Three years ago, when the Western European car market was still suffering from the European economic crisis, Russia offered hope for struggling European manufacturers looking for markets with growth potential. It’s a very different picture now in 2015. The impact of economic sanctions following the Russian annexation of Ukraine combined with falling oil prices and the devaluation of the Ruble have combined to take their toll on the Russian economy.

Car sales still falling

Compared with May 2014, the May 2015 car and light CV market in Russia fell by -37.6% while the January to May market was down by a similar -37.7% compared with the same period in 2014. Total sales for the period fell from 1,030,533 in January – May 2014 to 641,933 in the same period this year, according to data from the Association of European Businesses (AEB). Lada remains the strongest selling brand by a considerable margin with January – May 2015 sales down -29.8% compared with 2014 to 114,270. By comparison Hyundai, in second place is down -7.8% to 67,155 followed by sister brand Kia in third place with sales down -19.0%. Renault badges many Dacia models as Renault for Russia and this has helped to make the company the fourth best selling brand in the country, but with sales down -41% to 47,130, while alliance partner Nissan is also down -41% with sales of 41,636.

Only two further manufacturers in the top 10 are Russian. The list is otherwise dominated by European brands, although there are a number of Chinese manufacturers represented on the Russian market. Lifan is the highest placed as the 23rd best selling manufacturer in the Russian light vehicle sector, with Geely and Chery not far behind. Lifan sold 3,796 cars between January and May this year, a -55% reduction on the same period in 2014.

Opel and SEAT withdraw, Ford restructures

The Renault-Nissan Alliance was one of the Western European companies that became involved in the Russian market, when it formed a strategic alliance with Russian manufacturer Avtovaz in 2012. Under the agreement, the Renault-Nissan alliance acquired a majority stake in the alliance and Carlos Ghosn became chairman of the Avtovaz board in 2013. Renault has maintained its involvement in the country but others have decided to pull out for the time being.

GM decided to restructure its Russian business in March this year. As a result, Opel will pull out of Russia by the end of the year and Chevrolet will scale its involvement right down. This will leave US built products, such as the Corvette, Camaro and Tahoe on sale as well as Cadillac, but the mainstream Chevrolet models, mostly sourced from Korea, will not be sold. This will see production at the GM Auto plant in St Petersburg end by mid 2015. GAZ builds GM vehicles under contract but that will also cease this year. Explaining the decision, GM President Dan Ammann said, “This decision avoids significant investment into a market that has very challenging long-term prospects.”

GM also has a joint venture with Lada parent company Avtovaz to produce the 4×4 Chevrolet Niva, which can trace its ancestry back to the Lada Niva 4×4, sold across the world from the 1980s. Production and sales of the Chevrolet Niva will continue.

Fiat is considering withdrawing Alfa Romeo, while Volkswagen withdrew SEAT in April 2015, although other Volkswagen Group brands remain on sale in Russia. Ford, like Mazda, Toyota and Isuzu operates in Russia through a joint venture with Russian manufacturer JSC Sollers.

In April, Ford announced that it had taken control of the joint venture, although its 50% equity stake remains unchanged. The Ford Sollers joint venture recorded a loss of 5.5 billion Rubles (€90.3m), according to Reuters, in 2014. Ford moved quickly to consolidate its position, appointing Mark Ovenden as president and CEO of Ford Sollers. Ovenden moves from chairman and managing director of Ford of Britain, where he has been in post since 2011. Prior to that appointment he was managing director and president of Ford of Russia, a post he held for three years and his familiarity with the market is seen as an asset.

The Lada Granta was the best selling model on the Russian car market between January and May 2015. This C segment model is available as a four-door saloon or five-door hatchback. 49,542 models were sold, a -15.3% drop compared with 2014. The Hyundai Solaris, a re-badged Accent, is the second best selling car in Russia this year, with 44,455 sales between January and May, just 554 fewer sales than in the same period in 2014. The Kia Rio followed in third place, followed by the Lada Kalina and Renault Duster, which carries the Dacia badge in other markets. According to the CIA some 27.7% of roads in Russia are unpaved. The popularity of SUVs is growing.

