay attention to such vital problems.

Q: Russia continues carrying out the pension reform. Are there grounds to hope for decent pensions in old age?

A: The pension reform is based on a sound idea. It was a compromise between different political and public forces. But the mistakes made during its implementation have distorted what was planned. Here is one of these mistakes. Initially, accumulative contributions applied to men born in 1953 or later, and to women born in 1957 or later. After one year, the Unified Social Tax (UST) was reduced by 10 per cent under pressure from the business community. As a result, the pension fund developed a shortage of this insurance money, and in order to make up for the losses, middle-aged people were cut off from long-term benefits. The qualifying birth year was moved to 1967 or later. This is ridiculous and sad because middle-aged people earn the most in this country. The pension fund saved several dozen billion rubles - not that much compared to what it has. This change has had a negative effect on society. In particular, it has reduced the trust in the government on behalf of the middle-aged people. As a consequence, people will not receive the first payments from long-term benefits until 2022 instead of 2012, as was planned before.

Q: Is the pension fund short of money?

A: Formally, it isn't. Its incomes do not exceed its expenses, and pensions are paid on time. But 30% of funds are paid out of the federal budget, whereas insurance payments, and the UST are contributing less and less. It is estimated that in a couple of years the pension fund will receive more than half of its money directly from the federal budget. This reduces to naught the very idea of introducing an insurance-based pension system. The government was supposed to guarantee basic pensions, while insurance and pensions based on accumulative contributions were meant to depend on the salaries. But the reduction of the UST payments to the pension fund is eroding its insurance foundation. Pensions are becoming pretty much the same as they were under the old Soviet system. But in the Soviet Union, a pension of 120-132 rubles was not too bad, whereas nowadays it is difficult to live on 3,000 rubles, to put it mildly.

Q: Are state and private companies effective in dealing with long-term benefits?

A: Unfortunately, retirement savings accounts have been a major disappointment. More than 95% of the population has preferred Vneshekonombank (foreign trade bank) to be their government-run management company. As a rule, its interest rate is below inflation because its investment policy is very conservative - in government securities. This is reliable but not very profitable. The money deposited in this bank is gradually losing its value. There is a proposal to allow investment of this money not only in government securities but also on the domestic and foreign stock exchanges. I support this proposal - risks are better than the inevitable dwindling of funds.

The situation in private companies cannot be generalized. They have more options for investment, and some put their money into the stock market. Some are getting profits above the inflation rate. But results are different from one year to another, and the risks are certainly high.

We have to look for new mechanisms of saving retirement money. For instance, why not use the pension fund for the planned development of the Stockman deposit? In other words, all those who have a retirement savings account, could invest in this project. It is bound to be profitable, and its shareholders will be able to receive their part of the profits. This is just an example, but the gist is to link long-term benefits to profitable projects.

Q: What will happen to people who have remained outside the new pension system?

A: The pension reform took into account the position of today's pensioners. It was necessary to kill two birds with one stone - raise pensions for the future pensioners, who are now young and working (not much has been achieved on this front so far), and for those who are already retired.

The latter's pensions are very small, and the ratio of average pension to average salary is going down. When the pension reform was launched it was 31%-32%, whereas now it is 27%, and keeps going down. However, world standard is 40%. When the pension reform was under discussion, it was believed that this ratio would decrease in the short term and would then start going up, but this has not happened yet.

We have to come up with individual relief programs for the current pensioners. For example, the interest derived by Russia from investment of part of its Stabilization Fund into Western securities could be spent on care and additional medical insurance of all needy pensioners. The 2007 budget does not provide for such spending. This will evidently be a task for the next president.

All social and political forces should meet again because a pension reform is a product of public agreement. We should seek a compromise, which would allow us to help the people who are already retired, and to take care of those who are still working.

The main problem of our social policy in the last few years is that it has suspended the resolution of numerous problems for an indefinite period. The pension reform is just one example. The next president should be able to answer these questions if he or she wants to be elected.

The opinions expressed in this article are those of the author and may not necessarily represent those of RIA Novosti.

Mikhail Khmelyov is a commentator for Izvestia newspaper.

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