MOSCOW (RIA Novosti political commentator Alexander Yurov). In the first quarter of 2005, nearly all world car brands in Russia managed to maintain the growth in sales achieved in the previous year.

However, there is no room for complacency, as 2005 will be critical for the Russian car market.

The market has been booming for the last few years and figures show this trend is continuing. Foreign models are largely driving sales. The Industry and Energy Ministry reports that 1.6 million vehicles are sold in Russia every year. In 2004, total sales were up by more than 7% on the previous year. Over 500,000 foreign models were sold last year, in comparison with just over 300,000 in 2003.

The preferences of Russians are now clearly identifiable. The most popular cars are foreign models in the $10,000 to $15,000 price range. The highest sales were achieved by six foreign companies: UzDaewoo, Hyundai, Mitsubishi, Nissan, Chevrolet and Mazda. These companies more than doubled their 2003 sales. Out of the six, UzDaewoo and Hyundai are the clear market leaders, the main reason being that their prices are nearly one third lower than those of their competitors.

However, this does not mean that there is no demand in Russia for luxury cars. Sales of luxury cars such as Mercedes, BMW, Audi and Lexus, increased by 10% to 40%. Off-roader manufacturers also have reason to feel confident. Land Rover sales increased by 48%, and in the first quarter of 2005, Land Cruiser became the most popular vehicle in its class, with over 2,000 being sold. Out of the makes positioning themselves as ''prestige cars'', Volvo and Subaru have seen a drop in sales. However, this was expected. Volvo has started restructuring its dealer network, while Subaru, though well known, is too expensive for the Russian market. The company had probably counted on there being demand for its products among wealthy Russians, but by the time it entered the market, other foreign models already dominated this segment.

It seemed that the year 2005 did not start well for General Motors as well. Opel sales fell by 18%, Cadillac sales by 25%, and Saab sales by nearly 59%. These models are being squeezed out of the market by the Korean Chevrolets - Aveos and Lacettis, which now feature among the 20 best-selling cars in Russia. In terms of sales, General Motors came in ninth even without the inclusion of sales of Chevy-Nivas, which are manufactured jointly with the Russian AvtoVAZ plant. If Chevy-Niva sales are included, General Motors is the market leader in Russia.

In the first quarter of 2005, total foreign car sales in Russia reached about 120,000 units. The foreign car market has almost doubled. As car sales in Russia are traditionally higher toward the end of the year, we can expect there to be 600,000 more foreign cars in the country by 2006.

Foreign companies have achieved these high sales growth rates with only minimal investment in the Russian car assembly industry. For instance, Ford motor company, with its Russian-made Focus, is one of the leaders on the Russian market. It sold about 30,000 cars last year, and by the end of the first quarter of 2005, it had already sold almost 6,500 vehicles. Yet the company only initially invested $150 million in setting up production at a plant near St. Petersburg. With a car selling for an average price of $15,000, the company is clearly making a very good return on its investment. General Motors did not spend much more when it started manufacturing Chevy-Niva offroaders in Russia (one of the best selling vehicles in 2004). Its initial investment was just 104 million euros. Only Russian producers had higher sales than this model. In 2004, over 60,000 Chevy-Nivas were sold in Russia. In comparison, the total sales by Toyota Corporation, one of the leaders in the Russian market, only reached 47,000 vehicles. At the same time, about 50,000 Korean Hyundais were sold. Importantly, though, the majority of the Korean cars were not imported into Russia, but were manufactured at Russian plants. Moreover, total Korean investments in Russia did not exceed $200 million.

This paradoxical situation has not gone unnoticed by a French car manufacturer, Renault. To keep up with its competitors, the French company launched production of the new Logan at Moscow's Avtoframos plant. The company invested over 200 million euros in this project, which is to date the largest investment in the Russian car industry. Louis Schweitzer, Renault's chairman and chief executive, hopes that in the initial stage the plant will manufacture 60,000 Logans a year. Then, if Russian consumers like the new model, annual output will be increased to at least 120,000 vehicles and even more. There probably will be sufficient demand for Renault to do this. Car making inside Russia brings their price on the domestic market down by at least 15%, which will allow Logan to compete in the same price range as UzDaewoo and Hyundai.

It is widely believed in Russia that if the current trend in the car market continues, then in two to three years foreign models will account for more than half of the 1.6 million cars sold in Russia. This explains why some car makers are now redoubling their efforts. Deputy Industry and Energy Minister Andrei Reus has said, "By 2010 annual car sales in Russia will reach 2.6-2.8 million, leaving the market worth about $31 billion. This means that the 25% import duty on new cars is being met by an increase in the purchasing power of Russian consumers." Accordingly, the Russian car market will continue to enjoy high growth rates.

Naturally, many companies are keen to fill the gaps in the markets for high-quality and inexpensive cars. In this situation, the Ministry of Industry and Energy sees two possible strategies for developing the Russian car market. One is to promote imports while maintaining high import duties, and the other is to promote car manufacturing within Russia.

The ministry is convinced, however, that the first strategy would undermine the government's efforts to overcome the domination of the Russian economy by the raw material sector. It was with the aim of encouraging domestic production that the Cabinet imposed high duties on foreign car imports. The second strategy would correspond with the government's plans to overcome the technological backwardness of the car manufacturing industry. With this aim in mind, the Cabinet recently signed a special resolution slashing import duties on components for cars assembled in Russia. This is not a new strategy. Several years ago, the Russian government produced a plan to attract investment into the domestic automotive sector. It was suggested that there should be an initial phase of two to three years during which the duty on foreign cars would be 25%. During this period, foreign companies interested in entering the Russian market were to identify the sites for their car assembly plants and get ready to start production. After that, for four to five years, the import duties for cars would be raised to 35%. This would give the foreign companies the chance to recoup their investments. Then the import duties would be cut to the lowest level possible.

A start, however, for those who already opened their manufactures was made last year, with a 10% cut in import duty. This means that the "trailblazers" are rapidly recouping their investments. Moreover, the government is already looking ahead. The Ministry of Economic Development and Trade has said import duties on new foreign cars might be reduced to 15% in 2006. The Russian government promised to do this during negotiations on Russia's accession to the World Trade Organization. This would increase competition between imported cars and those assembled in Russia.

However, it may take foreign companies longer than they would like to recoup their investments. Andrei Kushnirenko, the deputy director of the Ministry of Economic Development and Trade's department of trade negotiations, says the government might consider increasing import duties again if imports of cheap Asian cars start flooding the Russian market. There are already signs that this could happen. Inexpensive Chinese jeeps appeared on the market this year, and an Indian offroader is expected to take the market by storm this summer. If the government decides to react, import duties will probably be raised to 35% again. Of course, this would substantially increase the profitability of foreign makes manufactured in Russia.

Meanwhile, the government plans to introduce tax breaks selectively. Companies manufacturing foreign cars in Russia will only enjoy preferential treatment up until the point when they have recouped their investment. After that, the benefits will be reduced or scrapped altogether, so that foreign investors will be forced to look for Russian partners or suppliers.