Lease contracts extended

The falling demand for new cars is not surprisingly having an impact on the business car sector. “We don’t buy as many new cars and lease them out, but we keep a ‘flat’ fleet,” explains Kent Bjertrup, general manager at ALD Automotive Russia. That effectively means extending contracts, the same technique used by leasing companies during the European economic crisis. “98% of our customers are international companies that lease their fleet from ALD, Bjertrup added. “International investors are saying, “let’s wait and see where the economy is heading”, so they would rather have a car that although isn’t new is good quality and prolong the contract for a year. Then maybe in a year they will have much better vision of where the economy is heading.”

Bjertrup has seen other developments in the economy too. Russian prices have traditionally carried high profit margins, which has led to companies being comparatively cash rich. But the change in economic fortunes has meant that more companies are retaining those profits, “So they do not sit on as much money any more and we have seen that some companies that were previously buying cars are re-considering their approach and are interested in leasing their fleets now.”

Crisis brings opportunity

“A crisis is always a time for opportunities,” he said. “That’s one of the opportunities we have seen. Another is that it has been a very much retail driven economy in Russia, so Toyota, for example, has almost no fleet sales in Russia, a lot is retail. Now we are seeing increased interest from these manufacturers to implement white label agreements that we normally have with car manufacturers around the world.

“When I read the international press, it seems like a big crisis and of course, numbers confirm that. But once you are actually in the environment, business is still taking place and life continues. We have a fleet of 18,500 cars.”

ALD’s operation in Russia also covers the Ukraine and although business is flat in Russia, Bjertrup has seen a different picture in that country, “In Ukraine we have seen some local competitors forcing their customers to give back their cars because they need to sell the cars to raise cash.”

High interest rates

“Smaller, local leasing companies here in Russia have been struggling for funding. When the interest rate exploded, funding was very expensive and the Russian banks were not able to re-finance themselves because of the sanctions. It has definitely been a difficult time,” said Bjertrup. Russian” Russian interest rates reached 30% at one stage, but the central bank rate is currently at 11.5%, having risen from 11% to 17% at the beginning of the year. Expectations are that it will return to 11% by the end of July.

Statistics are not easy to find regarding the Russian car market, apart from those produced by the AEB. According to Bjertrup, there are around 40m passenger cars on Russian roads and around 2.24m are in the corporate sector. Some 2.3m new cars were sold in 2014 and of those, Bjertrup says that less than 9% were sold to corporate fleets. Compared with Western Europe, the total seems small. As Bjertrup explains, cars are not generally given as a salary enhancement in Russia: “A lot of cars are needed as a tool for work. We have a lot of pharmaceutical companies and medical representatives have a car to visit clients, but for middle management, it is not so common for a company car to be part of their package.”

SUVs are gaining in popularity with Russian buyers as they are elsewhere around the world, but since price is a factor in the business car sector, Bjertrup says that more popular models include the Ford Focus, Renault (Dacia) Logan, Skoda Octavia and Volkswagen Polo, particularly in saloon form. Chevrolet models have also proved popular on the ALD fleet, but the withdrawal of mainstream Chevrolet models will obviously change that in future.

Although AEB data lists all light vehicles and does not separate light CVs from others, Russian manufacturer GAZ is probably the largest light CV producer in Russia. AEB data shows that in the January to May period sales were down -32% in 2015 compared with 2014 to 17,311. Mercedes-Benz van sales have not been greatly affected with sales down -2% in the same period to 2,530. VW van sales have fallen by -51% to 2,735.

Business cars are not taxed differently from privately bought cars in Russia according to Bjertrup, “We used to have a property tax on company cars but no longer. Since 2013 there has been no difference in the taxation of corporate and private cars.”

Moscow introduces parking charges

The Moscow authorities have recently started to charge for parking, which brings it into line with many other cities around the world. The complication, according to Bjertrup is that cars must be registered in the name of the driver, even if it is owned by a company, so this has presented a few administrative issues.

Bjertrup sees little prospect of economic growth until international sanctions are lifted and that is not likely to happen while there is fighting in Eastern Ukraine. “We expect GDP growth to be negative especially this year and I guess best case next year will be zero,” he comments, “We expect to see some bounce-back in 2017.”