Russia beware: Scrapping will not fix your problems

If you want an idea what Russia's new-car sales will be like in a year, just look at Germany or Italy today.

Both markets are suffering from serious scrapping hangovers.

Government subsidies that lowered new-car starting prices in both countries convinced waves of consumers to trade in their tired old clunkers for shiny new models.

The sharp increases have been followed by steep declines – Germany's sales were down 32 percent in April while Italy's slipped 16 percent last month.

Meanwhile, Russia's sales jumped 20 percent to 163,299 units in April, which was the first full month of its scrapping scheme. It was the country's first year-on-year sales increase since October 2008.

The good times will continue in Russia throughout 2010 due to the incentives.

Sales forecasts range from 1.8 million to 1.6 million vehicles, up from 1,465,917 cars and light commercial vehicles sold in Russia last year.

But then the market will run out of fuel.

Why? Because scrapping won't fix the country's fundamental problems. Experts such as Warren Browne, General Motors' former Russia boss and current president of U.S.-based WP Browne Consulting, say that Russia must overcome a weak currency, falling oil prices and a gross domestic product growth rate that is forecast to be below what he believes is needed to sustain a fledgling car industry.

What this all means is that it probably will be a hot summer and bountiful autumn for Russia's new-car sales, but a long, cold winter.

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