Economy, Auto

Russian Automakers Feeling Sanctions’ Heat

Russian Automakers Feeling Sanctions’ Heat
Russian Automakers Feeling Sanctions’ Heat

Automakers building cars in Russia such as Volkswagen and Ford Motor Co. have been hit hard by the ruble's steep decline, which has increased the cost of the foreign parts they rely on, forcing them to raise prices and reduce exports.

Western sanctions over Moscow's role in the Ukraine crisis and lower oil prices have caused an economic crisis and brought to an end the car market's decade of annual sales growth in excess of 10%, according to Auto News Europe.

Russia's domestic car sales have halved from their peaks in 2012-13 when during some months the country ranked ahead of Germany as Europe's largest car market by sales and the eighth biggest in the world. It now ranks fifth in Europe and 12th globally.

In the first seven months, sales are down 35% to 913,181 vehicles, according to data from the Association of European Businesses in Russia.

While a weaker domestic currency usually makes exports more lucrative, automakers' reliance on expensive foreign components has left them uncompetitive.

Russian authorities have introduced incentives to encourage carmakers to gradually start producing most parts locally, but the most expensive and technologically advanced parts such as electronics, engines and suspensions are still imported.

Volkswagen Group and Ford both import more than half of all parts used to assemble their cars in Russia. Even market leader AvtoVAZ, which produces Russia’s best-selling brand Lada, sources about a fifth of its production abroad.

Stung by its low level of local manufacturing, General Motors is closing its St. Petersburg factory and ending sales of Opel and mainstream Chevrolet models in Russia at the end of this year.

In 2012-13 the ruble was trading at around 30 per dollar, whereas now the current rate is about 65. This has forced automakers to raise prices—a desperate move in a country where the economy shrank by 4.6% in the second quarter of 2015.

Employers have cut staff and wages, while annual food price inflation is running at over 20%, leaving many Russians with little money for big purchases.

Kia, which produces Russia's second-most popular car—the Rio hatchback priced at 460,000 rubles ($7,235)—has raised prices by 15% in the first six months. In the same period, average car prices have risen 18% year-on-year to 1.16 million rubles ($18,420) and sales have fallen 36%, according to research group Autostat and the AEB.

"The devaluation of the ruble increases costs for manufacturers," said Yulia Dytchenkova, director of Mazda dealer Rolf Khimki. "They are reaching a critical point where the further revision of price lists is inevitable."

Russia's auto exports fell 27% to 49,000 vehicles in the first six months, customs data showed. The bulk of vehicle exports go to Commonwealth of Independent States nations such as Belarus and Kazakhstan.

A renewed drop in the ruble—it has fallen 15% against the dollar since the beginning of July and is trading near a new six-month low—is set to prompt more price hikes and further erode sales.

"If the ruble steadies at the current rate until the end of the year, then the market is set to decline by 28-30%," said VTB Capital analyst Vladimir Bespalov. "But if the ruble continues to weaken, prices will rise and the market could fall by up to 35%."

Russia's inflationary path follows that of Iran during the height of sanctions on the Islamic Republic. During the period of sanctions enforcement, which continues to this day, many buyers were and still are forced out of buying new vehicles. Imported parts also dried up halting production lines on many vehicles, including the best-selling Peugeot 206 that had to import third-party parts from China.