Dream of Audi, wake in a Zil

Foreign cars are beyond most Russians' reach but local ones are still useless

For Sale: hundreds of BMWs, Audis, Mercedes and other luxury cars. Only one previous owner, although not a careful one. The chauffeurs who whisk Russia's politicians around Moscow, blue lights flashing, usually drive with all the finesse of Roman chariot racers.

The cars are to be auctioned after President Boris Yeltsin issued a decree saying government officials must now use Russian vehicles on business, just as they did in Soviet times. In those days party apparatchiks travelled around in black Volga and Zil sedans,concealed from the masses behind tinted windows and curtains.

Behind the new order is the pin-up boy of Russian politics, Boris Nemtsov, previously governor of Nizhny Novgorod - where Volgas are made - and now one of the triad who lead the government. A gesture to his former fiefdom? Possibly. Every Russian knows, however, that the Kremlin's car pool can easily be stocked with cars which are Russian on the outside but equipped with foreign engines and luxury fitments.

Stunt though it is, the ban raises a far larger question. Mr Nemtsov, 37, and his fellow First Deputy Prime Minister, Anatoly Chubais, are launching a fresh round of changes aimed at accelerating Russia's transition to the free market and kick-starting its moribund economy. They must urgently decide what to do with Russia's heavy industries, vast plants with armies of workers whose production lines are either at a standstill or turning out unsaleable products.

High on the list are the car-making giants, most of which could not survive without fierce restrictions on foreign competition. Mr Nemtsov and his crew face a choice: should they continue to be zookeepers for white elephants - or open the gates?

When the Soviet Union collapsed, it was the fifth largest car manufacturer in the world, producing 1.3m cars a year. That figure has since shrunk by at least a third. Although famously shoddy and old-fashioned, they were in demand from a population which saw cars as a rare perk, a status symbol. So lengthy were the waiting lists that some Russians were willing to pay more for a second-hand Lada than wait for a new one.

Six years on, the Russian market is still tiny. There are only 14 million cars - one for every 10 Russians - compared with two for every three Americans.

To blame is a chronic lack of money, but not of appetite. Though short of cash, Russians are in the grip of motor-mania. A dozen car magazines have appeared on the newsstands. Most of their readers are doomed to dream of the state-of-the-art limos and off-road vehicles that adorn their pages.

Although imported Suzukis, Jeeps and BMWs are a common sight, in Moscow and St Petersburg, foreign cars remain out of reach of all but the richest Russians. Customs tariffs add as much as 80 per cent to their cost - a top-of-the-line Volvo, for example, is more than pounds 63,000.

Most buyers have to settle for sputtering around in Ladas, Moskvichs, Nivas or Volgas, lumbering themselves with unreliable technology decades behind US or Japan- ese models. There are no electric windows, power steering, anti-lock brakes, air bags or other fittings which Western consumers take for granted.

Overhauling the old Soviet production lines, now partly privatised, is a monumental, perhaps impossible, task. Overmanning is endemic. Most, like the giant Avtovaz, have huge unpaid tax bills. Equipment is outdated, up to 40 years old. Plants still have large holdings on the books from Soviet times, when they provided cradle-to-grave care for the workforce - kindergartens, sports halls, sanatoria, stadiums, apartment blocks. "All the producers are trying to transfer these responsibilities to local government," said Maxim Matveyev, of the Rinaco Plus brokerage house, "but in most cases they remain on the balance sheets." Gaz, the producer of Volgas in Nizhny Novgorod, is the only one faring reasonably.

No surprise, then, that foreign investors are unenthusiastic. General Motors has a plant in the republic of Tatarstan producing Chevy Blazers and South Korea's Kia Motors is setting up a plant in the Russian enclave of Kaliningrad on the Baltic. But the landscape is littered with the bones of failed joint ventures; these days most big players stay away. "These places are in the kind of condition where most auto executives would take one look and say 'Oh God, this is ghastly,'" said a Western diplomat.

Not so the mayor of Moscow. Yuri Luzhkov is the leader of an alternative school of thought in an intriguing debate over Russia's whole approach to privatisation. His battle cry is interventionism, combined with old- fashioned arm-twisting. He has just taken control from the federal government of the near-collapsed makers of Moskvich cars, and with it $400m in pension and tax debts.

Last year he assumed control of the near-bankrupt Zil company, now making only trucks. Mindful that he is a boss with whom few want to pick a fight, he has since used City Hall's muscle to place orders at Zil, slash costs and underwrite loans. Ads are running on television showing Soviet workers slaving away on production lines, with the voice-over: "After all Zil has done for us, it is time for us to do something for Zil."

Western observers seem unimpressed, pointing out that there has been little improvement at Zil. "It may work for the time being, but it won't last," said one industry analyst. "It does nothing to improve terrible quality. And what happens when Mr Luzhkov leaves office?"

Mr Nemtsov has another solution. He opposes government ownership or subsidy, favours joint ventures with foreign partners and is even - selectively - in favour of allowing foreign manufacturers to set up production lines on Russian soil. But he remains a firm supporter of high tariffs on imported cars - supplying proof that Moscow's new generation of whiz-kid economists concede that the free market alone cannot solve every problem. For now, there will be fences around the white elephants.