Sanctions imposed by the EU and the US on Russia over its stance on Ukraine are targeted at the country’s banking, defence and energy industries; and there are indications that further sanctions are being considered. Now, beyond the horrors of the fighting lie questions about the impact that sanctions will have on Russia’s automotive industry.
In isolating Russia from the West, Vladimir Putin is also isolating his country’s automotive industry from the countries in which the major global automotive OEMs and suppliers are headquartered – companies that have invested in automotive sales and production networks in Russia. Earlier forecasts that Russia would soon overtake Germany as Europe’s largest new vehicle market are now beginning to look increasingly unlikely.
Will Russia’s car buyers to foreign car brands respond as Chinese car buyers did to Japanese brands during the worst of the recent islands dispute?
As international pressure on Russia mounts, one key issue will be the attitude of Russia’s car buyers to foreign car brands; will they respond as Chinese consumers did to Japanese brands during the worst of the recent islands dispute? Brand nationalism is fine, if there are domestic brands to which buyers can be loyal. Bo Andersson wants to make AvtoVAZ’s Lada brand once again a source of Russian pride, but that’s a long-term goal; with limited domestic choice, and only weak Chinese alternatives, boycotting foreign car brands may be too much to ask of Russian consumers.
Another area of concern for the Russian automotive industry is its heavy reliance on foreign partners.
The current round of sanctions does not cover all trade, and excludes many existing contracts. It will be interesting to see how long OEMs and suppliers can continue to operate in Russia under sanctions. Currently, there is no unified response to the escalating Russia crisis from the political and business communities, although the Malaysia Airlines MH17 disaster looks set to change that.
Nonetheless, many global industrials have considerable interest in maintaining Russian operations that they have worked hard to establish. Investors must now decide how to proceed – play the long-game, gamble on this being a short-term geo-political situation and continue to invest for the future? Or tread more carefully, avoiding sanction-busting PR disasters as they seek to tap into Russia’s considerable automotive business potential? And will foreign companies dealing with Russia face legal or political pressure from their governments, their shareholders or even their customers?
Many global industrials have considerable interest in maintaining Russian operations that they have worked hard to establish. Investors must now decide how to proceed – play the long-game, or tread more carefully, avoiding sanction-busting PR disasters?
BP has admitted that sanctions could hurt its business; Total stopped increasing its stake in natural gas partner Novatek following the downing of MH17; and in the Financial Times, Jérôme Stoll of the Renault-Nissan Alliance – which includes Russia’s largest OEM, AvtoVAZ – spoke of the complications and uncertainty that sanctions are likely to create.
“Complications and uncertainty” – words that that analysts love, but investors fear. Russia claims sanctions will be ineffective, and that the country can be self-sufficient. The country’s 140 million strong population is highly attractive to emerging market investors, but Russia lacks sufficient growth and foreign investment – problems it already faced before the Ukraine crisis. With post-Winter Olympics goodwill confined to history, and Putin refusing to make any effort to come in from the cold, Russia may not yet be an investment no-go area, but it is rapidly losing its appeal.
Martin Kahl is Editor, Automotive World.
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