Russia To Rev Up Car Industry?

LONDON--Russian President Dmitry Medvedev said Friday some of the most badly hit sectors of the economy would see a temporary state ownership. His message has been interpreted as his intention to develop the car industry, one of Russia's weaker sectors amid the global downturn.

"State ownership in most of the sectors of the economy should be viewed as an inevitable but a short-term solution," Medvedev told investors in St. Petersburg. The Russian government has historically held a large stake in sectors strategic economic sectors like oil, transport and car manufacturing.

Russia has been particularly strong in the gas and oil sector, said Alfa Bank analyst, Ronald Smith, but it is now looking to become competitive in the auto sector. "Oil and gas companies are in pretty good shape," Smith said. "But since Magna purchased Opel, it looks like Russia is trying to become more competitive in this area."

On May 29, car parts maker Magna International ( MGA - news - people ) and Sberbank of Russia reached a tentative deal to acquire General Motor's European operations, Opel. (See "GM Joining Forces With Magna?")

"A healthy car industry would create jobs and attract investment," Smith said. But with demand falling sharply, this might not be the best time for Russia to carry out those ambitions. "In order to become competitive in the auto industry, the sector is looking for an outsider with enough money, and this partner could be the government."

A faltering Russian economy will not make things easier. Last month, new government figures showed Monday that the economy contracted 9.5% in the first quarter from last year. Figures for April were even worse: The economy contracted 10.5% in April. (See "Reality Check For Russia.")

The collapse of oil prices from $147 a barrel last July to $32 in January has had a damaging effect for Russia's heavily dependent oil economy, but a recent rally in prices could help the country. "If oil prices keep at their current level [roughly $70 per barrel], this will soften the blow to the economy," Smith said.

On the end of the global financial crisis, Medvedev said: "In my view, it is too early to crack open the champagne. The financial crisis is a multi-year plant capable of surviving for a long time...Nonetheless I think we have avoided the worst-case scenario."