One question was asked of almost every Russian representative of prominent Western car manufacturers in the mid-1990s: Would your company set up a joint venture to manufacture your car brand in Russia?

The answers were, invariably, vague – but simultaneously, a number of plants assembling foreign cars also cropped up across the country.

The question was pertinent for both domestic carmakers and consumers, because, for several decades, the market was dominated by three major domestic carmakers who did not bother to design new models.

Before the August 1998 crisis, Russian car manufacturers – as well as a number of other industries – could not rely on assistance from domestic investors. Instead they relied solely on foreign capital, regarded as the industry's driving force.

Foreign car corporations were motivated by the promise of lower costs to look at launching production in Russia. The need for joint ventures in the car industry was obvious to both Russians and foreigners.

But while foreign carmakers were considering setting up joint ventures in Russia, the Russian side did little to speed the process. As a result, only three companies – BMW, Ford and General Motors – have come to Russia with sizable investments, while others limited themselves to minor involvement.

The first joint ventures in Russia's automotive industry appeared in the mid-1990s. A poorly mechanized assembly of South Korea's Daewoo cars started in Taganrog at the Krasny Aksai factory, which belonged to the Doninvest financial-industrial group. Assembly of another South Korean car model, Kia, was launched in Kaliningrad at enterprises belonging to the Avtodor company. And GM set up a joint venture with the Yelabuga factory, GM-Yelaz, to assemble Chevrolet Blazer sport utility vehicles.

Around the same time, negotiations began with a number of other foreign automotive corporations, of which the most promising was a plan to set up a GAZ-Fiat joint venture, with investments of $850 million and production of up to 150,000 cars a year.

But the 1998 crisis forced revision of even the best-laid plans, and several projects projects. Those which survived suffered major cuts. In 1999, the joint venture share in the total passenger car production in Russia was 1 percent; currently it is around 2 percent.

Still, Russia's economic rise, combined with declining demand for cars in the West, is now forcing companies to revise previous attitudes about Russia. Experts say the share of foreign cars produced in Russia may reach several tens of percents in 2003, when the volume of car sales in the country is expected to reach 1.5 million.

Fiat, BMW and Ford have established a presence in Russia. A new business plan drafted for the Nizhegorodmotors joint venture of GAZ and Fiat calls for launching production of Fiat Palio and Sienna cars in the second half of 2002. During the first several years, the output will stay at 3,000-5,000 cars a year; eventually it will rise to 75,000 cars a year. The volume of investment has reached $420 million to date. Significantly, Russia's part in the project will not be limited to assembly; 22 percent of components will be Russian-made, which will lower end product costs.

Another major project is a joint venture of AvtoVAZ and General Motors, where the main focus is the VAZ-2124 – a sport utility vehicle based on AvtoVAZ's Niva model. Plans call for production of up to 75,000 cars a year, as well as up to 15,000 Opel Astra cars. The volume of investment is now about $50 million.

There was also some activity last year at the Ford Vsevolozhsk joint venture located in Leningrad Oblast, which will eventually produce up to 25,000 Ford Focus cars each year. The total investment is expected to be $150 million.

Also significant is the Krasny Aksai factory in Taganrog which belongs to the financial-industrial group Doninvest. After reducing Daewoo assembly, they are pushing to produce the Hyundai Accent with considerably increased local participation, including car body welding and painting.

Finally, the Kaliningrad-based joint venture Avtotor has produced 300 BMW cars so far. Skoda, which at one time planned to organize production of its Skoda Oktavia and Skoda Fabia vehicles in Russia, appears to be stalled.

There are several reasons for the slow pace of joint ventures in Russia's car industry. We will not dwell on well-known problems, such as the general economic situation and lack of government support for domestic car manufacturers, particularly in the sphere of customs regulations. Instead we will consider more specific aspects.

First of all, joint venture development in Russia's car industry is hampered by foreign cars' high prices. The cheapest Western car costs $10,000, which most Russians cannot afford. It was thought that increased Russian participation in manufacturing would allow Western cars to be priced lower than the Western level.

This hope is cherished by the Russian Ministry of Automotive Industry, which is why various benefits and exemptions are granted to enterprises to encourage increased Russian participation in the manufacture of foreign cars.

But the quality of locally produced parts is below Western standards; statistics show only 15-20 percent of car parts produced in Russia are fit for foreign cars. At the same time, foreign producers of car parts tend to view the Russian market as too narrow to launch operations in. The only way out of this vicious circle is to arrange deliveries of foreign parts to Russia, but that is barred by the Russian State Customs Committee.

The same problem has plagued joint ventures in telecommunications. Oddly enough, it is much cheaper to import a ready-to-use, fully assembled telephone exchange than to import parts to assemble one here.

The reduction of customs duties on foreign cars in January 2001 was a heavy blow to foreign car manufacturers operating in Russia. If tariffs had been reduced 10 percent, as was initially planned, it would have killed the whole business by making car imports more profitable than manufacturing locally.

Russia's regulating organs are now seeking to limit the flow of used foreign cars, which will generally favor foreign car producers in Russia. But there is still no clarity about taxation or market rules, which gives no reason to speak of a clear future for joint production of cars in Russia.

The author is a Moscow-based freelancer.