Rising prices on domestic cars, coupled with an expected increase in import duties on used vehicles, are creating an opportunity for foreign automotive assemblers. But most of them are just starting to make their first steps toward capturing a slice of this market.

AFTER the 1998 financial crisis, prices for Russian-made automobiles dropped significantly in dollar terms, giving domestic makers an advantage over their foreign counterparts. But now the price gap between local and foreign models is narrowing, and Russian makers are finding themselves under increasing competitve pressure.

Russian flagship AvtoVAZ reported only a slight growth in the first half of this year, while output dropped at Russia’s second largest automaker, GAZ. And Moscow-based Moskvich still hangs on the edge of financial abyss, as experts say the future of the company is uncertain.

Meanwhile, foreign automakers are boasting staggering growth in sales for the first half of the year, with gains ranging from 60 percent to more than 300 percent.

"There has been an almost twofold increase in [overall] car imports," said Vladimir Salov, an analyst at Brunswick UBS Warburg. "Peugeot, Volkswagen, Skoda and other foreign automakers have made great progress in Russia." He added, though, that many foreign manufacturers started with single-digit sales, which may help explain the enormous growth rate.

The automotive market remains sensitive to general economic conditions. "The car market’s growth is tied to overall economic growth," said Julia Zhdanova, an analyst at the United Financial Group, adding that current trends in Russia’s auto sector are positive.

Other experts point out that increasing incomes along with rumors about possible higher import duties on new and used cars have pushed up sales.

"People are making more money, and they are beginning to look at foreign cars," said Salov, who added that many customers are looking to buy now before any import duties can push prices higher.

General Motors C.I.S. is among several foreign manufacturers that enjoy an unprecedented growth on the Russian market. "Our sales are up 400 percent. As of last month, we have exceeded our sales for 2000," said Heidi McCormack, general director of General Motors-C.I.S. "We’re hoping to top the 2,500 vehicles of the four brands – Saab, Chevrolet, Opel and Cadillac – that we import and sell in Russia," she added.

Meanwhile, growing prices for domestic cars are making them less competitive, according to UFG’s Zhdanova. "The price/quality ratio of domestic cars is becoming less attractive to customers," she said.

Quality issues aside, inadequate production capabilities prevent Russian manufacturers from satisfying local market demands. Working at maximum capacity, AvtoVAZ, the largest domestic carmaker, assembled 439,669 cars in the first seven months of this year.

GAZ, the manufacturer of popular Volga sedans, GAZelle minivans and GAZ trucks, is in the process of restructuring after Siberian Aluminum, the world's second largest aluminum producer, bought a controlling stake in the company and took over all day-to-day operations at the plant. Last year, Siberian Aluminum also bought a major stake in the Pavlovsky Avtobus plant.

The Izhevsk automotive plant, recently taken over by the SOK group, is recovering from several years of recession and aims to produce 60,000 cars this year.

In its efforts to help, the Russian government has extended some privileges to domestic automakers, including a debt-restructuring schedule, which will be implemented through 2006.

But experts remain pessimistic about the prospects of Russian car manufacturers. "I’m not sure that the domestic automakers will use the opportunity created by increased customs duties," UFG’s Zhdanova said, "I don’t expect any positive changes."

Even AvtoVAZ’s over-hyped Kalina model, expected to debut in 2006, will be 10 years behind market demand by the time it reaches the customers, Zhdanova added.

To inspire domestic automakers, the government is reportedly planning to increase import duties on used cars. It is not yet clear what categories of used cars this regulation may apply to.

"If the government raises import duties on cars older than seven years, it will have no major impact on the domestic car industry," said Andrei Kormilitsin, an analyst at Troika-Dialog. "Even under current regulations, imports of older used cars are unprofitable."

However, if 5- to 7-year-old cars become subject to tariff increase, the impact could be substantial. "Cars of this kind are the biggest competitors to domestically produced cars," Kormilitsin said, adding that the price difference between new domestic cars and cheap used cars of 5 to 7 years old is narrowing as dollar prices for Russian cars increase.

Some industry experts believe this kind of government’s protectionist policy could do more damage than good by discouraging Russian car makers from improving quality. "At the moment, Russian manufacturers’ competitive edge is in offering lower prices, but at some point we will have to begin thinking about quality, too," Kormilitsin said.

Zhdanova agreed: "If there are no technological improvements at Russian car plants, foreign manufacturers’ assembly lines here will compensate for domestic manufacturers’ inability to step up quality standards."

Analysts also point out that used imported cars will still account for a large part of the country’s car fleet in the near future. "There will always be demand for [imported] used cars in Russia," said Brunswick UBS Warburg’s Salov, adding that the percentage of the population that can afford buying new foreign cars is still insignificant."

Clearly, the manufacturers that offer customers the best value for their money will be the likeliest to succeed. According to Salov, AvtoVAZ and foreign manufactures with domestic assembly lines have the best chances.

However, Russians should not expect an influx of major international automakers earlier than two to three years from now.

But those already here are just getting down to business.

The first cars are expected to roll of the assembly line at Ford’s plant in Vsevolozhsk later this year, while the mass production of the Chevy-Niva at the joint venture between AvtoVAZ and General Motors is scheduled for 2002.

Meanwhile, several smaller assembly projects have been battling to overcome obstacles. France-based Renault, which has a joint venture with the Moscow government, built roughly 1,000 Clios last year and renovated production facilities for a larger-scale assembly. But, according to Renault representative Yann Dorison, the company will start mass production only after it settles a dispute with the Russian government over customs duties on imported semi-finished cars.

The Aksai plant in Rostov, which is part of the Dononvest holding, started assembling Hyundai Accent last month. According to Aksai’s marketing specialist Igor Mironov, about 350 cars have rolled off the assembly line. This year the plant has also built about 500 Citroen-Berlingos that are marketed as Orion-M, Mironov said.

BMW’s assembly facilities at Avtotor plant in Kaliningrad produced 1,200 cars last year.