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New Sanctions Against Russia Will Speed Decline In Auto Sales

Ironically, Retaliation Might Actually Help Renault.

Harsher sanctions on Russia from the E.U and U.S. look set to put skids under the already sliding car market there, although any retaliatory measures could end up benefitting the Renault-Nissan alliance, the auto manufacturer most committed to the economically-ailing country.

General Motors and Ford are also big operators in Russia, although neither exports vehicles from there.

New Sanctions Against Russia

The new sanctions won’t have a direct impact on the car industry, but as they weaken the economy, all sectors will suffer.

According to a report from IHS Automotive, car sales in Russia were already falling in the first half year as the economy creaked, consumer confidence declined and the falling value of the rouble increased prices of imports and components. Car sales fell 7.6 per cent in the first half of the year, including a dive of 17.3 per cent in June. This raised concerns that car sales will fall sharply in the second half of the year, the report said.

A separate report from PriceWaterhouseCoopers forecast Russian car sales may fall by eight to 12 per cent this year to between 2.3 and 2.4 million. Its report in January forecast a three per cent fall. Last year sales fell 5.5 per cent to 2.6 million, after three years of strong growth.

The latest sanctions from the E.U and the U.S. targeted the financial, energy and defense sectors. IHS Auto said the manufacturing sector wasn’t affected directly, although the impact on lending might have indirect implications.

“As yet there are no sanctions relating directly to industrial manufacturing businesses or which relate directly to manufacturing or selling cars in Russia, or Russian-owned businesses exporting to the U.S. or the E.U,” the IHS report said.

Make up for Europe
European manufacturers had been looking to Russia to increase sales and profits to make up for increasingly tough competition at home. The Renault-Nissan alliance has so far invested the most in Russia and now controls 74.1 per cent of AvtoVAZ, with some local partners.

Russia has said it didn’t plan any tit-for-tat measures, but IHS said the new round of sanctions would likely put more downward pressure on the Russian economy and therefore hit foreign manufacturers operating in Russia.

Perversely, Renault-Nissan might benefit from any Russian retaliation.

“If the Russian government does decide to take punitive and retaliatory action that affects foreign carmakers this could actually turn out to be a boon for AvtoVAZ and Renault-Nissan, with the environment potentially made difficult for foreign (firms) to manufacture cars in Russia and import into the country. However, at this stage this overall scenario does not appear likely,” IHS Auto said.

In the near term, the new sanctions are likely to drive the Russian economy into recession for 2014 as domestic demand is dampened by tight credit, high inflation, and deteriorating consumer and business confidence, IHS Auto said.

Earlier this year, industry consultants Roland Berger said the previous hope that Russian car sales could hit four million a year by 2020 are being scaled back, but there are still high hopes that long-term, the Russian market will still become a source of rich pickings for car makers.

“Russia is and remains one of the top ten markets with considerable potential,” said Roland Berger’s Juergen Reers.

In mid-July Russia ordered a ban on Russian state and municipal purchases of foreign made cars. Bloomberg news quoted the RIA Novosti news agency as saying the ban only applied to vehicles made outside Russia, not to foreign brands produced in Russia that met localization requirements.

General Motors and Ford are also big operators in Russia, but none exports cars yet, or uses a big amount of Russian components for its global operations. GM has its own factory in St Petersburg and has a joint venture with AvtoVAZ at its Togliatti base,

Ford’s factory in St Petersburg makes small Focus and medium-sized Mondeo sedans with its 50-50 joint partner Sollers, for sale in Russia. The venture also makes other vehicles from imported parts.

Russia has 15 per cent of its GDP depending on Europe, while Europe has only one per cent depending on Russia.

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