“No sign of a recovery, as Russia struggles with an ailing economy, rising inflation and a volatile currency. Ukraine and the harsher sanctions imposed by the E.U. and U.S. adding to the pressure”
Russia was supposed to be the next big thing for car makers, but recent sanctions because of problems in Ukraine, and the sagging economy, means these hopes remain firmly on the backburner.
Industry consultant Roland Berger said in a report that if Russia takes an aggressive approach to the imposition of sanctions it will make matters even worse for itself.
“Any decision by Russia to retaliate and impose sanctions on car imports from Europe and the U.S. could undermine the Russian economy even more,” Roland Berger said in a report “Russian automotive market update: what would be the real cost of sanctions”.
Berger pointed out that the Russian car market fell almost 25 per cent in July and August and contracted 12 per cent in the first eight months of the year. If there was a full embargo on car imports it could damage Russia’s economy by 1.4 billion euros.
An earlier 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.
Berger, in its latest report, said it’s not just Ukraine that is undermining markets.
“There’s no sign of a recovery any time soon, as Russia struggles with an ailing economy, rising inflation and a volatile currency. The uncertain outcome of the Ukraine conflict and the harsher sanctions imposed by the European Union and the United States are adding to the pressure,” Roland Berger said.
Roland Berger offered three scenarios –
- Ten percentage point rise in import duties for European and American manufacturers – this wouldn’t have much impact on the 2015 volume target of 2.2 million new cars, and local European and U.S. could raise local production to circumvent the duties. Russian government revenues would benefit by 55 million euros.
- Import ban on cars from E.U., U.S. under 30,000 euros – this gap in the market could largely be filled by imports from Asia and ramped up local volumes.
- Ban on all car imports from E.U., U.S. – this would see almost 110,000 fewer vehicles sold by 2015. The Russia state would lose 1.4 billion euros in tax and duty income in 2015. E.U., U.S. automakers would lose 550 million euros in profits in next 12 months. China and Koreas imports would gain.
Roland Berger expects the crisis will last another year or two. The Russian government should restrain itself, eschew retaliation, and help to improve underlying conditions to stabilize the market long-term.
The Renault-Nissan alliance is 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.
European manufacturers had been looking to Russia to increase sales and profits to make up for increasingly tough competition at home. Renault-Nissan alliance has so far invested the most in Russia and now controls 74.1 per cent of AvtoVAZ, with some local partners.
Earlier this year, 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.
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.